New BEE rules ‘will lead to more firms failing rather than succeeding’

New BEE rules ‘will lead to more firms failing rather than succeeding’

December 13, 2007 – Published by Business Report.

By Sibongile Khumalo

Johannesburg – Small and medium-sized enterprises (SMEs) will have to be verified by accredited empowerment rating agencies from next year to qualify for black economic empowerment (BEE) scorecards, according to new rules introduced by the department of trade and industry.

Under the new policy, it will no longer be acceptable for businesses with annual turnover of R5 million or more to conduct self-assessment to determine their BEE credentials.

The move is expected to discourage fronting, a practice that is especially difficult to police among SMEs, but it is also likely to push up compliance costs for small businesses.

Keith Levenstein, the chief executive of empowerment consultancy EconoBEE, has slammed the new rules, saying they would only worsen the plight of small businesses.

“This flies in the face of [the department’s] statements that it wants to help create more small businesses and remove red tape. Each bit of extra red tape … is going to result in businesses failing rather than succeeding,” Leventein said.

“Even though the intention of this document is to ensure more BEE compliance, the unintended consequences … will be to decrease the number of companies trying to comply.”

He added: “It seems as if this is more a policy aimed at providing verification agencies with extra business than with reducing fronting.

“The most important point that [the department] seems to ignore, or even misunderstand, is that for BEE to succeed, it must win the hearts and minds of those businesses that suddenly, at the stroke of a pen, are going to have to pay thousands per annum extra.”

Empowerment rating agency Empowerdex said verification for a small company could cost from R4 500 to R12 000.

Empowerdex chief executive Vuyo Jack nevertheless welcomed the news, saying the verification of the BEE credentials of SMEs would stem the tide of fronting, which was most prevalent in this sector.

“Businesses, including SMEs, have for a long time been urged to come clean when doing their verifications,” Jack said. “And self-assessments have always opened an opportunity for flouting regulations.”

The broad-based BEE codes of good practice were gazetted earlier this year to guide businesses in implementing BEE.

Sally O’Shea, who runs a portable toilet hire company in Cape Town, criticised the department for failing to adequately publicise the new rules.

“This document is affecting us, and its implication should have been directly communicated with us,” said O’Shea.

“The small business sector is facing enormous cash flow challenges. The [verification costs] could be better used for training and other skills development programmes.”

But trade and industry spokesperson Vukani Mde dismissed concerns that the costs would be a burden on small businesses. Mde said firms with a turnover of more than R5 million should be able to afford to pay rating agencies.

“Fronting is a big problem when it comes to effective implementation of BEE,” Mde said. “This charter is meant to help regulate the industry.”

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