The first three sentences of the preamble to the B-BBEE Act 53 of 2003 give a very clear indication of the act, and its objectives:

WHEREAS under apartheid race was used to control access to South Africa’s productive resources and access to skills;

WHEREAS South Africa’s economy still excludes the vast majority of its people from ownership of productive assets and the possession of advanced skills;

WHEREAS South Africa’s economy performs below its potential because of the low level of income earned and generated by the majority of its people.

Commentary:

Is the above true?

• Apartheid did use race to control people, and access to the economy.
• Apartheid did deprive people of access to skills.
• The economy still does show inequalities: Ownership of assets is still low amongst black people. Access to skills is still difficult. For example, a black man of 50 years old had no opportunity in 1980 due to apartheid and today still has less opportunity than people more privileged by apartheid. Latest Commission for Employment Equity reports confirm an improvement in black people having access to top jobs, but it still has not redressed the past.
• SA’s economy would improve if more people had more skills and better jobs.

BEE is therefore aimed at redressing some of the problems caused by apartheid that still remain with us:

increased skills (note how skills is used twice in the first two sentences of the preamble).

Giving those people assistance in gaining access to productive resources

In order to increase low levels income to grow the economy

The 7th of December 2012 was a landmark day in terms of B-BBEE legislation. State owned enterprises, such as Eskom, Telkom, ACSA, Transnet – business listed on schedules 2 and 3 of the PFMA, are now required to follow the revised PPPFA regulations that take into account the B-BBEE status of supplies for tender purposes.

In June 2011 the finance minister gazetted revised regulations for the PPPFA (preferential procurement policy framework act) which government and all state owned enterprises must follow when they do any procurement or issue tenders. The new regulations of the PPPFA,(sometimes known as the tender act) uses the well known 80/20 or 90/10 rules whereby 90% of the tender is evaluated via the price quoted, and 10% is based solely on the verified B-BBEE status of the tenderer.

Therefore 10% (or 20% in the case of smaller tenders below R1million) of the tender evaluation is based on a valid B-BBEE certificate. The higher the BEE level, the better the chance of winning the tender.

The regulations came into affect on 7th December 2011. This applied to all organs of state and state owned enterprises. It meant that for procurement purposes, government were given a rigid and objective approach to evaluating all tenders received. Unfortunately, on the same day, the minister of finance issued an exemption notice whereby all state owned enterprises could choose not to follow the 80/20 rule and the apply the BEE status of tenderers. This exemption applied to all state owned enterprise, but not government departments. The exemption was for a year, ending December 2012. Treasury has not issued any new documentation around the exemption which implies that as of now, all tenders issued by, for example PRASA, ESKOM, ACSA and all other state owned enterprises has to strictly follow the new PPPFA regulations.

Until now it can be said that government has not applied B-BBEE principles in its own activities – nearly 6 years after the codes were gazetted. From now on all spheres of government will have to apply the new regulations in their adjudication of your tenders.

In practice, many SEOs did somewhat follow BEE principles. For example the following tender issued by ACSA gives a pre-qualification criteria. It includes the statement “Bidders must be a minimum Level 4 B-BBEE Contributor verified in accordance with the Codes of Good Practice for B-BBEE”. At the time that the tender was issued, pre-December 2012, ACSA was allowed to pre-qualify tenders in this way. The new regulations do not allow for the exclusion of anyone who does not have a valid B-BBEE certificate or specified level. However, the new regulations do take into account the status achieved if any. So even if a company does not have a valid BEE certificate, it could still win the tender if the price quoted is markedly below that of the competition that has a valid BEE certificate.

Recently Saatchi and Saatchi lost the ESKOM account because they did not have at least 50% black ownership. If the tender had been issued post December 2012, ESKOM would not have been able to use black ownership as a pre-qualification criterion.

Implications
A good BEE level will be essential to win the tender.  Without a good level the only way to win the tender will be to discount prices by up to 11% for large tenders, and up to 22% for small tenders. Black ownership is not a per-requisite, though without black ownership a company may struggle to obtain a high score. The target for black ownership is 25%, not 50%. From now on for businesses wanting to do business with government or state owned enterprises, a BEE certificate alone is not enough – it has to show a high verified level.

