Home Articles ANALYSIS: QUALIFYING: HOW TO COMPLY WITH B-BBEE

ANALYSIS: QUALIFYING: HOW TO COMPLY WITH B-BBEE

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In this article, we review the two routes available to qualifying small enterprises that want to achieve B-BBEE compliance. We also discuss the incentives for opting to become compliant as soon as possible

A Qualifying Small Enterprise (QSE) is, generally, a company with an annual turnover between R10 million and R50 million. There are two options for QSEs en route to achieving B-BBEE compliance.

OPTION 1

The first option for a QSE wishing to achieve one of the eight status levels is to adopt the QSE scorecard in its entirety. The scorecard consists of five scorecard elements that a QSE will have to address and on which it will be measured. A significant change from the ‘old’ to the recently amended codes is that to achieve a reasonable overall B-BBEE status level, during each financial year a QSE will have to implement focused initiatives addressing all five of the scorecard elements. Each element has a certain number of available weighting points that contribute to a total overall score which in turn equates to a B-BBEE status level (Levels 1 to 8) depending on how well the company scored. In addition, some of the elements (known as priority elements) each have a 40% sub-minimum criterion to avoid the overall status level being discounted by one level. The main points available under the standard codes are depicted in the table below:

SCORECARD ELEMENTPOINTS
Equity ownership (priority element)25
Management control15
Skills development (priority element)25
Enterprise and supplier development (priority element)30
Socio-economic development5
Total main points available100

The scorecard route to compliance is proving to be very difficult. As many QSEs have started contemplate their options, most have found that the above requirements are onerous and expensive to implement. To some, it is simply unaffordable.

Depending on the applicable sector code, to obtain a competitive status level a QSE will have to implement between 25% and 40% black ownership with an accompanying dividend expectation. The board of directors will have to consist of 50% and the rest of the workforce of 60% black people. In addition, the company will have to spend 3% of its annual payroll on qualifying skills development programmes; 60% of procurement will have to be with B-BBEE-compliant local suppliers, of which 15% will have to be with suppliers that are at least 51% black owned; and 1% of the company’s net profit after tax will have to be allocated to supplier development, 1% to enterprise development and 1% to socio-economic development. These are just the main targets contained in the standard codes and are more stringent in some of the sector-specific codes under which many companies fall.

One common thread throughout the standard and the nine sector-specific codes is that the scorecard route is likely to result in a non-competitive status level in the first year or two. Skills development is proving to be impractical, as the required technical training programmes often don’t exist and if they do, it cannot be foreseen that the average QSE would be able to maintain the annual targeted spending. The average employee can only be trained so much. Also, QSEs cannot afford to train people outside the business and be expected to remain profitable.

Very few QSEs are in a financial position to formulate an annual business case for implementing initiatives under all the scorecard elements. A strategy that ignores any one of the elements will most likely result in a non-compliant status, meaning that money spent would render a zero return. Therefore, many QSEs are currently not doing anything and are starting to feel the negative impact on their revenues.

It is expected that the QSE scorecard route will have limited uptake in the market as a result of these and other practical hurdles.

OPTION 2

Embedded in the B-BBEE legislation is a second, more strategic, route to compliance available to QSEs. The codes provide that a QSE that is effectively at least 51% black-owned qualifies for automatic Level 2 status and is exempt from the scorecard requirements above.

Such a status is not confirmed by undergoing an annual verification with a SANAS-accredited verification agency, as in the case of adopting the scorecard (Option 1).

After a B-BBEE equity transaction has been concluded, the QSE simply issues an annual sworn affidavit in a form prescribed by the Department of Trade and Industry (DTI). The onus thus falls on the QSE to confirm its black shareholding and B-BBEE status level. Many QSEs have already done so and are successfully trading in both the public and private sectors. A misrepresentation of a company’s B-BBEE status is now a criminal offence in terms of the B-BBEE Act.

The majority of QSEs have done their research and are opting for the 51% black-owned route. It alleviates management of smaller companies of the administrative burden of implementing a B-BBEE strategy that has the potential of distracting them from their core responsibilities of keeping the business afloat. This results in a highly competitive B-BBEE status that to a large extent ensures market retention and potentially opens the door to significant revenue growth. Depending on who the selected equity partners are, it allows the QSE to achieve many of the broad-based objectives it would have achieved under the scorecard.

For example, by partnering with black students, skills development is achieved, partnering with black entrepreneurs contributes to enterprise development and partnering with black employees leads to amazing opportunities to truly empower such individuals in more ways than one. Structuring these equity transactions transparently, sustainably and tax-efficiently becomes very important.

WAIT AND SEE COULD BE  COSTLY

B-BBEE is not compulsory. However, the main penalty for non-compliance is an almost certain loss of market share for many companies.

This can prove to be very costly, even in the short term. The B-BBEE legislation offers both black and non-black entrepreneurs certain opportunities that didn’t exist in the past.

It is important to understand not only the opportunities now open to existing companies that make certain mind-shifts but also the real threats that exist. Such threats can come from established competitors who make these mind-shifts first, or from new entrants such as enthusiastic and innovative black entrepreneurs looking for opportunities now available to them. Many have now entered an ‘adapt-or-die’ phase in their business. For these companies, a wait-and-see approach could prove fatal.

In these tough economic times, capitalising on the opportunities embedded in B-BBEE may just be the differentiator your business needs to survive and grow.

Author: Anton de Wet CA(SA) is a B-BBEE specialist and Managing Director of NetValue™ Equity Partners