The revised Broad-based Black Economic Empowerment (B-BBEE) Codes signal a more interventionist and prescriptive approach by Government to black economic empowerment. In response, companies will need to rigorously reassess their value chains and rapidly address areas that may no longer meet the new requirements.
While the previous B-BBEE codes were voluntary in nature, the new framework introduces penalties and even jail time for non-compliance and fronting practices. Compliance with the new B-BBEE codes will determine a company’s ability to successfully tender for Government or public entity tenders, and to apply for sector-specific licenses. In addition, as a result of increased emphasis on the procurement element of the B-BBEE Scorecard, private-sector suppliers will feel the pressure to meet the minimum B-BBEE requirements.
The new watchdog, the B-BBEE Commission, has been empowered to ensure that the revised codes, as well as the B-BBEE Act, are enforced and applied correctly. The B-BBEE Commission will co-operate with other organs of state including the Special Investigating Unit (SIU), the Independent Regulatory Board of Auditors (IRBA) and the National Prosecuting Authority (NPA) for this purpose. The commission is also tasked to maintain a record of major BEE transactions, currently proposed to be equal to or greater than R100 million, allowing the commission to vet the details of the transaction to ensure it demonstrates the required criteria. Once the new regulations have been finalised, the majority of B-BBEE ownership transactions will therefore need to be registered. The new regime will be applied retrospectively to all transactions concluded on or after 24 October 2014. The commission has implemented a defined complaints procedure which enables the reporting and investigation of suspected contraventions of the requirements. Such investigation processes can be lengthy and have severe penalties for transgressions, including imprisonment of up to 10 years for individuals that have misrepresented, or provided false information regarding their B-BBEE status, or engaged in fronting. For corporations, the penalty could be a fine of up to 10% of the company’s annual turnover and a ban from participating in Government or public sector contracts for a period of 10 years.
Government and public entities will have the right to cancel any contract awarded that was based on false information regarding B-BBEE status. They will also be obliged to apply the codes in procurement policies and in the issuance of licenses and authorisations, whereas before, the rule had been “as far as reasonably possible”.
The commission is also able to subpoena and make court applications to restrain breaches of the B-BBEE Act or instances of fronting. In addition, certain entities, including all JSE Listed Companies, will be required to submit a B-BBEE compliance report to the Commission on an annual basis.
Codes of Good Practice categories and points allocation
Achieving a good score on the B-BBEE scorecard has become more difficult as a result of stricter compliance requirements and changes in calculating the scorecard. The B-BBEE scorecard elements have been reduced from seven to five. Three elements (ownership, skills development and new enterprise and supplier development) are deemed priority areas, meaning that minimum compliance of at least 40% is compulsory in these categories. Failure to achieve this will automatically downgrade the company by one level, and this has already resulted in automatic B-BBEE downgrades for many companies.
In summary, the scorecard elements and corresponding points allocation are as follows:
- Ownership has been prioritised and will earn 25 points;
- The previous management control and employment equity elements have been combined into ‘management control’ which earns 15 plus a potential four bonus points;
- Skills development has been prioritised and will now earn 20 plus a potential five bonus points;
- The previous enterprise development and preferential procurement elements have been combined into new enterprise and supplier development and this element can earn 40 plus a potential four bonus points; and
- Socio economic development remains at five points.
While the revised codes are tougher for large businesses, there will be some relief for small, medium and start-up businesses due to an increase in the exemption thresholds:
- The threshold for exempted micro enterprises (EMEs) increased from R5 million to R10 million of total annual income, and EMEs will be deemed to have a Level 4 B-BBEE status.
- The threshold for qualifying small enterprises (QSEs) increased from R35 million to R50 million of total annual income.
- 100% black-owned EMEs and QSEs will be deemed to have a Level 1 status and 51% black-owned EMEs and QSEs will be deemed to have a Level 2 status. In these cases, no B-BBEE certificate from a verifying agent will be required to confirm the B-BBEE status. Rather, the company must provide an affidavit certifying the total annual income and the level of black ownership.
Compliance for QSEs can prove more difficult as the QSE scorecard will now be measured against all five scorecard elements, whereas it was previously possible to choose any four of the seven scorecard elements. In addition, failure to achieve minimum compliance with the ownership, skills development and new enterprise and supplier development areas will automatically downgrade the company by one level. With updated codes and a watchdog with teeth, the pressure is on for companies across the spectrum to investigate new partnerships and rethink their strategies to ensure B-BBEE compliance.