BEE Interpretations – EconoBEE Newsletter – 15 April 2011

EconoBEE - BEE Points = Business

EconoBEE, leading B-BBEE into the future. We have been saying for a long time that the B-BBEE Act, B-BBEE codes and requirements are incredibly lenient. As acts go, it must be the most easy-going of all acts. This is by design, to try to encourage businesses to be compliant rather than wielding the big stick.

 

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Being Reasonable!

The key principles of the B-BBEE codes is contained in code 000, statement 000, paragraph 2:
Para 2.2 states:

“In interpreting the provisions of the Codes, any reasonable interpretation consistent with the objectives of the Act and the B-BBEE Strategy must take precedence.”

This opens the door to allow any “reasonable” interpretation on the codes. It is only up to a measured entity to prove that their interpretation is reasonable to ensure that they earn the points claimed. Note how the codes state “must take precedence”. It does not say “may be taken into account”, or “could be taken into account”. The word must is an absolute. If my interpretation is reasonable, then I must be awarded the points. A verification agency must give this reasonable interpretation precedence over their usual interpretation.

An example of this application: An Exempt Micro Enterprise qualifies as such if they can prove that their turnover is below R5 million per annum. However the Codes state – Para 4.5 code 000 “Sufficient evidence of qualification as an exempted micro enterprise is an auditor’s certificate or similar certificate” which can be issued by an “accounting officer or verification agency”.

The codes are therefore saying that qualification for an EME is an auditors certificate or a similar certificate to an auditors certificate issued by an accounting officer, auditor or verification agency. If we consider what the codes are saying then proof is a certification of turnover. If an EME decided not to issue that letter but rather submit their audited accounts, it would be reasonable to accept that the company is an EME despite the lack of proof in the format the BEE Codes require. In this instance audited accounts ultimately meets the burden of proof for an EME.

There are many areas to the codes that are unclear. Some people call them errors. One estimate was that there are more than 100 areas of confusion/errors on the codes. Key principle 2.2 should be able to clear this up. It does mean that many entities can have the exact same BEE activity, and some will earn the points because they have proved to their verification agency that their interpretation is reasonable and in-line with the act and strategy and others will not earn the points because they did not.

The codes seem to be saying that it is almost more important that an entity should apply its mind to the codes, to understand them and the strategy, than simply running out and buying cheap points. We made this point in a newsletter a few years back when we used the analogy to quantum physics – the act of observing your BEE status, and being aware of the codes, act and strategy will automatically increase your points.

During the verification process a company needs to justify why it is claiming the points. If it can prove that its activities are consistent with the B-BBEE act and the B-BBEE strategy then it will earn the points.

Part of the preamble to the B-BBEE act states:
WHEREAS under apartheid race was used to control access to South Africa`s productive resources and access to skills;
WHEREAS South Africa’s economy still excludes the vast majority of its people from ownership of productive assets and the possession of advanced skills;
WHEREAS South Africa’s economy performs below its potential because of the low level of income earned and generated by the majority of its people;
AND WHEREAS, unless further steps are taken to increase the effective participation of the majority of South Africans in the economy, the stability and prosperity of the economy in the future may be undermined to the detriment of all South Africans, irrespective of race:”

Note for example how economic growth (economy performs below its potential, prosperity of the economy) forms an important aspect of the B-BBEE act.

This all goes towards helping us to interpret the codes, and remove confusion. To some extent this explains why the minister, the dti and SANAS issue so few comments on interpreting the codes. They want companies themselves to do the interpretation, and only really get involved when there is an absolute necessity – like the recent furore over fronting and sector codes where they did take a leadership role and had to discipline a small number of verification agencies.

