Opportunities await in the overhaul to B-BBEE legislation

b-bbee-opportunities-March2013The official rules measuring the black economic empowerment score of a business is set for major overhaul in the near future, and business owners are advised to assess these changes early to identify opportunities and measures to ensure their B-BBEE accreditation levels are not negatively affected, says Ben Bierman, Business Partners chief financial officer.

Whatever the changes to the B-BBEE legislation and its regulations (called “Codes”), the broad framework and approach of South Africa’s B-BBEE legislation will remain unchanged. More importantly, the elements or initiatives identified and prioritised will continue unchanged but for new targets and measurement criteria.

The draft codes raised some concerns that the changes in the rules can potentially harm businesses at a time when every effort must be made to support businesses to grow and to create more jobs. Business Partners was one of more than 500 organisations to submit comments to the Department of Trade and Industry, who is expected to issue a revised draft in the next month or two. He says although there are issues to be concerned about in the proposed changes, it is not all bad.

The changes to the codes will affect all companies. According to the draft released for public comment last year, it certainly looks like the Codes will continue to provide a special dispensation for small businesses. The draft proposes that the threshold for classifying a small business as an Exempted Micro Enterprises (EME) increases from an annual turnover of R5m to R10m. In other words, businesses with turnovers of less than R10m will automatically be given a 100% B-BBEE score once an auditor or accountant has confirmed the annual turnover.

The challenge lies with the tightening of the B-BEEE legislation for larger small businesses – those with turnovers of between R10m and R50m per year – known in B-BEEE jargon as Qualifying Small Enterprises (QSEs). Despite the proposed increase in threshold turnover levels for QSEs from the current range of R5m to R35m, these companies will no longer have the option to choose four out of the six elements for their verification. Under the proposed codes, QSEs will continue with a full B-BEEE verification process on all five of the new B-BBEE elements and will no longer be allowed to exclude a specific measure such as procurement or ownership should their business circumstances make it particularly onerous or expensive to comply with that specific element.

Companies that fully embrace the wider scope of transformation were up to now able to achieve significant B-BBEE compliance ratings by focusing on those elements that could effectively be incorporated into their business models.

The draft codes, however, reduces the number of measurement elements to five: ownership, management and employees, staff training and development, charity, and a combined measure of how much it procures from and supports the development of black-owned B-BBEE businesses.

Although the department has asked the public to comment on how QSEs should be measured, it is expected that QSEs will in future be measured on all five elements, leaving little discretion to adapt the codes to the unique circumstances which that business faces.

There is a further sting in the draft codes. Certain of the elements, such as procurement and supplier development and ownership, are seen as crucial or priority elements in delivering broad-based empowerment. The draft codes propose to “penalise” businesses that don’t score a pre-determined minimum number of points for each of these priority elements by decreasing the verified B-BEEE score by as much as two levels for big companies and one level in the case of QSEs.

This “penalty” can result in a significant number of companies potentially reducing B-BBEE compliance levels to such an extent that the loss of key contracts with government and State-owned enterprises or the corporate sector will be a reality. SMEs can often fail as the result of losing one or two contracts, with job losses and other decreases in tax revenue the consequence.

For Bierman, there is an unresolved contradiction in the draft codes. On the one hand, the new proposals seek to boost small businesses by placing the emphasis on procuring from them and supporting them in the supplier development element. On the other hand, this very support may well push many growing businesses over the R10m turnover threshold (which can happen very quickly in certain industries) where they will be faced with a comprehensive B-BBEE scorecard that might result in them being initially non-compliant with B-BBEE requirements of the very supply chains that helped them.

Bierman says insofar as the draft codes seek to boost emerging businesses and broaden black economic empowerment to include as many South Africans as possible, the intention of the codes are sound and should be embraced, but the challenge lies in limited flexibility in how the elements are complied with in a diverse and often complex business environment.

Business owners must remember that the change in B-BBEE legislation requires consultation and takes time. The DTI plans to finalise the new codes this year, and possibly allow for a year of transition before full implementation. Observers, however, are doubtful whether this timeframe will be achievable.

There should therefore be sufficient time for business owners to familiarise themselves with the new B-BBEE legislation. Thriving in the businesses environment often depends on how quickly and effectively opportunities and threats can be adapted to, utilised or managed. Like any change in the legislative environment, such as changes to tax law or labour law, the new B-BBEE legislation demands from every business owner at least a basic understanding of the elements and the targets. It allows the entrepreneur to adapt to the new environment quickly and focus on the core aspects of the business within the much needed broad based transformation framework, creating jobs and boosting economic growth in the process.