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Submission – Revised B-BBEE Codes

EconoBEE - BEE Points = Business

The dti has been very busy in the past couple of months. They issued the revised codes, and followed this up with a document covering their proposal for Enterprise Development relating to shorter payment periods, and a clarification on measurement dates and measurement periods. In addition the minister has gazetted the final Financial Sector code (FSC), and has tabled the B-BBEE Amendment Bill in parliament.

In today’s newsletter we cover technical interpretations on the B-BBEE Codes, submissions and proposals.

Submission – Revised Codes

The deadline for the submission on the revised codes of good practice is now upon us. We have already submitted our comments which are available on our website.

Submission to the dti regarding the Revised B-BBEE Codes.

Prepared in line with Government Gazette 35754, of 5th October 2012, notice 800 of 2012.

Introduction

This is our summarized submission. We have prepared a detailed analysis that we will be happy to present in person to the relevant people at the dti, if the dti calls for it. The detailed analysis contains our reasoning behind every clause in the codes and analysis of the effects of each. This summary highlights only those areas that we consider most important, though we caution the dti that almost every clause needs to be analysed in detail to ensure interpretations are consistent.

General Concerns

  • The existing codes have been subject to abuse via fronting, loopholes, strange and inconsistent interpretations. We would support any initiative that improves upon this. The revised codes perpetuate and exacerbate the problem.
  • There are numerous errors both in the existing codes and in the revised codes.
  • The scorecard adds up to 105 points (or 113) with bonus points. It would simplify matters if it added up to 100.
  • We note with dismay that the QSE codes, code 600 has still not been gazetted making it impossible to comment. We note that the dti has called for comments on how to treat black owned QSEs. Without code 600 and explaining how QSEs are treated, this is an impossible task.
  • Lack of interpretations/inconsistent interpretations in the existing codes are perpetuated in the revised codes.
  • Lower points for employment equity will lead to less compliance for EE
  • Revised points to levels table will lead to more non-compliant entities and result in lower compliance
  • Priority elements: Will lead to more non-compliant companies and result in lower compliance. While we understand the need to emphasise certain elements, the relative weightings of the elements should be used for this purpose. It also does not make sense that the majority of the elements (3 out of 5) are priority elements. Normally we would expect one item to be a priority. Also, the three priority elements (ownership 25, skills 25, ESD 43) add up to 93 points including bonus points. At worst we would recommend that thresholds be implemented as per the current 40% on EE.
  • All the revised points to levels table achieves is unhappiness and it is really a form of re-valuation. E.g the new level 8 is the old level 6/7. A bigger problem is compliance is from 40 points upwards. The consequence of this is many existing level 8 companies will become non-compliant. This, together with the potential loss of 2 levels will ensure that many companies that currently have earned 70 points – level 4, will become non-compliant if they have no ownership, or fail to earn sufficient points on the other priority elements. In addition due to the harsher targets on procurement, all companies will earn lower points, with even lower levels.
    • Our biggest concern is that many more companies will choose to become non-compliant. We already see far too few compliant companies. There is a disturbing trend by many companies to request and obtain a non-compliant certificate, showing 0.00 points. We see that this will increase if there is no possibility of companies reaching a compliant level. While it is ideal that all companies reach level 1, we would rather see more level 8’s than a company that makes no effort.
    • At worst, our recommendation is that a new level, level 9, 30 to 40 points with a procurement recognition of 5% be instituted.

Read more…

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Shorter payments under review

The dti minister, Dr Rob Davies has issued a gazette, notice 922 of 2012 on 7 November 2012 covering the shorter payment periods, and the definitions of Measurement Period and Measurement Date.

Background: Shorter payment periods is used as a method of performing Enterprise Development. Code 600 identifies many activities that will be recognised as ED. This includes a grant, minority investment in a black owned EME or QSE and shorter payment periods.

Shorter payment periods is described in code 600 as follows:

“3.2.8.3 settlement of accounts with beneficiary entities over a shorter period of time in relation to the Measured Entity’s normal payment period, provided the shorter period is no longer than 10 days;”

Annexure 600 gives the recognition value of each of the ED activities. For example a grant contribution is recognised at 100%. i.e if you spend R100 on a grant contribution to an ED beneficiary then you can recognise R100 * 100% = R100 as ED spend, and this counts towards the 15 points for generic companies.

Code 600 also defines exactly what constitutes ED:

“3.2.1 Enterprise Development Contributions consist of monetary or non-monetary, recoverable or non-recoverable contributions actually initiated and implemented in favour of beneficiary entities by a Measured Entity with the specific objective of assisting or accelerating the development, sustainability and ultimate financial and operational independence of that beneficiary. This is commonly accomplished through the expansion of those beneficiaries’ financial and/or operational capacity.”

Codes 600 also defines who can be beneficiaries of ED:

“(a) Category A enterprise development contributions involves enterprise development contributions to exempted micro-enterprises or qualifying small enterprises which are 50% black-owned or black-women owned;

(b) Category B enterprise development contributions involves enterprise development contributions to any other entity that is 50% black-owned or black-women owned; or 25% black-owned or black-women owned with a BEE status of between level one (1) and level six (6);”

The problem:

Annexure 600 describes the recognition of shorter payment periods as follows:

“Percentage being 15 days less the number of days from invoice to payment”.

