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Advice: The Elephant in the Room

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It has now become apparent, beyond any doubt, that a company planning to become or remain B-BBEE compliant must have some level of black ownership. This is not because black ownership is somehow ‘compulsory’, but simply because of how the point-scoring system works.

From multiple calculated scenarios we have done, more than 95% of companies that have no black ownership will be ‘non-compliant’ (meaning that no B-BBEE level will be awarded) despite whatever other B-BBEE initiatives were implemented. Black equity ownership has therefore become the elephant in the room that can no longer be ignored by both large and small companies.

Large companies face ever-increasing pressure, especially in certain sectors, to be 51% black-owned. Although a smaller black ownership percentage may qualify a company for full ownership points on the scorecard, there is a massive drive from Government that suppliers need to be 51% black-owned to receive preferential treatment. We expect 51% black ownership to be built into more and more government tenders as a pre-requisite for tendering. This effectively means that B-BBEE will have two distinct aspects to it. On the one hand, a company’s overall BEE status level will impact the scoring for the tender while, on the other, a lack of a specified level of black ownership will automatically disqualify some companies from tendering.

There is a misconception that the above only applies to companies dealing directly with Government. Large private sector companies are also under tremendous pressure to buy from 51% black-owned suppliers, as larger suppliers (more than R50 million turnover) can only contribute a maximum of 5 points on a large client’s preferential procurement scorecard. The other 20 available points on a large enterprise’s scorecard can only be scored by buying from exempt micro enterprises, qualifying small enterprises, 51% black-owned, and 30% black woman-owned enterprises. For this reason, more and more large enterprises will expect their suppliers (large and small) to consider becoming black-owned in order to maintain existing contracts.

But where does this leave smaller companies with an annual turnover under R50 million? Such companies have only two options to becoming B-BBEE compliant. The first option is the scorecard route, which almost all such companies have realised by now, is unworkable and simply too expensive. The other option is to become 51% black-owned and qualify for automatic Level 2 status. This requires careful planning and structuring by experts, but in my opinion is the only viable option. It requires a serious commitment to genuine empowerment but if done in the correct way, should result in client satisfaction and sustainable growth.

The Solution?

Despite initial resistance from the DTI and B-BBEE Commission, it seems, from a review of various recent pieces of legislation coming out of the DTI’s office, that broad-based ownership schemes and employee share ownership schemes are here to stay. These are normally housed in well-structured empowerment trusts that must meet the rules for such schemes as outlined in the codes of the good practice. Thousands of companies have done their homework and implemented these types of schemes and even more beneficiaries have already started seeing tangible financial benefits from participating in these well-managed schemes.