by Keith Levenstein
EconoBEE is giving a cautious welcome to the new BEE codes which were gazetted by the dti minister, Dr Rob Davies last 11th October 2013. The codes will replace the existing BEE codes of Good Practice and must be followed within a year.
The codes contain a mixture of good aspects and some complexities. They are fairly similar to the existing codes, although some weightings and names of some elements have been changed. Instead of seven elements, we now use five. However they still contain mostly the same indicators as before. The five elements are:
This has not changed significantly. The targets are still 25%, and weighting is 25 points. We are encouraged that there are some clarifications around how to score points.
2. Management Control:
The codes previously included two elements: management control and employment equity. Both elements have been consolidated into a single element, but with substantially 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 to businesses to become compliant. By dropping the points available and making the weightings more onerous could rebound in that companies may make less effort in this important activity.
3. Skills Development:
Skills has increased from 15 points to 25 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 than ever before and we see this as a positive move.
4. Enterprise and Supplier Development:
The current codes speak of two elements: Preferential Procurement and also Enterprise Development. The new element Enterprise and Supplier Development is a simple combination of both elements. The two previously were worth 35 points. This has now increased to 44 points.
A slight concern is it is now more difficult to reach targets on procurement in that 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 compliantlevel, it may not be sufficient to help its customers earn BEE points.
The driver behind BEE compliance is that a company asks its suppliers for BEE certificates in order to earn points and therefore companies obtain certificates to satisfy their customers. 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 indicators on the new element Enterprise and Supplier Development is for a company to spend 40% of its procurement from empowering 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 now 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 too much time. From a black industrialist’s viewpoint, this is an excellent opportunity to grow his business. If procurement works, BEE will pretty much have succeeded.
5. 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)|
|Enterprise and supplier development||44|
|Socio Economic Development||5|
As a result of the increased points available the minister has changed the points to levels table as follows.
|Level||Amended Codes||Current Codes|
|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|
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 a 5.
The minister has exempted all businesses with an annual turnover of less than R10-million (previously R5-million) from all forms of BEE
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, no matter its ownership is automatically level 4. Furthermore, any business that is 100% black owned and has an annual turnover of less than R50-million is automatically level 1. If that business is more than 51% black-owned and less than 100% it is level 2.
A QSE (qualifying small enterprise) which is currently any organisation/business with a turnover ofbetween R5-million and R35-million and follows 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 or easier aspects to its scorecard than the generic.
QSEs still have to follow the entire scorecard with very few allowances or easier aspects to its scorecard than the generic.
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.
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 see that most companies will be able to quite easily reach the same number of points as previously. There will be more work and planning required. It will be important to understand how the new codes work, and a change in strategy will be required. This will result in more and better transformation of the economy and we are therefore encouraged.
*Keith Levenstein is CEO of EconoBEE – a B-BBEE advisory firm