New black empowerment codes could leave you trailing in the dust

Posted 05 November 2013 Written by Jako Liebenberg CA(SA)

Recent changes to the Broad-Based Black Economic Empowerment Codes of Good Practice pose a major challenge to the way South African companies must conduct business. Jako Liebenberg explains how.

For the past five years most businesses have been aligning themselves and planning their operations to obtain a good B-BBEE rating in terms of the B-BBEE Codes of Good Practice. Your current B-BBEE rating reflects the work done towards our common goals of transformation and growth in the South African economy. The goal posts have now been shifted. How does this change your strategy around B-BBEE?

We knew the new codes for B-BBEE were coming and now they are here. The B-BBEE Amended Codes of Good Practice were promulgated and Gazetted on 11 October 2013.

In this article I will discuss six high level changes brought about by the new Codes that you should look out for as well as how they might affect your business and what action steps should be taken in your business.

The six high level changes   

B-BBEE Recognition levels


The B-BBEE recognition levels have changed. Previously 65 points would have gotten you to a level 4           B-BBEE rating, whereas now 80 points are needed to maintain a level 4 rating. A Level 3 rating previously required 75 points, whereas 90 points will now be required.

B-BBEE Pillars

There are also changes regarding the pillars of B-BBEE and the scoring attributable to these pillars. The seven pillars of B-BBEE have been amalgamated into five. The first major change is the removal of the Employment Equity pillar and partial amalgamation into the Management Control pillar. Employment equity is now an underlying concept to the pillars of B-BBEE. The other major change is the amalgamation of the Procurement and Enterprise development pillars. The score cards points allocation attributable to each of these pillars have also been amended.
 
The B-BBEE Generic Scorecard
 
Pillar   Weight
Ownership 25
Management Control 15
Skills Development 20
Enterprise and Supplier Development 40
Socio-Economic Development 5
Total   105
   
 
Priority Elements

The new codes introduce three priority elements to Broad Based Black Economic Empowerment. These are:
  • Ownership
  • Skills Development
  • Enterprise and Supplier Development

Thresholds for Enterprises
  • Exempted Micro Enterprises must have an annual turnover of less than R10 million (previously R5 million)
  • Qualifying Small Enterprises must now have a turnover between R10 million and R50 million.
  • Enterprises with a turnover of more than R50 million must to be measured on the Generic Scorecard.
 
Sector Codes

Most businesses by now fall within sector codes. These sector codes have not been aligned to the new amended codes for B-BBEE. An entity will still be evaluated under the current codes until the relevant code has been revised.

Implementation date of the new codes

The new codes are to be implemented within one year from Gazetting. The codes however allow for early implementation.

What is the effect of the new codes?

This change in B-BBEE recognition levels will result in most business dropping by 2 or 3 levels if their current status quo and approach remains the same regarding B-BBEE. This might result in a negative perception of your business in the market as a result of any regression in your B-BBEE status.

The reduction of the pillars and the accompanying change in the weighting of the B-BBEE scorecard will have an adverse effect on your B-BBEE score and overall rating. QSE’s and companies rated on the generic scorecard will have to take note of the emphasis placed on Skills Development and Enterprise and Supplier development.

With the introduction of priority elements comes the “Discounting Principle Effect”. Non-compliance (with a 40% sub-minimum score) on any of the “priority” elements will result in a one level downward discount of a company’s B-BBEE rating. Large enterprises (turnover exceeding R50 million) have to comply with all three priority elements. Qualifying Small Enterprises (turnover between R10 million and R50 million) must comply with the Ownership priority and can make a choice between the Skills Development or Enterprise and Supplier Development priority.

Although the threshold for Qualifying Small Enterprises (QSE’s) has been raised, there is not much relief in terms of B-BBEE compliance requirements due to the change in the pillars and weighting of the B-BBEE scorecard. QSE’s have a mountain to climb as they could previously choose any four of the seven pillars and now they are measured on the same scorecard as the Large Companies. The only advantage a QSE now has over a Large Company is the choice of one priority element other than ownership. The changes to the thresholds in terms of which a company is measured might assist the small businesses which previously had to comply with the administrative requirements of B-BBEE.

Sector codes are up for review and will have to be aligned with the Amended Codes of Good Practice. Sector codes usually addressed specific needs in terms of transformation in certain industries. The goals were generally set at a higher level than the goals for generic companies which did not operate in a sector where a code was already Gazetted. There are also major challenges in the mining sector where the mining charter is not aligned with the B-BBEE Codes of Good Practice. There focus in mining is currently only on ownership.

The new Codes will be effective on verifications after 11 October 2014. There is however a choice for early adoption. Sector codes will have to be aligned by the effective date to ensure a level playing field in the economy.

What do you need to do?

The first thing you have to do is to determine your status quo. You have to determine where your company is currently rated in terms of the Amended Codes of Good Practice. The next step would be to determine what strategic actions are required to get back to your level previously achieved.

The changes to the Codes make it necessary for Exempted Micro Enterprises and Qualifying Small Enterprises who have black ownership to re-evaluate their position, as early adoption might have advantages in terms of B-BBEE level ratings automatically allocated to certain entities in terms of ownership.

The review of the B-BBEE Codes results in all businesses having to go back to the drawing board. Plans and strategies have to be redrafted.

But let us assume you have done your B-BBEE ownership deal, where would you have to focus?

You have to take note of changes to scoring within the different pillars of B-BBEE contained in the scorecard.

To obtain a level 3 B-BBEE rating you will have to obtain 90 points on the new scorecard. A level 3 rating is considered a superior B-BBEE rating in the market. Sixty of these points need to come from Skills Development (20 + 5 Bonus) and Enterprise and Supplier Development (40 + 2 Bonus) in terms of the new B-BBEE Scorecard. These are points that are attainable through proper and continuous management. There are thus also bonus points available under both supplier development and Skills Development.

Your B-BBEE Scorecard needs to become an active agenda point at monthly directors and management meetings. Your rating needs to be continuously tracked to ensure that you obtain the maximum B-BBEE rating without throwing sound economic principles overboard.
 
Jako Liebenberg is the CEO of LDSW Incorporated Chartered Accountants and Auditors and is registered as a Public Auditor who may conduct B-BBEE verifications. Jako is involved in the structuring of B-BBEE transactions, B-BBEE verifications and advises clients on B-BBEE policies and structures. Jako can be contacted at e-mail: jako@ldsw.co.za

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