EconoBEE: New BBBEE codes, pros & cons, explained

Seven years after the official launch of the BEE codes, there is still confusion about BEE shareholding and partnerships.

Keith Levenstein, CEO of the BEE advisory firm EconoBEE, says there are numerous stories about companies taking on a BEE partner which failed or a BEE partner not receiving any material benefit from their shareholding.

“The question is, did the business need a BEE partner in their first place and was there opportunity for the BEE partner to benefit from their partnership?” says Levenstein.

“It is often not necessary for a business to acquire a BEE partner in order to increase its BEE rating. There are other methods to raise a business’ BEE rating.”

There have been numerous cases of businesses being involved in BEE fronting, says Levenstein. “Obviously the most well-known form of fronting is putting a ‘black name’ onto a share register.”

“Very often a company will ‘give/transfer’ shares to a black person, who is not even aware of this. The company will also obtain a signature from the black person agreeing to sell the shares back to the company at the same price as the purchase price. Effectively the black person will be used to warehouse the shares.”

The new codes which come into effect in October 2014, enable any 100% black owned business with an annual turnover of less than R50-million to automatically receive a level 1 rating. If a business is more than 51% black owned it will receive a level 2 rating.

Ownership:
This has not changed significantly for businesses with a turnover between R10-million and R50-million. The target remains at 25% and the weighting is 25 points. We are encouraged that there is better clarification around how to score points.

Management Control:
The codes previously included two elements: Management Control and Employment Equity. Both elements have been consolidated into a single element but with the same indicators. Previously Management Control and Employment Equity were worth 29 points combined. The new combined element is only worth 19 points.

In recent years, Employment Equity has improved dramatically. Points are the incentive for businesses to become compliant. By dropping the available points and making the weightings more onerous, companies may make less effort in this important activity.

Skills Development:
The Skills Development rating has increased from 15 points to 25 points, showing the importance of skills development in the economy. Some targets have increased: Target spend is now 6% of payroll, instead of 3%, but more points can be earned. We see this as a positive move.

Enterprise and Supplier Development:
The current codes from 2007 speak of two elements: Preferential Procurement and Enterprise Development. The new element, Enterprise and Supplier Development, is a simple combination of both elements. The two were previously worth 35 points and has now increased to 44 points.

A slight concern is that it is now more difficult to reach targets on procurement as the minister has defined “empowering suppliers”, which is a more complex definition than having a simple recognition level. It implies that even if a company does reach a compliant level, it may not be sufficient to help its customers earn BEE points.

The driver behind BEE compliance is for companies to ask their suppliers for BEE certificates in order to earn points and, in turn, companies obtain certificates to satisfy their customers’ BEE scoring requirements. If a company cannot meet the requirement of being an “empowering supplier”, even if it can reach a BEE level, it may discourage that company from continuing its transformation journey.

One of the terms of the new element Enterprise and Supplier Development is for companies to spend 40% of their procurement from suppliers that are at least 51% black owned. We know that there is a distinct lack of black industrialists and this target is going to be very difficult to achieve.

Clever businesses will start the process of identifying black businesses who can supply substantial values of goods and services.  Since the new codes give a one year transitional period, there is not much time. From a black industrialist’s viewpoint, this is an excellent opportunity to grow their business. If procurement works, BEE will have succeeded.

Socio-economic Development:
The last of the five elements is unchanged at 5 points. The points on all elements add up to 118 (previously 107 for all seven elements).

Element Points (incl Bonus)
Ownership 25
Management Control 19
Skills Development 25
Enterprise and supplier development 44
Socio Economic Development 5
Total 118

As a result of the increased points available, the minister has changed the points to levels table as follows.

Level Amended Codes Current Codes
1 ≥100 ≥100
2 ≥95 but <100 ≥85 but <100
3 ≥90 but <95 ≥75 but <85
4 ≥80 but <90 ≥65 but <75
5 ≥75 but <80 ≥55 but <65
6 ≥70 but <75 ≥45 but <55
7 ≥55 but <70 ≥40 but <45
8 ≥40 but <55 ≥30 but <40
Non-Compliant <40 <30

We see this as an unnecessary complication to the codes. Everything could have been calculated out of 100%. Psychologically businesses may feel disappointed when they see their current level 3 become a 4 or 5.

In addition, the minister has exempted all businesses with an annual turnover of less than R10-million (previously R5-million) from all forms of BEE. Any organisation falling in the category, no matter its ownership, is automatically given level 4 status. But any business that is 100% black owned and has an annual turnover of less than R50-million automatically has a level 1 status. If that business is more than 51% black-owned but less than 100% owned it has a level 2 status.

A QSE (qualifying small enterprise), which is currently any organisation/business with a turnover of between R5-million and R35-million and following a far more lenient scorecard, has been adjusted to R10-million to R50-million. However, other than for black-owned businesses, it still has to follow the entire scorecard with very few allowances.

Priority Elements

The minister has also defined three of the five elements as priority elements with additional targets.

·       40% on ownership’s net value

·       40% of the skills development score

·       40% of the Enterprise and supplier development score

·       If a generic business does not achieve all three targets (two targets for QSEs), it drops one level.

Conclusion:

There is a general improvement in the targets, which should result in better transformation. Some of the weightings and targets may be a disincentive. At first glance, the new points-to-levels table may be more onerous but we feel that most companies will be able to easily reach the same number of points as before. There will however be more work and planning required. It will be important to understand how the new codes work and therefore a change in strategy required. This will result in increased and more effective transformation of the economy, which is encouraging.

Press Release

News@ujuh.co.za

 

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