Planned BEE reforms need scrutiny

Independent Newspaper Limited

Organisations dependent on private sector financial aid, like childrens homes, will face disaster if the Department of Trade and Industry goes ahead with proposals to amend the B-BBEE codes of good practice as proposed by Trade and Industry Minister Rob Daviest. It would mean that businesses would have to donate to institutions with 100 percent black beneficiaries if they wanted to achieve high ratings.

ROB Davies, the Minister of Trade and Industry, wants an inclusive economy and believes that this will be effected by the amendment of the broad-based black economic empowerment (B-BBEE) codes of good practice.

We agree with minister Davies that the codes need revision. All strategies need to be reviewed regularly to ensure that they deliver on their intentions and clearly the old codes were in desperate need of revision.

But will the proposed amendments lead to an inclusive economy? Let’s subject them to the devil’s own advocate and examine some of the salient points.

There are now three priority elements: ownership, skills development and supplier and enterprise development. Priority elements are important as it will reduce you by two levels on your scorecard for big business and one level for medium-sized businesses.

Let’s start with ownership. In essence no white-owned business will ever be able to achieve a Level 1 on the scorecard in the future – so in reality the country can have Indian-only-owned businesses, African-only-owned businesses, but not white only.

Loophole

Davies

Ntswe Mokoena

However, a huge loophole exists in that the priority in terms of the ownership scorecard centres on debt repayment of the black shareholder where 40 percent of the annual debt target must be repaid.

The management control element now further divides black South Africans into sub-race groups where African, coloured and Indian males and females have separate targets.

Now 60 percent of all senior management must be divided up as per the ratio of African, Indian and coloured male and female demographics in the country.

This will be a difficult task in specific areas of the country where national demographics are skewed as in the Western Cape and KwaZulu-Natal.

The final result will be that Indian-only management or even African-only management will not score maximum points.

Should your company have focused on employing African females in the past, they will now leak points if the appropriate number of coloured and Indian males and females are not appropriately represented.

The skills development element target has now been doubled. Few companies achieved the original 3 percent of total salaries spent on black skills development (also now divided into sub-race groups). The new proposed target of 6 percent will seem unachievable to many. The result of this could well be a recognition that we will never achieve this target and therefore choose to ignore skills development altogether and lose our levels on the scorecard.

This would be disastrous for skills development in the country.

Perhaps the most alarming change is the one in the procurement/supplier development element. It is now not enough to be B-BBEE compliant.

One also has to be a value adding supplier to earn points on this priority element. A value adding supplier is one that is VAT registered and whose total labour costs summed before tax exceed 25 percent of total revenue.

How many small black businesses are VAT registered? Sars law allows for small businesses to register as small business corporations and not be VAT registered. This will mean that procuring from small black businesses will not be encouraged through these new codes.

Then there is the issue that the small black business only needs to get a B-BBEE certificate for the first year and then confirmation from its accounting officer/auditor annually thereafter that it complies.

This does not take away the burden of the cost of verification from the business as the accountant/auditor will need to confirm: black ownership (and the debt repayment), turnover, value adding status etc.

It is doubtful that the accountant/auditor will do this for no fee, thereby transferring the cost of verification from the verification industry to the auditing/accounting industry.

This is sure to be contested by the existing industry.

Lastly, there is the element of socio-economic development which in the past has allowed for the full recognition of the donated amount to charities if at least 75 percent of the beneficiaries of such charity were black South Africans as defined by the act. If the beneficiaries were, for example, 60 percent black, then R60 of the R100 was recognised. This has now changed to at least 100 percent of the beneficiaries to be black South Africans.

This will have a dire impact on the NGO communities in South Africa, for in effect should one child in a children’s home be Mozambican then the donation will not be recognised. The effect of this will be to have separate facilities for white children and non-South Africans and another facility for black South African children.

One can only shudder at the ramifications of this for nation building, separate white/foreigner sports teams etc, and it is certainly not conducive to building a united economy.

What the minister has done is ensure that these revised codes are out for public comment so that we as South Africans can participate in helping the ministry develop a tool that indeed will take the country forward in building an inclusive economy.

The deadline for responses is December 2, 2012.

Now it’s up to you to suggest alternatives to what is on offer.

l Brun is a B-BBEE verification specialist, and the chief operating officer of the AQ Rate rating agency.