The new, new BEE amendments: be careful what you wish for

JOHANNESBURG - The Department of Trade and Industry (dti) has really done it this time, gazetting two separate controversial draft amendments to the Broad-Based Black Economic Empowerment (B-BBEE) Codes of Good Practice in the space of three months.

The 1st amendment
The first proposed amendments were gazetted on March 29 for public comment. They introduced a contentious clause called “enhanced recognition” for black-owned businesses. This clause gives companies with more than 51 percent black ownership an automatic B-BBEE score of level two, while those with 100 percent get level one.

Until now, automatic B-BBEE scores were limited for SMEs to spare them compliance costs. This change effectively exempts all black-owned businesses (excluding those owned through the modified flow-through principle) from complying with the B-BBEE codes.

Enhanced recognition has been roundly criticized for sending empowerment back to pre-2007 when BEE consisted of issuing shares to the politically connected and not much more. The amendment gives the impression that black people, no matter how successful, carry no responsibility for empowering their less fortunate countrymen and contributing to job creation and economic growth.

The risk of fronting is also increased substantially with this amendment.

Black ownership, even if only on paper, now carries a very high price and offers a hassle-free existence for all corporates. It frees them from having to bother with employment equity, skills development, preferential procurement, SME development, and socio-economic development.

The amendments also deal with skills development and youth unemployment by introducing the Youth Employment Services (YES!) to the codes.

Unfortunately, the amendments did not touch on small and medium enterprises (SMEs) despite the universal consensus that SMEs are key to ending high unemployment. This was troubling because there is even more agreement that South Africa has yet to create a sufficiently supportive environment and policy framework to unlock the potential of our SMEs and get the results needed.

The 2nd amendment
Wishing to see some changes, I wrote an article in this publication on May 2 bemoaning the unintended negative impact of the B-BBEE codes on SMEs. I observed that our corporate clients lose out on B-BBEE points when the SMEs they are procuring from grow beyond stipulated turnover thresholds (R10 million and R50m).

These thresholds are there to ensure that the SMEs that fall within them are given preferential market access. However, they are self-defeating, because they discourage corporates from issuing large contracts to SMEs, fearing they will outgrow the thresholds. The format is bad for SMEs, the economy, and job creation. It frustrates the objective of the codes.

I thought Christmas had come early on June 15 when our consultants told me that the DTI had gazetted new draft B-BBEE amendments to Code Series 400 that deals with Preferential Procurement and Enterprise & Supplier Development.

My joy soon evaporated as they took me through the amendments. Yes, the dti has removed the previous barriers to SME growth, but not in the way we had hoped.

The amendments propose three key changes: Firstly, the DTI has collapsed the two categories of SMEs into one.

Preferential Procurement will no longer differentiate between SMEs with turnovers of less than R10m and those between R10m and R50m.

This means that corporate companies will get the same B-BBEE points for procuring from an SME as it grows its turnover above R10m.

The second key change relates to businesses that are more than 51 percent black-owned (excluding ownership through the modified flow-through principle). All procurements from these businesses, irrespective of their size, will now earn B-BBEE points which were previously reserved for procurement with SMEs.

Lastly, development support that corporates are required to give to SMEs can now be extended to any business that is more than 51 percent black-owned, whether large or small.

The effect of these latest amendments is that black-owned businesses of all sizes are now treated the same under Code Series 400.

I found all this very confusing initially, especially when I was pointed to clause 3.5.3 of the Gazette. It states that procurement spending with a business that is more than 51 percent black-owned will be multiplied by “a factor of 2” on the B-BBEE scorecard. Basically, R1m procurement spent with a black-owned business can now be claimed as R2m.

The amendments give black-owned businesses much-needed competitive advantage in the market but, read together with enhanced recognition, they risk an undesirable return to narrow-based empowerment.

One last wish
All these changes taken together appear to signal a renewed focus on ownership of companies, almost to the exclusion of all other elements. A lot of us are wondering if the DTI is suffering from battle fatigue and giving up on the broad-based part of black economic empowerment.

There is another perspective, though. Perhaps the DTI decided to retract enhanced recognition because of the backlash it received. Maybe the second additional change is being offered as an alternative solution.

Allowing corporates to multiply their procurement spend with black-owned businesses by “a factor of 2” on their scorecards gives the black-owned businesses a competitive edge, which makes it unnecessary to exempt them from compliance with B-BBEE.

A black-owned SME can now be issued with an R100m contract and receive the necessary development support to deliver. The company issuing the contract will be able to claim R200m procurement spend and the development cost under the SME category, even if the SME outgrows the R50m turnover threshold. Corporations will now be able to continue earning good B-BBEE points by procuring from black-owned business as it keeps growing (and creating jobs).

If that is the compromise, then it is a nifty and welcome amendment. It will simplify B-BBEE management and verification, reducing compliance costs while hopefully increasing impact by removing previous barriers.

It recognizes that while SMEs can help solve unemployment, they only create sustainable jobs when they grow.

Yet still, there are two major drawbacks of these changes:

Black-owned SMEs no longer enjoy a market access advantage over their larger counterparts. Corporations are likely to favor issuing contracts and orders to more established black-owned businesses because the compliance effect is the same and the larger ones carry lower risk and costs.

To avoid leaving SMEs totally in the cold, the DTI should consider introducing an SME quota. It will guarantee market access and development support for SMEs while ensuring that corporates do not completely lose out on B-BBEE points as the SMEs grow.

Secondly, even without “enhanced recognition” there is now nothing compelling large black-owned businesses to comply with the codes.

Black ownership alone should not be enough to get preferential market access. They should be required to meet a B-BBEE compliance threshold, say level 4, to qualify for the “factor of 2” clause. Policymakers must discourage a culture of free rides or unearned entitlements, especially for beneficiaries of B-BBEE.

But perhaps I am getting ahead of myself, I have not seen any confirmation that the dti has retracted “enhanced recognition”.

All things considered, I feel compelled to venture one more wish: that the DTI will explain to South Africans exactly what they are thinking and doing as they engage with the public on the Gazettes.

The public has until August 14 to submit comments on the latest draft amendments. A better understanding of the DTI’s intent will probably result in more meaningful input.

Karabo Mashugane is the chief executive of 20/20 Insight – Specialist in B-BBEE Advisory, Supplier Development, and SME financing.

The views expressed here are not necessarily those of Independent Media.