The New Targets Conundrum – EconoBEE Newsletter – 20 January 2012

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The New Targets Conundrum

The BEE Codes of Good Practice sets variable targets for employment equity and procurement. For all other elements, there is a fixed target e.g 3% of NPAT for enterprise development on the generic scorecard.

Employment Equity and Procurement have targets that state “Years 0 to 5? and “6 to 10?. The 6 to 10 targets are higher than the 0 to 5. eg. senior management targets for 0 to 5 are 43% and 6 to 10 are 60%.

Since the codes came out there has been debate about when the new targets kick in. It was presumed that codes have a duration of 10 years as per paragraph 13.2 of code 000 and the new targets apply half-way through. The wording has been ambiguous enough for people to came up with various interpretations.

1) New targets apply for all verifications as from 9th February 2012
2) New targets apply for all verification as from 9th February 2013
3) New targets apply after the 5th verification that a company undergoes
4) New targets apply for companies whose rating period ends after 9th February 2012
5) New targets apply after a full rating period after the 9th February 2012

In May 2011 we wrote to the dti asking for clarity and pointing out that if the minister were to issue a new interpretation, it may have be issued in terms of 9(5) of the act giving the public 60 days to comment before the final gazette would be issued well before 9th February 2012. This is no longer possible.

The new targets will have a very serious effect on your scorecard – there can be nearly 14 points difference compared to the old targets and potentially a two level drop.

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Latest news from the dti is that they are tending towards option (4) above as their understanding of the codes. This means if your rating period ends after 9th February 2012, then you will use the new targets. A rating period generally refers to your financial period, or financial year. So, a company that has a financial year that ends in December 2011 will be rated on the old targets, even if the actual verification takes place in October 2012. A company whose financial year ends on 29th February 2012, and uses that as their rating period will be verified on the new targets, even if that verification takes place in June 2012.

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

There has been another lively debate over the concept of the time of measurement period or rating period. Is it the date on which you are being verified, or the period during which your scorecard is being calculated? Financials form a large part of the BEE scorecard so companies generally use their annual financials as the basis for measurement. It does happen that due to delays a company will submit its 2010 financials for verification in 2012 because its 2011 financials are delayed. In this case the old targets would be used. A more diligent company that produces its financials on time will have to use the new/higher targets sooner.

Another issue is many verification agencies do not respect the rating period for their EE, management and ownership calculations. Your measurement period may be 2010 to 2011, but the agency will insist on measuring you on EE, management and ownership as at the date of verification. Under these circumstances we wonder which targets the verification agency will use?

The solution is for the minister to issue a gazette or regulation outlining exactly how the new targets will work. It would have to encompass better interpretations around the measurement period.

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We were very pleased when the finance minister gazetted the changes to the PPPFA regulations. It brought the PPPFA in line with the B-BBEE act and codes. It made for consistency and ensured fairness and objectivity in adjudicating and awarding tenders.

It was a shock therefore to see that the finance minister had issued an exemption to all public/state owned enterprises for the new regulations. SOEs no longer need to follow the new regulations and have pretty much carte blanche on how they will issue/ advertise and ultimately award tenders. The exemption is for a period of 12 months to 7th December 2012. The PPPFA does allow the minister to issue those exemptions notices, but we feel that this has set back the entire B-BBEE process, almost irretrievably.

Who is affected? All entities in schedules 2 and 3(b), (d) of the Public Finance Management Act. This includes ACSA, Telkom, Transnet, SAA, Eskom, Rand Water, Umgeni Water and many others. It refers to a huge proportion of government expenditure.

What is left are only government and provincial departments and smaller organisations like Boxing SA that need to follow the new regulations.
We see this as a huge blow for true empowerment. The only measure of empowerment is your B-BBEE certificate, and yet, the largest SOEs are refusing to implement the new regulations in favour of a different, inconsistent system.

The SOEs do have reasons for wanting to be exempt – ranging from difficulty in implementing the new policies to their feeling that B-BBEE is “too soft”. The Black Business Council feels that the new regulations threaten black business because many white owned businesses have a better B-BBEE level, or can win business by giving a discount of more than 10%. They are asking that certain spend be set aside for specifically black business.

This is inconsistent with the B-BBEE scorecard. If there was a problem with the B-BBEE scorecard being “too soft”, then the route to go should be to change the B-BBEE codes and strengthen the fight against fronting rather than throwing out B-BBEE in favour of the old PPPFA regulations.

We do recognise that some SOEs, e.g ESKOM demand that their suppliers have a valid BEE certificate, level 4 or above, so they are not dismantling B-BBEE totally.

The new regulations have been discussed for 3 years, and were gazetted in June 2011, so there was sufficient time for discussion before it was implemented, rather than the minister having to issue his exemption on the date that the new regulations came into effect. It really makes us wonder why the minister bothered to implement any regulations at all if he is going to exempt probably more than 50% of all state procurement from the regulations.
This is not going to improve peoples’ attitudes around tendering and B-BBEE – rather will harm them and result in lower compliance. At the moment the dti is trying to get its new B-BBEE Amendment Bill accepted by parliament. This is also a set back for the chances of that bill being approved. We, ourselves have spent nearly two weeks writing up our submission on that bill, giving it our qualified support, and making what we consider are positive suggestions.



BEE Verification Agency EMEX closes down

EMEX who at the time was one of the larger BEE verification agencies had their accreditation suspended in November last year. Unfortunately they went into liquidation shortly afterwards. The official announcement was made in a letter dated 6th January 2012.

Although EMEX had a very large client base many accredited BEE verification agencies have agreed to offer discounts to assist companies who are in desperate need of a BEE verification.

Contact our consultants to assist you prepare for your BEE verification. We will be able to assist our clients find a suitable BEE verification agency and manage the entire verification process on their behalf.

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EconoBEE Newsletter
20 January 2012

In this issue

  • The New Targets Conundrum
  • PPPFA Fails
  • BEE Verification Agency EMEX closes down

In other news

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