How Corporate South Africa can support SMME Development

by Karabo Mashugane for IOL, sourced by Fariba Bowen

A 2018 IOL opinion article by Karabo Mashugane argues that the BEE codes are hindering SA’s SME development. The Enterprise Development (ED) scorecard was introduced to drive entrepreneurship and SME development. These became accepted as key drivers of economic growth and job creation. ED requires corporates to invest 3% of Net Profit After Tax (NPAT) on developing SMEs. Unfortunately, most corporates simply donated the required money without bothering much about the development impact realised. What mattered was that the compliance box was ticked.

The amended B-BBEE Codes were introduced in 2013 and ushered in Supplier Development. Corporates were now required to spend a portion of the 3% (ie 2% of NPAT) on the development of black-owned SMEs from whom they procured goods and services.

The logic was that corporate companies would open market opportunities to SMEs and use the 2% of NPAT contribution to capacitate those SMEs. It was hoped that this would encourage entrepreneurship, increase the number of SMEs, drive economic growth and ultimately create jobs.

In the amended B-BBEE Codes, small businesses were split into two categories to ensure the codes really had a broad-based reach. SMEs with annual turnover below R10million were categorised as Exempt Micro Enterprises (EMEs), and those between R10m and R50m labeled as Qualifying Small Enterprises (QSEs).

Corporates are required to spend 15% of their procurement spend with each SME category (30% in total). For large corporates with billions in annual procurement, this created a serious headache. Corporates struggled to meet the targets and some simply gave up.

Unfortunately, those who succeeded were faced with a dilemma. The SMEs which they developed and gave market opportunities might grow turnover beyond the stipulated categories. If that happened, the corporate would not be able to claim the BEE points they sought in that category.

For example, issuing an EME with a contract for R20m per annum increases the EME’s turnover above the R10m threshold. When this happens, the corporate can no longer claim BEE points on that procurement spend in the EME category. It thus risks non-compliance despite acting in the true spirit of BEE.

The result is that, to maximise B-BBEE compliance, corporates avoid developing SMEs or issuing them with large contracts even when it is feasible. The SMEs only receive small purchase orders designed to keep them as unsustainable “one-man” businesses.

As a possible solution, Mashugane suggests corporate tax incentives to encourage corporates to issue large long-term contracts to SMEs (Business Report Opinion&Analysis, April 5). Treasury can lean on its years of experience with tax incentives to design a framework that would keep negative unintended consequences to a minimum. In addition to the tax incentives, another amendment should be introduced to the B-BBEE Codes.

The amendment should allow all procurement spend on a contract issued to an EME to be claimed in the EME category for the duration of that contract. This should remain, even if that EME grows turnover above R10m. Equally so with QSEs that grow above R50m.

For example, a corporate entity issuing a 5-year contract of R20m per annum to an EME should be allowed to claim R20m each year in the EME category on its B-BBEE scorecard. This must continue each year over the 5-year period, even though the turnover of that SME would obviously grow above R10m. This amendment would encourage corporates to issue large long-term contracts to SMEs. It would then lead to more meaningful SME development, economic stimulation and accelerated reduction in unemployment and poverty.

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