Archive for category BBBEE Knowledge

ED Re-visited

Enterprise development is worth 15 points on the generic scorecard and 25 on the QSE. The revised codes are talking of combining ED with Preferential Procurement and calling the new element Supplier Development.

ED has always been an integral part of  the BEE codes. It helps grow the economy and create employment. The link between procurement and ED is also very important. We believe that a business has a better chance of succeeding if it is supported via extra business, than simply providing seed capital.

One of the ways to perform ED with a supplier has been to assist with cash flow – specifically by arranging early payment of invoices. Many large corporations have red tape to the extent that it can take many months to be approved as a vendor and up to three months to be paid. Small businesses simply cannot afford to finance their big customers. They need the cash flow to purchase raw materials, pay expenses – rent , salaries and wages. Almost by definition if the business is small and in need of ED support it has no, or limited, financing or overdraft. We know of small businesses whose biggest dream, but also nightmare is that they will win a big contract with a large company due to cash flow constraints. That is why the BEE codes suggested that a company that pays ED suppliers early – less than 10 days from issuing of invoice to payment would earn points on the ED scorecard.

Let us re-look at the definition of ED:

“…with the objective of contributing to the development, sustainability and financial and operational independence of those beneficiaries”.

Lately we see too many ED activities that do NOT meet this definition. A company will identify a potential beneficiary that meets the requirements for being a beneficiary – i.e at least 25% black owned (with various other clauses not important to this discussion). The company will then pay invoices from that beneficiary early and claim points. Verification guidelines require that the beneficiary agree to being appointed as an ED beneficiary and supply a “request for assistance letter” and “thank you” letter.

If you visit your local supermarket (let’s assume it meets the definition of being a beneficiary) and you pay your invoice at the till, i.e within 10 seconds of receiving the request, can this really be seen as you performing ED because you have paid for your goods COD? We generally say that if your usual terms to your supplier is 30 days, and he approaches you and explains his financial constraints, and you then decide to change your financial policy towards him and ensure that he receives payment within 10 days, then you will earn ED points.

We have seen many situations where large companies that meet the definition of being a beneficiary are given ED assistance in the form of early payment of invoices. All companies will, naturally, accept any form of cash flow benefit because it makes business sense. We would ask whether the beneficiary could genuinely state that they are receiving ED assistance. We have seen these standard form letters – we even designed them, but we expected them to be used to state the truth!

Put another way would a large listed company that has a annual turnover of many billions be prepared to put out a SENS announcement stating: ”

We would like to thank XYZ company for appointing us as their enterprise development beneficiary. The early payment on our invoice no. 34567 dated 31st August to the value of R1596.87 will assist us to develop our business further. This assistance will contribute to us becoming sustainable. We hope that we will eventually become financially and operationally independent”

The acid test is:

  1. Does the business meet the definition of an ED beneficiary?
  2. Are you doing something different to your usual treatment of him and other similar suppliers?
  3. Do your activities meet the definition of ED as above?

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Clarification on Effective Dates

The dti has issued a document clarifying the effective dates of government notices.

This is a very welcome move. The purpose of the document is to explain which sector code a company must follow and from which date if the sector code is newly released. The signatory is Nomonde Mesatywa, the chief director in the BEE Unit.

Recently two new sector codes have been gazetted – the Property Charter and the ICT Charter. Both state that the sector code is effective as from the date of the gazette.

The clarification statement explains that if a company falls within the sector code it must apply that code as from the date of publishing of the sector code. The date of publishing refers not to the date that the minister signed the notice (which is generally some weeks prior to publishing), but the date of publishing of the gazette. In the case of the ICT Sector code, this is 6th June 2012. A problem that cropped up is a company may have been half-way through its verification using the Codes of Good Practice when the ICT sector code was gazetted. The question we asked was must the verification agency redo the verification because the date of issue on the certificate would be after the date of gazetting of the sector code. The dti’s statement also clarifies this. It says that any verification that  was begun, i.e applied for verification, prior to the gazetting of the sector code would use the Codes of Good Practice, whereas a verification applied for after the sector codes were gazetted would need to follow the sector code.

