Revised codes were in response to… – EconoBEE Newsletter – 25 October 2012

I can fully understand the reasoning behind every single change in the revised BEE codes. Every aspect of the revised codes is in response to the effectiveness of the current codes. The current codes cannot be said to be doing the job. The main reason behind BEE is to transform the economy – to remove the huge disparities and inequities caused by apartheid and which still remain. We feel that the revised codes will not achieve their objectives, but the good reasons for wanting to improve BEE still remains.
BEE has been subjected to abuse and therefore it is no wonder that many people want BEE to be strengthened.

Fronting
Fronting is rife. Companies openly transgress the codes. Fronting is not only placing a “black face” in a board of directors, but cheating on all aspects of the BEE scorecard. We see 2-3 certificates per day (up to 600 per annum) where companies are misrepresenting their BEE status. A common instance is where a generic company pretends to be a QSE or EME (which have easier requirements). They will often create a second company with a similar sounding name which has no income, and obtain an EME certificate for that business. When asked for a valid BEE certificate they will issue the incorrect company’s EME certificate. When confronted they will issue denials and plead ignorance of the Codes.

Abuse of the Scorecard
The scorecard has far too many aspects of poor drafting, allowing a company too much leeway in interpretations. For example the codes allow imports to be excluded from the procurement calculation if the import carries a different brand or technical specification. This wide definition allows almost all imports to be excluded, and even encourages companies to import rather than obtain goods locally from a possibly non-compliant supplier. The revised codes have removed imports as an allowable exclusion in reaction to this abuse of the intentions of the codes.

Another instance: The codes allow companies to earn points for paying invoices from their enterprise development beneficiaries early. There is a clear definition of enterprise development, but we have found that all verification agencies look to see if the entity is a potential beneficiary, and then award the points regardless. We know of a large JSE listed company (R80billion turnover) that is 27% black owned. They supplied a letter acknowledging receipt of R200 000 for an invoice that was paid on the day it was issued – thereby earning BEE points for its customer. This defeats the true aims of BEE and enterprise development. Can we really say that for example paying your telephone account on the day you receive it is “enterprise development“ towards TELKOM? Some agencies do see it that way.

Ignoring BEE
Many companies ignore BEE, or maybe worse, give worthless excuses as to why they cannot comply with BEE. We see hundreds of these “excuse” letters. Unfortunately many companies who are asking for BEE certificates do not have trained staff to see through these excuses. Some excuse letters are still dated 2010 with a promise to issue a certificate within three months. One of the best prepared letters, and worst excuses was issued by a BEE consultant and verification agency on behalf of their client. This letter (issued in August 2012) stated that the company could not become compliant because of uncertainty about the soon to be released revised BEE codes. The letter included a whole lot of legal and technical information about the codes, which surely would have impressed many procurement officers. There is no doubt that that was the intention of the letter – it gives the company another year or two years of not having to comply with the current codes.

Verification agency abuse
Verification agencies, including approved auditors contribute to the problems, sometimes due to their accreditation body. They have widely differing interpretations, and spend more time trying to appease SANAS than analyzing the codes and doing the job right. They are more interested in getting a suitable letter from an independent person for SED than checking whether the money is even going to be used properly.

In another case regarding start-up enterprises, the codes are clear that “In order to qualify as a Start-up Enterprise, the enterprise must provide an independent confirmation of its status”. This is not an issue raised by SANAS, so agencies do not query in great detail as long as they have a piece of paper. It should be obvious to any businessman that a R200 million company is not an EME, but the agencies fail to check on this. This is often due to them appointing inexperienced business people as analysts who have never heard of some of these companies with well-known brands. Agencies also tend to be reluctant to change interpretations, even if instructed by SANAS or the dti. Other agencies see nothing wrong in issuing a non-compliant certificate. We have seen many showing 0 (zero) points. It should be obvious to the agency that the company is not following the BEE strategy if they are happy with a zero score. It does imply that the company has not even bothered to try to identify even a couple of Rands of spend with businesses like TELKOM, MTN, VODACOM, the banks, who are all compliant. It is impossible for a company to earn zero points for procurement. We’d like to see agencies refusing to issue a non-compliant certificate.

A case study:
An existing company registered a new company with CIPC in 2009, because it was about to be sold. The new entity did not operate in 2010. In 2011 the sale took place and the company transferred all its assets into this new entity. The new business began operating late in 2011. The business itself has a revenue of about R100 million per annum. In December 2011, their auditors issued financial statements for the new entity for the year ended December 2010, showing (naturally) no turnover. At that stage they would also have produced financials for the operating company showing its turnover of R100 million or more. In February 2012, the company applied for a BEE certificate using its new name. As evidence it produced the financials of 2010 showing almost zero turnover and on that basis the verification agency issued an EME certificate. To confirm: they issued an EME certificate valid from February 2012 to February 2013 using financials dated December 2010. The verification agency was completely happy with this situation because it “has signed accounts which are legit”.

Is it any wonder that many people find BEE a total waste of time. We have tried many times to report this activity, or at worst get the dti to issue a statement condemning this type of activity, but have had no response. If they had, this abuse would end instantly. Instead they issue more complex codes! The more complex the codes, the more room there is for abuse.

Consultants looking for loopholes
It is the job of consultants to help find the best opportunities for their clients, even look for loopholes – as long as it is legal. Too many consultants advise irregular ways of defeating the aims of the act. There are many loopholes, like the enterprise development issue mentioned above. We would like to see the dti and the minister take immediate action to close loopholes, rather than wait for more than 6 years since the original codes were issued.

BEE is too Easy
As much as there is slow implementation of BEE, with businesses giving every excuse they can think of, BEE is still too easy. Even if every company reached level 1, the level of transformation would still fall far short of an equitable system. We cannot blame, for example the Black Business Council for feeling that government pays lip service to BEE. When we see large companies reaching level 2 or 3 without needing to undertake very much in the way of true transformation, we understand the anger that many people have about the easy codes. For the record a company can reach level 1 with as much as 75% white ownership. It can have 50% of its directors, and 60% of its top managers being white. Between 40% and 57% of its senior manager can be white. It needs to train its staff, without undue effort. It needs to assist other smaller businesses – even those 74.9% owned by white people will qualify to receive enterprise development. It needs to spend a negligible amount on socio–economic development. That money can be used to support organizations that themselves benefit up to 25% white people. Let us not forget that white people only make up about 9% of the population so white people have more benefit than any other group. In all, the codes were designed with the hope that the current very lenient targets would easily be met, and this would encourage more transformation once businesses saw how well it worked.

Government itself does not follow BEE.
The codes apply to government: public entities and organs of state. The vast majorty of public entities do not have their own certificate, and many use the excuse of “we are government” for the reason why they do not have a certificate, and are not prepared to lead by example. Even SANAS, the first accreditation agency for B-BBEE verification agencies does not have a valid certificate! State owned enterprises like Transnet and Eskom have a special exemption from the minister of finance to NOT follow BEE principles when awarding tenders.

DTI taking no action
As mentioned above, the dti is slow to take action, and invariably takes no action. Their excuse is they are waiting on the B-BBEE Amendment Act and the BEE Commissioner. Their solution of issuing revised codes has made the situation far worse, as it does not address any of the issues mentioned previously.

Conclusion
The reaction to the problems mentioned above was unfortunately not to try to fix them, but to issue a whole new set of codes, which in the main does not address the problems but will rather make many worse. The old codes were a bit like a parachute with a hole in the fabric. To solve it the minister has taken the same parachute and replaced the cord with stronger rope. The parachute still has the same hole.