Business and Economy

ESD can speed up development of black businesses

GetBiz CEO Andile Ntingi says the heavy emphasis on ESD will curb the old enterprise development practice of training black businesses but starving them of opportunities to quote for work in the private sector. Photo: GetBiz

Of all the pillars of black economic empowerment, enterprise and supplier development (ESD) provides the best hope of launching thousands of marginalised black entrepreneurs into the upper echelons of the South African economy.

The idea behind ESD is to train black business owners to be competent in running their enterprises sustainably. Once this has been achieved, these businesses are plugged into the supply chains of large, white-controlled corporates to supply goods and services, thereby opening markets previously closed to them.

South Africa’s BEE legislation is incentivising private sector companies to open up their supply chains to black-owned firms in return for earning points on their BEE scorecard.

BEE scorecards are a requirement when bidding for tenders in the public and private sectors. A low score makes a bidder less competitive against companies that are more technically capable, price-competitive and BEE-compliant.

In the old BEE legislation, ESD played second fiddle to black equity ownership, which stifled entrepreneurship. As a result, black entrepreneurs were unable to contribute significantly to growing the economy, generating employment and expanding the tax base.

Instead, black entrepreneurs were reduced to being passive minority shareholders, earning dividends in companies they knew very little about running.

The revised BEE scorecard was introduced in 2015 as part of ushering in new BEE codes of good practice to replace the 2007 version, which failed to grow black businesses and boost local manufacturing.

Thus ESD (40 points) carries heavier weighting in the revised BEE scorecard than equity ownership (25 points) and other pillars of broad-based BEE, such as skills development (20 points), management control (15 points) and socio-economic development (5 points).

A closer look at the revised scorecard reveals that corporates and established medium-sized companies will have to increase their procurement of goods and services from black suppliers to collect maximum BEE points.

The heavy emphasis on ESD will curb the old enterprise development practice of training black businesses but starving them of opportunities to quote for work in the private sector.

Under the new empowerment regime, where ESD rules the roost, we are likely to see a spurt in BEE transactions in the SMME space, where non-BEE compliant companies will have to look for black partners to avoid losing out on lucrative government tenders and corporate contracts.

A closer look at the revised scorecard reveals that corporates and established medium-sized companies will have to increase their procurement of goods and services from black suppliers to collect maximum BEE points. 

The focus on developing black suppliers is a step in the right direction for the South African economy and its industry supply chains. This will grow and diversify supplier bases, introducing much needed competition, thereby reducing costs of goods and services for corporate and government buyers. Where buyers rely on few suppliers, it has been argued that such suppliers hike prices by 30 percent to 60 percent because they enjoy a monopoly position in the market place.

However, there is another school of thought that believes that opening the door to untried suppliers to replace known, trusted suppliers poses a risk to the operations of large corporates as new businesses are vulnerable to failure in their formative years. However, this risk can be mitigated by conducting due diligence on the new suppliers to ascertain their competencies and capacity to deliver the required goods and services prior to awarding them contracts.

Beyond the due diligence, new black suppliers can also be gradually phased into the supply chains of corporate buyers through dual sourcing, whereby a small percentage (say 20 percent) of a single product is procured from a new supplier and the remaining 80 percent from the known, established supplier. Over a period of time, the corporate increases its sourcing from the new supplier as it becomes confident in its ability to provide a reliable, uninterrupted service.

Dual sourcing can also be complemented by coaching and mentoring to increase the chances of the commercial sustainability of new suppliers. Whatever the case, there are many strategies that can be implemented to grow black suppliers as their continued marginalisation more than 20 years into South Africa’s democracy is no longer politically acceptable and could destabilise the country down the line.

Now is the time to kill two birds with one stone – increase competition in supplier markets, while broadening economic participation.

It is encouraging to see that the government, which spends R500 billion annually buying goods and services, is working towards taking the lead in increasing market access for black businesses. Black suppliers may receive a major shot in the arm from the soon-to-be unveiled Public Procurement Bill, which may introduce the long-awaited preferential tender set-asides where a portion of government contracts are ring-fenced for black bidders.

Enterprise development experts have recommended that government include a clause in the procurement legislation that forces state buyers to commit to three-year supply agreements when procuring from SMMEs to support long-term sustainability of small businesses, since unexpected cancellations of contracts usually lead to small business failure. The revised BEE codes contain a clause that commits private sector companies to three-year supply agreements when sourcing goods and services from black suppliers. 

 

  • Andile Ntingi is the chief executive and co-founder of GetBiz, an e-procurement and tender notification service

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