Our comments:

We are very happy that the dti issued a statement so soon after the issue was raised. It completely explains to everyone if a sector code should be followed or  the Codes, and there is no room for misinterpretation. We applaud the chief director for clarifying an issue that does affect a fair number of companies. We recognise that the chief director has no discretion over the actual sector codes and is unable to vary it by for example adding in a transitional period as some are requesting. We sincerely request the BEE Unit to issue more clarification statements of this nature. It will instantly solve most the the problems we have seen with interpretations.

We would recommend that all verification agencies or approved auditors that are affected,i.e who were busy with the verification of a property company or ICT company prior to the gazette include a statement on the certificate as follows:

“Please note that (insert company name) falls within the (ICT Sector/Property sector). The verification agreement was signed prior to the gazetting of the (ICT/Property sector code) and the company was verified in terms of the Codes of Good Practice. This makes their certificate valid”

This will ensure there is no confusion in for example 6 months time when the company’s B-BBEE certificate is scrutinized and a query raised that the certificate was only issued on say 1st July 2012, but not following the relevant sector code. If the disclaimer as suggested is not on the certificate, the company runs the risk that someone will see that the wrong sector code was used and disqualify the certificate. This is especially important if the company is tendering for business, and they do not have the opportunity of explaining why their certificate appears to be incorrect when it is actually entirely valid.

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Becoming B-BBEE compliant – a one-pager crash course for large businesses

This document assumes a large business with turnover of above R35 million that is not yet compliant and has no black ownership or top management.

B-BBEE compliancy is measured by means of points.  Companies wishing to become compliant will earn points by taking various actions on the various BEE elements.

A large business will follow the generic scorecard and earn points on all seven elements. These elements are

Ownership Equity (23 points available), Management Control (11 points), Employment Equity (18 points), Skills development (15 points), Preferential Procurement (20 points), Enterprise Development (15 points) and Socio Economic Development (5 points).

Compliancy is measured from 30 points upwards so while all businesses should strive for maximum points, even 35 points is considered.

A typical white owned business can become compliant via the last three elements.

Socio-economic development (donations to charity) 5 points

Enterprise development (assistance for black owned firms)  15 points

Preferential procurement (companies earn points depending on the BEE level of their own suppliers). Quite feasible to earn 10-15 points out of 20.

Total: 35 points (known as level eight)

In addition large companies may earn points on Skills Development (training of black staff) and Employment Equity. It is feasible, with a bit of work to earn 45 points (level 6).

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Prepare for verification vs certificate

Today, again we received a query from a person saying “Can you tell me , what is the value of attending this seminar (Prepare for Verification) if the B-BBEE score card /certificate must be done by an accredited agency.”

Our answer is quite simple. A certificate is not “done” by an accredited agency. It is verified by an accredited agency. There is a big difference. The agency verifies (checks) that the scorecard is calculated correctly and issues a formal certificate based on an accurate scorecard.

The whole reason for getting a certificate is to achieve a high score or level. The agency cannot “give” a high score. The company itself wanting a scorecard has to build up that good score. They have to take the correct actions in order to achieve the points on the elements. The agency does not do this, as they are only called in after the company has earned the points and calculated their scorecard. The points are not automatically earned. The elements: Ownership, Management Control, Employment Equity, Skills Development, Preferential Procurement, Enterprise Development and Socio Economic Development can all contribute towards points on the scorecard.

A sporting analogy is referees do not award points, until the team has scored the try or penalty of conversion. The team itself has to score the points. The coach helps and advises the team on how to score the points or runs or goals. The team itself has to do the work, both off and field and on it before it can earn its points. In the same way B-BBEE consultants act as the coach to the company (team), and the referee is the verification agency and he confirms that the team has earned the points.