When we first saw this we contacted the dti for clarity. The chief director of dti gave an explanation that if payment was received on the same day as invoice, i.e zero days after invoice received, then the calculation would be (15-0)/15 = 100%. If payment was received one day later, the formula would be (15-1)/15 = 14/15 = 93.3% and so on. This has always been a controversial aspect as it was deemed “too easy” to earn points. What many people did not realise is the huge benefit to many EMEs that this provided. Our own ED beneficiary, Msizi Ngwenya of Mabuya Glass has a dream of selling thousands of glass whiteboards to one of the big corporations. His biggest fear is he will land the deal and will not be able to pay his glass supplier. He has not yet won the deal, but if he could have benefited from shorter payment periods, and his customer earned points it would have given him the kickstart he needed. Like many others we also felt that this concept was abused, by both measured entities and their “ED Beneficiaries” that sometimes were large corporations. The error that was made was in allowing those “beneficiaries” to be considered ED beneficiaries, as the activities offered to them did not meet the definition of enterprise development.

Many agencies followed the dti’s letter, while some did not. Those that did not followed the logic that if you paid on the date of invoice you would recognise 15% of the invoice value. If you paid one day later you could recognise 14% of invoice value and so on to a maximum of 10 days late where you could recognise (15-10) = 5%  of invoice value.

It gave rise to the ridiculous situation where a company could spend say R10000 on shorter payment and earn either 15 points or 2.25 points depending on which agency was chosen to verify your business. This is a 12.75 points differential – two levels.

Notice 922 issued by the minister on 7th November 2012 (replacing an earlier gazette dated 2nd November 2012) gives a detailed explanation of how the minister would like this to be followed.

The public has 30 days to comment. The methodology that is being proposed is to use the “15-x”% principle.

The wording in the gazette is:

“The refined principle relating to shorter payment periods”

(a) In terms of recognition of enterprise development beneficiaries as per the Codes of Good Practice, shorter period means settlement of accounts with beneficiary entities over a shorter period of time by the measured entity.

(b) In order to claim points for shorter period, the payment must be made within a period of fifteen (15) days from the date of the invoice.

(c) This means that if payment is at least made within the first fifteen (15) days from the date of invoice by the qualifying supplier, then the amount that can be claimed is a percentage of the invoice amount which is equal to 15 minus the number of days from invoice to payment date.

Example: Say that the invoiced amount is R10 and that the measured entity makes payment thereof 5 days after the invoice date then the measured entities. contribution to Enterprise Development is measured as follows:
R10 x (15- 5)% = R10 x 10% = R1 (contribution amount)

(d) This mechanism is only applicable to shorter payments made to Exempted Micro Enterprises (EMEs).

The proposal is to recognise shorter payment up to  15 days (increased from 10 days). It also proposed that the lower calculation (maximum 15%) should be used. It further limits this benefit only to EMEs.

Our comment:

Shorter payment was heavily used, and did go to benefit some tiny black owned businesses that could otherwise not have won any business. It was abused. The new method will be more expensive and not used as much as previously, to the detriment of some tiny businesses.

The limit to EMEs is acceptable, though we would like to see QSEs included. The minister should also clarify that it should only apply to ED beneficiaries.

Legal Issues:

Code 600 states:

5. The Benefit Factor Matrix

The Minister may from time to time, by notice in the gazette, revise or substitute the Benefit Factor Matrix. Any changes will only be applicable to Compliance Reports prepared for a Measured Entity in respect of the first 12-month period following the gazetting of a revision or substitution.

The question is whether the minister himself recognises that the move from 100% recognition to 15% is a revision of the codes. The gazette uses the term “refinement principle”.

This is important because it will guide us as to whether the new rules around shorter payments comes into effect on the day that it is gazetted, or gives a transition period of 12 months. It will also help verification agencies know where they stand because even today some agencies use the 15% principles, whereas the majority use the 100% rule. We need to know what is going to happen for the next 12 months after the rules are gazetted.


Measurement Period vs Measurement Date


It sounds so simple. The measurement period is the period of your financial year under review, on which your verification will be based, and the measurement date is the last date of that financial year.

In practice it has become a minefield. Verification agencies do use financials, or in some cases management accounts for the preceding 12 months.

The difficulty comes in that they only use the financials for 4 of the elements:
1) Skills development: the actual spend during the financial period
2) Procurement
3) Enterprise Development
4) Socio-Economic Development

Ownership, Management and Employment Equity are verified, not at the end of the financial year, or any other time, but on the date of the site visit during verification. It can happen therefore that the financial period under review is 1st March 2011 to 28th February 2012, but the verification and site visit is only October or November of the same year. We have even seen verifications taking place up to 18 months AFTER the financial year end. So while procurement and enterprise development is based on data that is maybe a year old, ownership, management control and employment equity is verified on the date of the visit – a year later than the financials.

