Submission to the dti regarding the Revised B-BBEE Codes

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.

Comments on Individual Elements:

Ownership

In general we support this.

Consequences: The new definition of new entrants, points available and targets will ensure that new entrants are not being encouraged.

The codes need a detailed explanation and worked examples on Net Value. We have seen accredited verification agencies making serious mistakes on the net value calculation. One agency takes the view that no matter how many shares are sold, if they are all paid for, then 7 points will be earned – even if only 1% of the business was sold. This is obviously wrong, but reporting it to SANAS and the dti gave no response. This is important because the priority element calculation is based on net value.

Management Control

We support the merging on management control with employment equity. We are very concerned about the decrease in points – from 29 for both elements to 15. This will result in widening employment equity gaps.

We support the removal of the adjustment for gender – it became confusing for many to calculate and it had a serious error in the algebra. It must be an error that middle management does not have points reserved for black women. We do not support any initiative that seeks to breakdown the definition of “black” into more detail and set specific targets, ie Black, coloured and Indian

Skills Development

Revised skills matrix:
More explanation is needed to guide entities and verification agencies through the various categories. We know that many companies abused Category G training. This should not have caused it to be removed, rather verification agencies warned to be more vigilant against misrepresentation.

There are insufficient formal training programs for many specialized companies. They cannot send their employees on existing courses. They need to offer their own internal training courses, and do not want to register or accredit the courses to retain their competitive advantage. They will now not receive recognition.

As a result the 6% target is perceived as too high by many companies who will choose not to comply. Together with the higher points to levels table and priority elements, most companies will “give up” on B-BBEE. See procurement in the next section.

Enterprise and Supplier Development

We note the error in the procurement indicator referring to procurement only from value adding suppliers. We do wish to point out that the definition given on page 60 of the gazette uses the same definition as the current codes:

 

“Value-Adding Suppliers”

means an Entity registered as a vendor under the Value-Added Tax of 1991, whose Net Profit Before Tax summed with its Total Labour Cost exceeds 25% of the value of its Total Revenue

 

Previously we noted with dismay far too many errors in the existing and now revised codes. Note that the existing codes, sector codes, and now revised codes have left out the word “Act” in the sentence “..under the Value-Added Tax of 1991…”

This severely reflects on the lack of professionalism of the dti and the drafters of the codes.

More important even is the new procurement calculation that states that procurement from only value-adding suppliers may be recognized. We have covered this in detail in our newsletters and press articles. More detail can be given if/when we present our detailed submission. From a sample of 10000 certificates from companies only 33% were value-adding suppliers. 67% of all companies who are not value-adding suppliers will not be asked for their BEE certificate because they cannot comply. This will reduce compliance even further. While B-BBEE is a voluntary undertaking, we submit that if this clause remains, it will be the end of B-BBEE – see our “biggest concern” on page 1 of this document.

It will also result in most companies not even achieving the 40% priority thresholds, further reducing compliance as more and more companies will choose to ignore B-BBEE. The only logical conclusion is that this will return to narrow based empowerment.

The targets for black owned businesses are, sadly, unrealistic and not in line with the key principle that black women should make up 40-50% of the scorecard.

Imports

We understand the rationale for the removal of imports as an exclusion: We want to encourage local production and value-added beneficiation, but there has been abuse of this exclusion. Abuse is caused by companies, in conjunction with lack of guidance from the dti and verification skills by verification agencies. However, for example the reality is SA does not produce crude oil for use in the oil refineries. If crude oil is not an exclusion-able import then all oil companies will not reach the 40% target on procurement, a priority element and drop two levels. Once again this will ensure lower levels of compliance as more and more companies will choose not to become complaint since they will end up being non-compliant. Every oil refinery will not achieve the 40% procurement threshold and stands to drop 2 levels, as would all companies that import the majority of their raw materials.

We understand the importance of local content, and submit that the codes should spell out how to spot abuse of the system and verification agencies and approved auditors should be more diligent. In our detailed submission we can explain how we see an improved role for agencies and give case studies of how severely abused the existing codes have been.

Enterprise Development

Change of beneficiaries
We know that there has been abuse of ED. Many companies provided minimal assistance to other generics who were ED beneficiaries and earned points. We tend to support changing beneficiaries from generics to only QSEs and EMEs, but think of 1 Time Airlines, a generic that could have benefited from genuine ED. The solution would be to ensure better verification: to ensure that the ED does indeed meet the definition of Enterprise Development which is well thought out. Verification agencies concentrate on the documentation around ED, rather than the substance of what the ED achieved.