Our up-coming seminar on “How to Prepare for Verification” is a one day event training our clients on how best to “play the game” to earn the maximum points before the verification agency can be called in to adjudicate the points earned. We will help you identify the points you have earned and also prepare your files properly. This will ensure that the verification agency will be able to easily and quickly verify the points and issue the certificate.

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The Measurement Period Problem

The measurement dates are becoming a problem again. I have a situation where a company was verified in December 2011, using March 2009 to February 2010 financials. The audited financials showed the company to be a QSE and they stated that more recent audited financials were not available. The verification agency did not ask for management accounts, or if they had now become a generic.

However the company’s revenue for the year March 2010 to February 2011 was more than R35 million making them a generic entity. The verification was carried out in December 2011 but by using older data the company was measured as a QSE. Surely this is wrong in terms of B-BBEE?

The Verification Manual states:

“10.1.3 In order to determine if the measured entity is classified correctly the Verification Agency shall obtain the audited financial statements and agree the amount recognised as revenue to the thresholds set by the Codes. When the measured entity is not audited the Verification Agency shall perform some or all of the following procedures as a minimum to verify the accuracy, completeness, occurrence and cut-off of revenue as shown in the financial statements:”

I know that it does not state which audited accounts must be used. However the codes define Total revenue as being determined under generally accepted accounting practice (GAAP). This surely also implies that an entity should be in compliance of the laws, ie be audited where required and financials submitted to SARS, CIPC, JSE etc within the allotted time period (e.g. 6 months after year-end). Therefore, if audited statements are not available, as in this case, the accreditation bodies, SANAS and IRBA should ask agencies to perform the procedures as outlined in 10.1.3. This would have shown that the entity is not longer a QSE, and must follow the generic scorecard. Moving from a generic to QSE and vice versa is a material change that verification should pick up.

We also note the key principles:

2.1 The fundamental principle for measuring B-BBEE compliance is that substance takes precedence over legal form.
2.2 In interpreting the provisions of the Codes any reasonable interpretation consistent with the objectives of the Act and the B-BBEE Strategy must take precedence.
2.3 The basis for measuring B-BBEE initiatives under the Codes is the B-BBEE compliance of the measured entities at the time of measurement.
2.4 Any misrepresentation or attempt to misrepresent any enterprise’s true B-BBEE Status may lead to the disqualification of the entire scorecard of that enterprise.
2.5 Initiatives which split separate or divide enterprises as a means of ensuring eligibility as an Exempted Micro-Enterprise, a Qualifying Small Enterprises or a Start-Up Enterprise are a circumvention of the Act and may lead to the disqualification of the entire scorecard of those enterprises concerned
2.6 Any representation made by an Entity about its B-BBEE compliance must be supported by suitable evidence or documentation. An Entity that does not provide evidence or documentation supporting any initiative, must not receive any recognition for that initiative.
2.7 Wherever a Standard Valuation Method applies to measuring an indicator, the same standard should apply, as far as reasonably possible, consistently in all other applicable calculations in this statement.

What is even more concerning is that most agencies measure ownership, management and employment equity as at the date of verification, but revenue, profits, skills, procurement, ED and SED as at the last audited financials, even if three years older. Surely this is in conflict with 2.7 above?

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The worst B-BBEE certificate I’ve ever seen

This is probably the worst BEE Certificate I’ve ever seen.

