The new set of B-BBEE codes, gazetted for public comment last Friday by Minister of Trade and Industry, Rob Davies, will have wide implications on empowerment transactions if implemented in their current form. Though the revised codes are a major improvement on what’s currently in place, concerns have been raised on some of the five elements of the scorecard, with BEE analysts warning of unintended consequences and unrealistic targets.
Ajay Lalu, MD of Black Lite Consulting, warns that the codes will effectively apply retrospectively, which will impact existing BEE deals, especially those that are underwater. One of the major changes in the new codes is a 40% sub-minimum requirement on ownership; skills development; and enterprise and supplier development for big firms. Companies that don’t meet the 40% sub-minimum requirement will drop two levels. Lalu says the retrospective application of the new codes means companies will have to restructure or refinance their existing deals. This will mainly affect deals that were financed through debt and those that were done without broad-based components.
Procurement is another area where big corporations will experience major hurdles. Under the new codes, preferential procurement and enterprise development have been merged to form the enterprise and supplier development element. Targets for BEE procurement have been raised from 70% to 80%. The codes require companies to source 40% of the 80% of BEE procurement from “value-adding suppliers” – defined as entities whose net profit before tax plus total labour costs exceeds a quarter of their revenue. This is aimed at barring companies from sourcing from “middle men” and agencies that do not add value or create meaningful jobs in the value chain.
Keith Levenstein, CEO of BEE verification agency EconoBEE, says the procurement targets only allow points for procuring from “value-adding suppliers”. This almost “ruins” the well-intended and good codes by setting unrealistic targets. While this may be possible in certain sectors, Levenstein says it won’t work in others. For instance, he says, if companies in the road freight industry spend 50% of their expenses on fuel, which they source from oil companies that are not value-adding companies, they will never reach procurement targets.
Even more concerning is that companies will not even ask their non-value-adding suppliers for a scorecard, almost allowing them to ignore BEE completely. From his database, about 67% of current BEE certificates don’t make the “value-adding supplier” grade. In his opinion, Government should revert to the current system where companies earn an extra 25% recognition from sourcing from “value-adding suppliers”.
The revised codes have also removed the import exemption, which Lalu says was used as a loophole by many companies to improve compliance without having to meaningfully participate in creating black-owned companies.
Stephan van der Walt, Head of Corporate Finance at Bravura, says the revised codes also propose to make it more difficult for companies to achieve a particular B–BBEE status level in the first place by increasing the number of points required at each level fairly significantly. For example, a current Level Four contributor who obtained 65 points on the current scorecard will drop to become a Level Seven Contributor – and to regain Level Four status in terms of the Revised Codes will need to score 80 points.
However, Xolani Qubeka, CEO of the Black Business Council, doesn’t believe the revised codes are too onerous to companies. He says they will compel big companies to actively develop small black-owned firms and stop using the scorecards to tick boxes for compliance.