Shorter Payment Periods
We acknowledge that the minister has a second gazette refining the shorter payment period concept. In both cases the lack of clarity and interpretation is going to harm the process. The revised codes talk of recognizing no more than 15% of the available points, but fail to give a clear explanation of how the points can be earned. Is it trying to say that only 2.25 points can be earned via shorter payment, and other ED methods must then be followed, or that the recognition factor is no more than 15% of invoice value depending on number of days from invoice date? It is limiting maximum points earned from shorter payment periods which will harm the process of ESD.

We know of situations where shorter payment periods has been the catalyst for a micro business to become sustainable due to them having no banking or credit facilities, and other situations where JSE listed companies with no credit problems whatsoever received early payment and points were awarded.

We acknowledge that shorter payment periods is an “easy” way to earn points, but refer to the dti’s recent media release where it was stated that BEE is not intended to be hard.

Case Study

We offer the case study of Msizi Ngwenya of Mabuya Glass. He produces glass whiteboards, used for writing on with erasable whiteboard markers. The traditional problem with whiteboards is they eventually get stained and do not rub out. In the case of the Mabuya Whiteboard, since it is made from toughened glass, it always looks sparkling clean. At most it needs a drop of Windolene to clean. Msizi’s biggest wish is to land a contract with a large corporate, e.g. a bank to install 10000 units. His biggest fear is landing that contract, because he does not have cash flow to finance the purchase of the glass from PG Glass. He does not have credit card or overdraft facilities, and therefore would have to turn down the large contract he would dearly like to win. He does get some business, and is always grateful for the payment on delivery of his whiteboard, on the date of the invoice. The new shorter payment period rules will almost disqualify him from ever getting that business.

Socio-Economic Development
We again recognize the error made in suggesting 100% of beneficiaries must be black, and appreciate the dti withdrawing statement 500.

Sector Codes

We do not support the concept of sector codes. They cause more unhappiness, effort, cost more money than any benefits that arise, and would be happy to see the sector codes scrapped. The sector councils are dysfunctional, play little oversight role, and cannot give any guidance on interpretations of the codes.

However we recognize that they exist and note that 8 sector codes have already been gazetted in terms of 9(1) of the act. All 8 sector codes, with the associated sub-sector codes closely follow the current codes of good practice. They use the same points to levels table, do not have priority elements, or any of the new rules around procurement. Sector codes are perceived as aiming for higher levels of compliance than the Codes of 9th February 2007. As a result there have been low levels of compliance from the affected sectors, with many companies in those sectors still using the generic codes. (This is the reason for the B-BBEE Amendment Bill specifically stating that the sector code must be followed). The 8 sector codes account for a large proportion of economic activity, leaving those who must follow the codes in the minority. (Consider the size of the transport, tourism, construction, property, ICT industries as well as the mining industry that does not follow the B-BBEE codes at all).

The sector codes must therefore also be modified in line with the revised codes, at the exact same time that the revised codes are finally gazetted. The consequence of not doing so will be that many companies that did not previously follow the sector codes, will choose to do so. Companies will do so because they will soon realize that a sector code is an easier route to obtaining a compliant scorecard. It is not difficult to convince a verification agency that the company belongs to a specific sector, or does not belong to the sector. The sector councils are non-operational or are dysfunctional and there is no organisation able to police this. The BEE Commission will not be operational for another year, and will be swamped with other work.

Verification Manual

The current verification manual covers existing codes. Prior to the revised codes coming into effect, it needs to be re-written. It needs detailed interpretations, explanations and methodologies.

SANAS/IRBA

SANAS accredited verification agencies will need to apply for an extension of scope of new accreditation once the revised codes are gazetted. IRBA approved B-BBEE auditors do not have the same requirements, though they need to show competency on the new codes.

Transitional Period

Based on the above and the need for companies to begin understanding the revised codes we recommend a transitional period of one year where entities will still use the 2007 codes after the revised codes have been gazetted. We need a clear definition of how the transitional period will be used.

Even this will be fraught with difficulties:

  • Do we state that all verifications after a set date will use the new codes?
  • Does this refer to all verification agreements signed after the set date?
  • Alternatively do we state that all financial year ends after the set date will follow the new codes?
  • It can happen that an entity is verified up to two years AFTER its year end.
  • We need guidance on which certificates are valid during the first two verifications after the set date, considering the huge impact of the revised codes and their new points to levels table.

Conclusion

The revised codes give us some idea of the thinking behind the codes, ie that skills development and enterprise development is really important. Also, more effort must be made towards getting support to the people and businesses that really need it in line with the objectives and preamble of the B-BBEE Act.

We support these sentiments.

As a result we do not support the revised codes as they stand, but commit to assisting the country, the government and the dti wherever we can.

Prepared by:

Keith Levenstein – CEO EconoBEE – division of EconoServ SA cc
keith@econobee.co.za
011 483 1190

You may also like...