BBBEE Codes

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BEE expert John Mophethe
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The newly revised BEE Codes (New Codes) have replaced the Old BEE Codes (Old Codes) with the purpose of furthering the BEE goals and objectives of the Department of Trade and Industry (dti). From various media reports, it appears that the dti was of the view that the Old Codes did not realise the needed level of transformation originally envisioned by the dti and thus implemented the New Codes to address some of the areas that needed attention.

The New Codes contain provisions that are aimed at rectifying certain shortcomings in the Old Codes, addressing current priority objectives and in general intensifying the transformation of the economy.

New concepts (such as priority elements, empowering supplier status and “automatic” BEE recognition levels) were introduced by the New Codes, which reduce the need for a scorecard verification procedure. Most of the targets were increased and the recognition levels were also escalated with the resultant effect that it will be increasingly difficult for a company that is obliged to be verified under the New Codes to achieve similar levels as under the Old Codes.

As much as the provisions of the New Codes will make it much harder for most companies to be competitive on a BEE level, it will also provide opportunities for other companies to hold a competitive advantage in the market.

So exactly how much more will companies have to do now to be competitive with regard to their BEE level? BBQ spoke to John Mophethe, BEE expert and Director and Head of Phatshoane Henney Attorneys’ BEE Consulting Division, to find out more about how companies should approach the new codes.

Different opinions

Looking at the biggest problem with the new BEE Codes – and who will it affect most, Mophethe says different BEE experts will probably provide different answers to the problems associated with the new codes as there are many points of contention relating to the New Codes, which one can also define as problems.

“In my opinion, the biggest problem with the New Codes is the effect it will have on the ability of Qualifying Small Enterprise’s (QSEs) - companies with a turnover of between R10 million and R50 million per annum - to achieve a good BEE certificate. QSEs that fall between the R10 million and R35 million brackets will find it especially difficult to cope as they will have to report under all 5 elements and will have no previous experience with complying with all scorecard elements. Most QSEs could previously achieve an acceptable certificate by choosing their best 4 out of 7 elements and could avoid reporting under ownership, management and employment equity, all elements typically more complex to address in the short term.

“These companies will now be forced to report under these elements as well without the choice of not doing so. A paradox does arise in that certain QSEs will at the same time have the best opportunity to achieve the best levels without incurring large costs. The New Codes make provision for QSEs (and EMEs) [please clarify what this is] to attain a level 2 by just proving their black ownership of at least 51% without going through a formal score card procedure. These companies will essentially only have to provide an affidavit confirming their ownership status and turnover and such affidavit will be the required document to confirm their status. This is what the New Codes state. How this will play out in practice, we will have to wait in see,” he says.

Another issue that created some confusion is the fact that QSE companies can still report under the Old Codes provided they are verified on financial statements ending before 30 April 2015. But questions were raised about how they will go about it after that period.

Uncertainty

Although the last clarification notice released in May 2015 confirmed this window of opportunity, at the same time it potentially created more uncertainty, as it is not sure for how long companies will effectively be able to still report under the Old Codes and for what period these certificates will be valid.

“The notice states that for the inaugural year of the New Codes (until 30 April 2016) all certificates issued under the Old Codes will remain valid. At first glance this seems to be clear, but on further contemplation various questions arise. Let me provide an example: Company X is verified under the Old Codes during December 2015 and the certificate is issued, which will normally state that it is valid for 12 months until December 2016. Will the certificate only be valid until 30 April 2016 or will it be valid until December 2016? Will this certificate be valid for procurement purposes of clients until it expires? A company that procures from Company X during its 2017 financial year would normally be able to use any supplier BEE certificate that was valid for even 1 day during its financial year. The result can be that Old Codes certificates could possibly still be used for companies being verified even as far as 2018. But is this what the notice intended? This problem will hopefully be clarified soon.”

Furthermore, if a QSE has to report under the New Codes it will have to develop a totally different mind-set towards BEE and our expert suggests that people affected by the New Codes make sure that they gain the required knowledge of the New Codes, either by way of a BEE consultant, or by having an internal designated person who is knowledgeable on the subject. “It is imperative that top management be involved with, or at least up to date with, BEE planning and initiatives for its company, as BEE compliance under the New Codes will carry a considerably larger cost which need to be planned and budgeted for.”

Mophethe says in the past QSEs could achieve a level 1 without ownership. Now the reality is that QSEs that are obliged to do a scorecard verification (having less than 51% Black ownership) will, in his opinion struggle to achieve a level 4 with ownership. This puts into perspective the extent of change brought about by the New Codes. The reality is that without ownership, many companies will struggle to even attain a level 8 scorecard result.

Mophethe motivates the main reasons for this change:

  • QSEs have to report under all 5 elements. They cannot choose the best elements.
  • The concept of priority elements: QSEs must achieve a sub-minimum for ownership and one of the other priority elements in order not to be penalised by an automatic drop in level. The priority elements are ownership, skills development and enterprise and supplier development.
  • The scorecard targets for each sub-element or indicator are very high.

The recognition levels have been amended and a company will have to score much higher points to achieve the same level. For example: 65 points was equal to a level 4 in terms of the Old Codes, but in terms of the New Codes it will only get you to a level 7.

Incentives

Mophethe says the main incentives for QSEs to go the 51% black owned route in order to achieve an automatic level 2 without spending on BEE, are that these QSEs will not have to incur the costs of spending on the elements, they will require little internal resource allocation for continuous BEE planning and verification, they will not be required to mandate a verification agency to annually issue a BEE certificate, and they will achieve a BEE level that will be very difficult for a company that does not have 51% black ownership to attain.

Regarding procurement under the New Codes, Mophethe says there are many direct and indirect implications. The following are the most relevant:

  • There is a large emphasis on 51% black owned procurement and the targets for all the indicators have increased. This will impact on the procurement scores that can be achieved by companies. On the positive side, any supplier that is 51% black owned will be a valuable procurement asset for any company utilising such a supplier.
  • The empowering supplier concept introduced by the New Codes will have the effect that some suppliers will not qualify as empowering suppliers and you will not be able to use their certificates for your procurement.
  • Most companies will score considerably less points and suppliers will struggle to achieve similar levels to those achieved previously, which will affect the company in question’s procurement score.
  • Companies will place increasing pressure on their suppliers to produce good scorecards, which in turn means suppliers will have to be far more pro-active in addressing their BEE or risk losing business.

Asked about the cost of obtaining a competitive certificate, he says it is very difficult to guess total cost figures for QSE companies as net profit and employee costs differ from company to company. “However, in terms of my experience (without taking into account the costs of the ownership and management costs) you can easily find QSEs having to spend between R100 000 to R400 000 per annum on BEE across all of the other elements. Of course if this cost is well spent there will be residual benefit for the company but appropriate budgeting is paramount.

Mophethe says the DTI identified ownership as a crucial element in achieving transformation in the economy and used the priority element concept to incentivise companies to implement ownership. “If companies do not achieve the sub-minimum for ownership, they will lose a level after the total points are calculated. The end result is that without ownership, companies will not be able to attain a competitive certificate.”

So going forward, what should the first step be for QSEs hit by the implementation of the new codes? Mophethe says they should seek the services of a BEE consultant to do an analysis of their current planning and what needs to be done by a certain time to ensure proper compliance. “The BEE consultant should also assist the company on an on-going basis to ensure that proper systems are put in place to ensure continuance compliance. With the New Codes, planning and continuity is key and will allow those companies that are doing this properly to stand out from their competitors failing to do so,” he concludes.

 

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