The good news is it is still very easy to comply and to reach good B-BBEE levels.

The long awaited draft B-BBEE Codes were officially launched by dti Minister Rob Davies on 2nd October 2012.
The B-BBEE act requires that any changes to the BEE Codes be gazetted as a draft, giving the public a 60 day commentary period. Thereafter the dti minister can gazette the codes in terms of  Section 9(1) which becomes the final codes. In practice it takes far longer than 60 days – usually about a year before draft codes, particularly as far reaching as these drafts can be finalised and put into practice.

It is important to understand the draft codes, to be able to comment if necessary, and also to begin preparing to change your B-BBEE strategy for when the final codes are gazetted.

DISCLAIMER: This article is written based on the minister’s presentation. The formal draft codes giving the detail are not yet available

Draft Codes – Generic Scorecard

Salient Features:

There is some good news for small businesses:

EMEs (Exempt micro enterprises – businesses that are exempt from calculating a B-BBEE scorecard): The threshold has increased from up to R5 million annual turnover to a maximum of R10 million. EMEs are automatically given a level 4, but 100% black owned EMEs are level 1 and 50% black owned EMEs are level 2.

QSEs (Qualifying small enterprises – businesses that followed a more lenient scorecard): The threshold has increased from between R5 million annual turnover and R35 million to R10million up to R50 million.

Priority Elements
The codes have defined three priority elements:

Ownership
Skills development
Enterprise and Supplier Development

If a generic does not achieve minimum targets on all three of the priority elements, it calculated BEE level will decrease 2 levels. For example if your company has no black ownership but reaches level 4,  it will be dropped down to level 6.

A QSE has to comply with Ownership and  any one other priority elements. Otherwise it will drop one level.

Summary of each element:

Ownership – points available: 25
Little significant changes other than to points on indicators.
New entrant threshold increased from R20 million to R50 million
An enterprise must achieve at least 40% of the net value targets (points?) in order to comply with the priority requirements. If they do not, then they drop 2 levels.

Management Control – points available: 15
The indicators for management and employment equity have been combined into one element.
Still awards points for board members, directors
Points for top management (senior top and other top have been removed)
Points for Senior management
Points for Middle management
All points for junior management have been removed
The calculation for adjustment for gender has been removed and poits awarded specically for black women and black people (same effect)

Skills Development – points available: 20
Target spend has gone up from 3% to 6%.
5 extra points awarded for “absorption of learners”. Refers to providing permanent employment of  learners after they complete their learnership program
Is a priority element: 40% threshold is a requirement – alternatively the company drops 2 levels

Enterprise and Supplier Development – points available: 40

Is a simple combination of both preferential procurement and enterprise development, with additional indicators
Is a priority element: 40% threshold is a requirement – alternatively the company drops 2 levels.
Recognition levels thresholds have changed.Recognition only awarded for value-adding suppliers.

ECONOBEE note: Details are not fully available. Most companies are not value adding suppliers and have no way of becoming a value adding supplier. Therefore their certificate cannot be used by their supplier and they have no incentive to produce a BEE certificate. If they have no need or ability to produce a BEE certificate, then they will have no incentive to ask their suppliers to produce a BEE certificate. BEE has been driven by large companies asking their own suppliers for scorecards.

Recognition from all suppliers: Target increases to 80% (previously 70%) – only 8 points awarded (previously 12)
Recognition from  50% black owned suppliers: Target increased to 40% (previously 12%) – 9 points awarded (previously 3)
Points awarded for enterprise development – sector specific programs
Bonus points for new venture creation
Clarification that early repayments may only be used to earn points for assisting black owned EMEs and QSEs, and limiting points to 15% of the available 15 points

Socio-Economic Development – points available: 5
No change, other than an emphasis on sustainable access to the economy, job creation

As more information becomes available and we analyse the codes, we will give more commentary.

EconoBEE will be holding a series of briefings on the new codes and provide a submission to the dti. Watch this space for details.