Let’s identify the errors and problems on it:

  1. Produced by Hansie D Labour Brokers – not an accredited agency or approved auditor
  2. Ownership states “Male owned”. It does not mention any black ownership. (On contacting the company they confirm they have no black ownership)
  3. The rating certificate is called “Unaccredited Transitional SMME”. There was a transitional scorecard in 2007 ending in 2008, otherwise “transitional” does not make sense. In B-BBEE terms we use QSE, not SMME.
  4. Spelling: “procerement recognition rating”. Also “Non Complaint Contributor” instead of “Non-Compliant Contributor”.
  5. It lists the procurement recognition rating as level 2.  The procurement recognition is 125% for level 2. However if you add up the points “earned” on the four elements, it comes to 100, which is level 1
  6. It lists the 7 elements by number 1100, 1200 up to 1700. This numbering methodology was used in the draft codes of 2005. The gazetted codes of 2007 use 801, 802, up to 807
  7. It lists code 1200 as “equity ownership”. It should be “Management”
  8. It lists code 1500 as “preferred procurement”. It should be Preferential Procurement”
  9. It lists code 1700 as “residual”. This is also a relic of the draft 2005 codes, and should be “Socio Economic Development”
  10. It awards 25 points to ownership because the business is 100% white owned. It should be zero.
  11. It awards 25 points to “equity ownership” (should be management) because the business is 100% white managed. It should be zero.
  12. The certificate is unsigned.
  13. It mentions a date of 01-02-2011 and a validity date of 28-02-2012. Certificates at most can be valid for one year, not 13 months.
  14. The table “BEE Status Qualification” describes the points to levels table: e.g “Level Two Contributor > 85 but < 100 on the generic scorecard”. It should be “Level Two Contributor >= 85 but < 100 on the generic scorecard”. There is a big different between greater than, and greater than or equal to. This is why the entity apparently earned 100 points but is level 2.
  15. The points earned for preferential procurement is 25 and enterprise development also 25. Based on the numerous errors we would doubt their methodology and calculations.
  16. Based on the errors identified so far we would doubt that they took into account key principle 2.6:  “Any representation made by an Entity about its B-BBEE compliance must be supported by suitable evidence or documentation. An Entity that does not provide evidence or documentation supporting any initiative, must not receive any recognition for that initiative.” We doubt that they have the evidence to support their conclusions.
  17. Based on the errors identified so far we believe that key principle 2.4 applies: “Any misrepresentation or attempt to misrepresent any enterprise’s true B-BBEE Status may lead to the disqualification of the entire scorecard of that enterprise.” This certificate definitely misrepresents the company’s true B-BBEE status.

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New Targets – Clarity?

The minister has gazetted an explanation regarding the new targets conundrum, notice 102 of 2012 issued 7th February 2012.

The key paragraph states:

“With effect from the 9 February 2012, the 0-6 year targets will come into operation. However for measured entities whose Measurement Date is prior to 9 February 2012, the 0-5 year targets will still be applicable. But for measured entities whose Measurement Date is post 9 February 2012 the new targets will be applicable.”

The notice of course should have  stated “With effect from the 9 February 2012, the 6-10 year targets will come into operation.”, instead of saying 0-6 year targets. We have notified the dti of this typo.

That notwithstanding the dti has clarified the issue to some extent, but it still is going to cause some serious problems.

The intention of this notice is that a company that is using its financial period of say 1st January 2011 to 31st December 2011 will use the “old targets”, whereas a company whose financial year ends on 29th February 2012 will use the new, higher targets for its next verification. We can therefore expect to see new targets being implemented as from about March or April of this year.

The codes, and this notice uses the term “Measurement Date”.

One of the key principles of the codes (statement 000, code 000) states:

2.3    The basis for measuring B-BBEE initiatives under the Codes is the B-BBEE compliance of the measured entities at the time of measurement.

This, presumably is what the minister had in mind when he stated “However for measured entities whose Measurement Date is prior to 9 February 2012, the 0-5 year targets will still be applicable.”

There has been some discussion about the concept of “measurement date”. We have always seen the measurement date as the end of the financial period under review. However many verification agencies do not see it that way. They correctly use the financial period for financial information like turnover, net profit after tax, skills spend, ED spend, payroll, SED spend and procurement. However those agencies tend to use ownership data and EE data as it appears on the date of the verification. We have argued that this is not a consistent approach. The purpose of verification is to verify that data as it was on the measurement date. This is consistent with for example an audit where the audit is performed many months after the year-end.

