Home Articles A SEASON OF UNINTENDED CONSEQUENCES – A TIME TO HARVEST?

A SEASON OF UNINTENDED CONSEQUENCES – A TIME TO HARVEST?

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Recent developments in the area of Broad-Based Black Economic Empowerment (B-bBEE) suggest that corporate South Africa is currently facing a season of unintended consequences in terms of compliance and adaptability with respect to existing regulations. The ensuing complexities impacting business range across a number of areas covering the global economic landscape to the local obligations for B-bBEE compliance. But the current economic uncertainty may also point to areas of enhanced compliance in local business activity. To understand the full picture, it is useful to step back and map the recent terrain.

Since 2006, KPMG in South Africa has undertaken annual surveys to benchmark and monitor the implementation of B-bBEE and the levels of compliance attained by participating companies. Broadly speaking, initial findings displayed a fair amount of denial, confusion, uncertainty and resistance around BEE legislation. This is understandable, given a human reluctance to change in what has been perceived as an emotive process of transformation. By 2007, however, there was a marked improvement in terms of compliance with the requirements of regulation and a willingness to accept the introduction of the new modes of business practice. While nowhere near the intended targets, there has been a clear improvement since 2006.

The formalisation of the Codes of Good Practice (gazetted in February 2007) saw a significant reversal of the progress made up to 2008, and represents the first phase of the unintended consequences. With the Codes came new measures, particularly around the empowerment of women. The introduction of the adjusted recognition for gender principle, stipulates that it is no longer sufficient just to empower black people, but that there has to be a specific focus on the empowerment of black women and other designated groups. Those companies that had reached some level of BEE compliance suddenly found themselves lacking on the issue of designated groups.

While KPMG was undertaking its 2007 survey, government commissioned a study by the Presidential Working Group on BEE. Its study found that BEE compliance in general was being met very slowly. The general sentiment at the time was that government needed to adopt a stricter approach towards non-compliance.
Although there has been a fair amount of public discussion about BEE benefiting only an elite few, this has actually been somewhat fallacious, as it only looks at one element of the legislation, which is ownership. This brings the debate to a further unintended consequence. Ironically, the current financial contraction is likely to see a shift of focus away from ownership, towards the other broad-based elements. As a number of the BEE deals were financed during the SA economic upsurge, we have seen a few of them falter in the current economic climate. This should compel companies to move away from capital-intensive ownership activities and focus on elements such as preferential procurement and enterprise development, as well as employment equity and skills development. In other words, a clearer emphasis on indirect empowerment elements and human resources empowerment issues should emerge. There are some compelling reasons for this.

South Africa needs to create more jobs in order to sustain historic levels of growth. Enterprise development and preferential procurement should receive particular attention because of their job-creation consequences in the current economic environment. In addition, they do not require as much financial effort as ownership, and can be achieved relatively quicker than skills development and employment equity, which are normally achieved through medium to longer term planning. Smartly done, a company could still earn compliance points, create jobs and empowerment through its intensification of focus in these areas.

Furthermore, these elements could improve the value chain of a company by identifying and supporting dependable, high quality and competitively-priced suppliers. Companies that want to accelerate their compliance activities could focus on these two elements. Given that companies have moved very slowly in enterprise development and preferential procurement, there remains a potential margin of improvement in these areas, which could see quick gains in terms of compliance.

Additionally, most companies have performed exceptionally well in the area of socio-economic development, and this element of BEE should not fall by the wayside in the current economic climate. Another unintended consequence has arisen out of the mismatch of intent captured in the Preferential Procurement Policy Framework Act of 2000 (PPPFA) and the Codes of Good Practice. Much concern has arisen from corporate South Africa, particularly amongst those that do business with government and State-Owned Enterprises (SOEs), who are compliant with the Codes but face a different set of rules when engaging in State business. A fundamental difference between the compliance requirements of the two is that the PPPFA, while focusing on costs, tends to emphasise ownership, or narrow-based BEE, while the Codes address seven different elements amongst which, ownership is but one. Government has signaled quite strongly that it is aware of this regulatory disharmony and will begin to align the PPPFA and the Codes. This harmonisation should make it easier for those companies wanting to do business with government.