How to prove your case:
A business’s objective is to maximize their BEE scorecard. Their BEE activities are not always clear cut. On the other side are verification agencies whose job is to verify, but not look for points. The company (measured entity) must justify to the agency why, for example their contribution to a particular socio-economic development project counts. At the same time the verification agency needs proof of those activities. Generally the agency needs a letter signed by a competent/independent person proving that 75% of the value of benefits goes to black beneficiaries. How do we prove a donation to a black person living in a rural area? Is it unreasonable to expect the company to find a competent/independent person who can confirm that the person living in the rural is indeed black? Can we come up with a reasonable interpretation for the onus of proof to justify why the letter is not signed by an independent person? If so, then this contribution must be accepted.

 

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Almost every situation requires some form of analysis and justification. What you presumably cannot do is think up a reason after the fact to try to justify why you should earn the points. You would need to provide details of the activity/project to the verification agency together with your reasonable interpretation during the site visit.

A good example relates to the sector codes: We consulted to an electrical contractor. They had been verified according to the generic codes. We asked them and their verification agency why the generic codes were used, and not the construction charter. They gave us the explanation that the business does do pure contracting, i.e. maintenance of fixed assets, but the majority of their income comes from non-contracting activities. This sounded reasonable and we know the company had applied their mind to this issue, so this interpretation took precedence, and was applied.

Reasonableness does not give carte-blanche to use any interpretation, but should assist most companies to earn more points by following the act and the strategy more closely. This will result in better transformation.


Revision of the codes

The dti has been looking at revising the codes, and recently issued a tender for companies, presumably law firms to take this further. Once the service providers are appointed, the process will take many months or even years to evaluate and then re-evaluate the B-BBEE codes. We are quite sure that this will not result in “canceling” B-BBEE, but gazing into a crystal ball we expect in one or two years time to see the following:

Ownership
Ownership indicators will change to award more points to broad-based and employee ownership schemes. Individual ownership will be awarded less points. Less emphasis will be placed on direct voting rights and more emphasis placed on a new form of economic interest to ensure that new owners get direct benefit out of their investment. To date many companies do not declare dividends so a minority owner has no benefit, other than when he sells his shares, and in private companies there is no good way to value shares like the JSE does.

Management Control
Will be worth less points than present. Currently one new black director can be “worth” up to 6 points. This is seen as only benefiting a few, it is not broad-based enough. Management may be reduced to 5 points or even consolidated into the Employment Equity element reducing the number of elements to 6.

Employment Equity
Definitions will be cleared up. Allowing a significantly more objective measure of “senior, middle and junior” management employees. More points will be awarded. There is a possibility to have the definitions expanded to broaden the reach of the management levels. It should be noted that as from next year the targets for EE go up anyway.

Skills Development
Skills is anticipated to be the biggest beneficiary of the re-evaluations and will certainly be worth more points. Additional indicators, similar to the excellent construction charter will be created. This will include a more detailed breakdown including mentorships and bursaries.
The cost of Skills Development will not be a major discussion point, rather what does that spend get used for. The cost will therefore be targeted in more specific and beneficial areas.

Preferential Procurement
As from next year the targets for procurement go up anyway. Definitions and interpretations, especially around exclusions – imports, third party will be cleared up. The procurement element cannot change substantially as it is the theoretical driver behind Black Economic Empowerment.

Enterprise Development
Points may drop slightly. More indicators like those in the construction charter will be added. Some “easy” points, may decrease in importance. Mentorships for developing enterprises will be added. Increased emphasis will be placed on the type of beneficiary ensuring better Enterprise Development opportunities and not generic spend with any qualifying beneficiary.

Socio-economic Development
Points may drop slightly in favour of the EE and Skills elements.

QSEs may find that the “easy” points on ED and SED will have less value.
The thresholds on EMEs will rise.

The charters will also have to be re-evaluated, so there may be a recommendation to decrease the number of gazetted charters
Let’s re-look at this in two years time and see how accurate we were.

 

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EconoBEE Newsletter
15 April 2011

In this issue

  • Being Reasonable!
  • Revision of the codes
  • BEE Crash Course

In other news

About EconoBEE

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