In terms of the B-BBEE Codes, the preferential procurement element encourages procurement from suppliers that have a valid and compliant B-BBEE Certificate. It is, however, necessary to consider the treatment of third-party procurement spends.
A third party is a person who is indirectly involved in a transaction between two parties or entities but is not the principal party to the transaction.
An example of third-party procurement would be as follows: Entity A is the airline; Entity B is the travel agent and Entity C the measured entity. The measured entity makes flight bookings for its employees through entity B and entity B makes these bookings with entity A for the sum of R20 000-00. The measured entity will pay R20 000-00 to entity B for the tickets. Entity B will then pay the sum of R15 000-00 to entity A for the flights and retains R5 000-00 as its commission for the service. In this instance, the measured entity must recognize the third party spend as follows:
- The measured entity can only include the R5 000-00 commission for entity B as part of the Total Measured Procurement Spend (TMPS) as this is the true income that entity B has recognized in its financial statements.
- The sum of R15 000-00 will be recognized in entity A’s financial statements as income. This qualifies as pass-through procurement, which forms part of an exclusion in the calculation of TMPS.
- The measured entity can only claim the full R20 000-00 for entity B if this amount is recorded as income in entity B’s financial statements.
- The measured entity will also be able to count the full R20 000-00 as part of its TMPS if it has a B-BBEE Certificate for both entities as well as a clear breakdown of how much was directly spent with each supplier;
If a measured entity submits false information regarding its TMPS during verification, this could be seen as fronting, therefore it is imperative that all verification professionals provide entities with proper advice and guidance on third party procurement so that businesses are using the correct figures under their TMPS.
ABOUT THE AUTHOR
Seshni Chetty obtained her LLB degree from the University of KwaZulu-Natal in 2014 and is an admitted Attorney. She joined SEESA as a BEE Legal Advisor in September 2016.