A development that is likely to come to an abrupt halt in the current economic climate is the tendency for companies to spend money in order to gain points. This has been seen where companies simply gave out money in the form of loans or donations in the name of enterprise development and socio-economic development, respectively, to earn points for those elements. There should emerge a tendency, in the area of skills development and enterprise development, for example, to exhaust all non-financial options before starting to spend in this area. A tendency to explore all internal training avenues, before sending staff on expensive external training, should emerge.
In general, this means that companies will have to develop more innovative ways that speak to cost optimisation while gaining BEE points. This will compel companies to streamline their BEE activities so that they get as much as they can from a BEE point of view, while ensuring that funds spent on these efforts are spent wisely and offer the best of both worlds (good BEE compliance and cost optimisation).

Overall, while the B-bBEE compliance requirements are more detailed in South Africa, they are more flexible than in other countries such as Malaysia, Thailand and India, where similar legislation has been introduced and implemented. The fact that South African legislation comprises seven elements allows companies to focus on specific areas at a time, and encourages a much wider socio-economic impact at best compliance levels.
A further factor is that the pressure to comply is not being brought to bear by government, but has been inter-company (and even intra-company) competition. Companies are being pressurised into compliance by suppliers and customers because of the negative ripple effect of non-compliance on associated entities.

In terms of the government sphere, a consideration has to be given to State Owned Enterprises (SOEs). Although SOEs face little pressure to be compliant, they have become a trendsetter in the area of preferential procurement. They tend, like government in general, to be leading by example. Based on the size of their purse, they have realised that they can influence the B-bBEE landscape, and they have done so. This approach will serve to modify the activities and complexions of suppliers, as SOEs continue to insist on stricter adherence to the Codes and the PPPFA.

The overarching perspective, of course, has to take into consideration the verification environment. Although there are 11 accredited verification agencies in operation at present, we will see more by August this year. This will influence the efficiency with which compliance can be achieved. In particular, this development should see the dispensing of the common corporate excuse that verification agencies cannot be found to deliver the required compliance assessments.

The establishment of the new agencies should also create a new level of certainty in the BEE arena, and develop new standards for the efficiency and reach of the verification process. To a large extent, however, companies have been using the currently accredited 11 agencies, which is also a good thing. This acts to minimise the repercussions of any litigation, as a measure of certainty can still be found.

A final (and this is not meant to be an exhaustive list!) unintended consequence of the global economic contraction will be the dawning of the realisation that BEE is actually part of doing good business. This will bring us significantly closer to the normalisation of corporate activity in South Africa.

Currently, it seems the norm that many companies have normal business activities and separate BEE activities. That is costing them more money, effort and energy, which could be saved if they were combined, but it will also mean that a lot more will be achieved as far as compliance is concerned. For example, why do we need a procurement policy and a preferential procurement policy? Procurement processes and procedures everywhere are exactly the same. BEE is just another of many considerations in companies making procurement decisions. Do we need to differentiate between the two?

In conclusion, the broad landscape suggests that we are not getting to equity compliance rapidly enough, but the global financial crisis dictates that we should be trying to get there rather quickly in the interests of business survival. From a pure cost optimisation perspective, in the interests of running a lean, mean operation in this environment, an alignment with B-bBEE principles makes survival sense.

It makes no sense to run an operation with parallel activities addressing what are perceived to be business concerns alongside those that are seen to be B-bBEE concerns. It is wasteful and not in the interest of the activities of the operation. It is simply not sustainable.

Lehotlo Ramokgopa, BSc, Post-graduate Diploma in Marketing Management, MBA, is the Director: BEE Services at KPMG South Africa.

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