Unfortunate consequences of BBBEE Codes

By Keith Levenstein

The intention of the revised BEE codes announced last week is to broaden the empowerment base, according to dti minster Rob Davies. Unfortunately it will have the opposite effect.

The driver behind BEE is the need to produce verified B-BBEE certificates. While some businesses choose to undertake the empowerment process, the reality is most businesses obtain a verified certificate because customers ask for it. Government is not the main force encouraging BEE compliance – it is private enterprise that is doing this.

Of the verified companies in the country, the vast majority have produced a scorecard because they were told to do so by their customers. Large companies will invariably request a certificate even before they will allow a supplier to be registered as a vendor.

Many smaller businesses have only chosen to go the empowerment route because they know they would not acquire new business without it. They also need it to continue business with some of their existing clients. This became an incentive to many companies to become empowered. We have seen many of these companies, initially very “anti-BEE”, slowly moving to be more positive about BEE.

But unfortunately the new codes miss the point. While the old codes awarded points to companies for good procurement practices, due to the addition of two words “value-adding”, the new codes have removed this incentive. The value-adding status is documented on each company’s BEE certificate.

A value-adding supplier, according to the definition in the BEE code, is an entity with a net profit before tax plus labour cost combined of more than that 25% of its turnover. Effectively this is a business that spends more money on its staff / labour.

The new codes will award points for procurement for companies that procure from only value-adding suppliers. If a supplier is not a value-adding supplier, the customer will not benefit from the procurement points.

The possible intention of the dti is for businesses to migrate from supporting non value-adding suppliers to value-adding suppliers. If that were the case, and if it were feasible to find value-adding suppliers, the code would be quite good. But this is not the case.

The rationale for the new codes, which encourages the support of value-adding businesses, must be to support businesses that employ a large number of people. Unfortunately the majority of businesses are not value-adding, so there is no benefit for companies to even ask for a BEE certificate.

 

Value-adding suppliers tend to be companies with high profit margins and high labour costs compared to their turnover. Value-adding tends to be industry-based such as accounting, consulting and legal businesses where their stock in trade is their staff and intellectual property. Companies such as Ernst Young, PWC and Deloitte are value-adding.

MTN is value-adding whereas Vodacom is not. All the banks are value-adding. The media, like Avusa and 24.com are value-adding.  On the other hand, large engineering and manufacturing firms tend not to be value-adding: Arcelor Mittal and Nissan are not value-adding. Companies in the wholesale and retail trade also tend not to be value-adding. Bidvest, Shoprite, Pick ‘n Pay and McCarthy Motor Group are not value-adding.

In the oil industry Sasol Oil, Shell, Total and Engen are not value-adding. This is no reflection on the business, but an indication of how the industry works. A company that needs to be highly mechanised, like an oil refinery, simply does not spend anywhere near 25% of its turnover on its labour force.

The value-adding status of a business or industry is not something that can easily be changed. Even if a business did agree to employ 10 000 more people immediately, it would have an almost reciprocal effect of decreasing profits by the same amount and still not able to become a value-adding supplier.

Some of the road freight companies are value-adding. When they process their own BEE certificate, they will have to ignore oil companies as suppliers. They need not even bother to ask the oil companies for a BEE certificate. Irrespective of their supplier’s BEE score, it will not be taken into account.

If a supplier is not asked for a BEE scorecard, the vast majority of businesses will not bother to produce one. This will harm the BEE process far more than the small benefit of supporting only value-adding suppliers.

An analysis of our database of BEE certificates that have an expiry date of after 01-01-2012 show that we have 6 467 certificates for companies that are not value-adding and 3 157 that are value-adding.

Less than a third of all the most recent certificates on our database are for value-adding suppliers.  Therefore 67% of businesses may no longer need a BEE certificate because their customer will not ask them for one.

This will certainly please many companies that have resisted BEE. It will not please the minister and the BEE Council or those supportive of transformation.

Keith Levenstein is CEO of EconoBEE, a BEE advisory firm

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