Key principle 2.3 of the BEE codes states:
2.3 The basis for measuring B-BBEE initiatives under the Codes is the B-BBEE compliance of the measured entities at the time of measurement.

Key principle 2.7 of the BEE codes states:
2.7 Wherever a Standard Valuation Method applies to measuring an indicator, the same standard should apply, as far as reasonably possible, consistently in all other applicable calculations in this statement.

Principle 2.3 talks of “time of measurement” whereas 2.7 says you should be consistent.

We have been calling on the dti to give a better explanation on the measurement date for many years – see http://blog.econobee.co.za/2011/01/06/call-for-changes-to-bee-certificates/

In July 2012, the dti published a gazette 548 which stated:

“Furthermore. the dti seeks to advise that the measurement period means the immediate twelve (12) months preceding the measurement date.”

It did not clarify the measurement date, though it did imply that measurement activities should take place for exactly 12 months prior to the measurement date. Therefore if an agency believed that the measurement date was the date of verification, then it should base the measurement period on the 12 months preceding this date. This is obviously not what should occur and in practice nothing changed. Most agencies continue to base verification on whatever financials are available, but only award ownership, management control and employment equity points based on the data on the day of the site visit.

On 7th  November 2012, the minister issued a gazette explaining what “measurement date” is. This notice states:

In terms of the Codes of Good Practice unless the context otherwise requires:

a) Measurement period is the period of 12 (twelve) consecutive months prior to the measurement date, for measurement and verification of B-BBEE Compliance.
This period may coincide with the measured entity’s financial period.

b) Measurement date refers to the date when the application/agreement to be verified was signed by the measured entity and the verification agency.

This does not make sense: Paragraph (a) says the period is the immediate 12 months preceding the measurement date. Paragraph (b) says the measurement date is the date on which the verification agreement was signed. If your financial year end is 29th February 2012, and you appoint a verification agency on 12th August 2012, then the measurement period is 13th August 2011 to 12th August 2012.

A bigger question now is what is the purpose of knowing the measurement date? Is this going to refer to the measurement period which is the period on which verification is to be based? Paragraph (a) seems to suggest so. If this is the case, then an entity will have to produce their audited financials based on the random date chosen by the transformation manager to appoint a verification agency, or else a company is going to have to appoint and sign the verification agreement on the exact same day that its financial year ends, e.g. end February. This is a ridiculous situation. Few companies will be happy to appoint an agency and pay a deposit up to a year prior to when the work actually starts. The agency may not even be in existence 12 months hence.

Measurement date should simply refer to the last date of the financial period under review.

What the gazette has still not covered is that all elements should be verified based on a measurement on the same day, ie the measurement date. It should clearly state that all elements must be verified based on the same measurement period, a standard valuation method as per key principle 2.7. At the moment most verification agencies follow the rule that they use financials for verifying skills, procurement, enterprise development and socio-economic development, but use the date of the site visit to verify ownership, management control and employment equity.


 

B-BBEE Amendment Bill has been tabled

The dti minister, Dr Rob Davies tabled the B-BBEE Amendment Bill in parliament on 23rd November 2012. It’s main objective is to establish the BEE Commission, and make provision for criminalising fronting.

It is likely that this will only be debated next year and only come into effect in February/March 2013.
We had previously given our submission on the version issued in 2011. We have pointed out to the dti a small problem in the definitions of the Amendment Bill – it only defines a B-BBEE Professional as one who is accredited by SANAS and ignores B-BBEE auditors approved by IRBA.


 

Financial Services Charter

The FSC – financial services charter has finally been gazetted in terms of 9(1) of the B-BBEE Act. The FSC has been in progress for many years, and now applies to all in the financial sector.

This includes;

  • Banks
  • insurance – long term and short
  • re-insurance
  • retirement/pension fund managers
  • Financial Services Intermediation and brokers
  • underwriters.

This is a large industry with many large banks and insurance/investment companies, but also many financial services businesses, like insurance brokers.

It applies to all measurement periods commencing on or after 1st January 2012. (see article on measurement periods in this newsletter). This effectively means that any financial organisation whose financial year end is after 1st January 2013 (12 months after 1st January 2012) will use the FSC.

Some features: Ownership points have dropped to 17 (from 23). New elements affecting certain financial businesses have been added: “Empowerment Financial” and “Access to Financial Services”
This is the 8th sector code so far issued as a final code to be followed by businesses in that sector.

EconoBEE will be organising briefing sessions on this sector code. Watch this space for details.

Sometime back we issued a newsletter stating that some SANAS accredited agencies have become IRBA approved auditors. AQRate Verification Services have asked us to clarify why they have taken a dual accreditation and have stated “AQRate Verification Services are proud to hold both the SANAS accreditation and the IRBA approval ensuring that the highest standards are met at all times”.


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EconoBEE Newsletter
05 December 2012

In this issue

  • Submission – Revised Codes
  • Shorter payments under review
  • Measurement Period vs Measurement Date
  • B-BBEE Amendment Bill has been tabled
  • Financial Services Charter

In other news

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Executive summary of B-BBEE

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