The reason that verification agencies give is that SANAS requires them to interview a selection of employees, and if an employee has left they cannot interview the employee.

In our discussions with the dti, they see measurement date in the same way as we do.

To their credit the dti has promised us that they will fix the “0-6 year” error, and give a more detailed explanation of measurement date.

It does mean that verification agencies that have incorrectly used the verification date as the measurement date will have to change their policies. They will also need to satisfy SANAS that they have sufficient information about an employee who has subsequently left the company to justify having awarded them the points.

We have one more suggestion and that is that the measurement date be included on the verification certificate, clearly showing which target is being used. This information should be included o the verification report that agencies submit to their clients, but is not included on the final B-BBEE Certificate.

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PPPFA Fails

We were very pleased when the finance minister gazetted the changes to the PPPFA regulations. It brought the PPPFA in line with the B-BBEE act and codes. It made for consistency and ensured fairness and objectivity in adjudicating and awarding tenders.

It was a shock therefore to see that the finance minister has issued an exemption to all public/state owned enterprises for the new regulations. SOEs no longer need follow the new regulations and have pretty much carte blanche on how they will issue/ advertise and ultimately award tenders. The exemption is for a period of 12 months to 7th December 2012. The PPPFA does allow the minister to issue those exemptions notices, but we feel that this has set back the entire B-BBEE process, almost irretrievably.

Who is affected? All entities in schedules 2 and 3(b), (d) of the Public Finance Management Act. This includes ACSA, Telkom, Transnet, SAA, Eskom, Rand Water, Umgeni Water. It refers to a huge proportion of government expenditure.

What is left are only government and provincial departments and smaller organisations like Boxing SA that need to follow the new regulations.
We see this as a huge blow for true empowerment. The only measure of empowerment is your B-BBEE certificate, and yet, the largest SOEs are refusing to implement the new regulations in favour of a different, inconsistent system.

The SOEs do have reasons for wanting to be exempt – ranging from difficulty in implementing the new policies to their feeling that B-BBEE is “too soft”. The Black Business Council feels that the new regulations threaten black business because many white owned businesses have a better B-BBEE level, or can win business by giving a discount of more than 10%. They are asking that certain spend be set aside for specifically black business.

This is inconsistent with the B-BBEE scorecard. If there was a problem with the B-BBEE scorecard being “too soft”, then the route to go should be to change the B-BBEE codes and strengthen the fight against fronting rather than throwing out B-BBEE in favour of the old PPPFA regulations.

We do recognise that some SOEs, e.g ESKOM demand that their suppliers have a valid BEE certificate, level 4 or above, so they are not dismantling B-BBEE totally.

The new regulations have been discussed for 3 years, and were gazetted in June 2011, so there was sufficient time for discussion before it was implemented, rather than the minister have to issue his exemption on the date that the new regulations came into effect. It really makes us wonder why the minister bothered to implement any regulations at all if he is going to exempt probably more than 50% of all state procurement from the regulations.
This is not going to improve peoples’ attitudes around tendering and B-BBEE – rather is will harm them and result in lower compliance. At the moment the dti is trying to get its new B-BBEE Amendment Bill accepted by parliament. This is also a set back for the chances of that bill being approved. We, ourselves have spent nearly two weeks writing up our submission on that bill, giving it our qualified support, and making what we consider are positive suggestions. Based on the failure of the PPPFA, our feeling right now is that the Amendment Bill will never be gazetted or implemented, so why bother wasting time on a submission. If that is our feeling, as the biggest supporters of empowerment and B-BBEE, I’d hate to hear what others are saying.

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PPPFA and Treasury tries to clear waters.

The Treasury Dept has issued guidelines to be implemented for the new PPPFA regulations coming into effect tomorrow (7th December).

They have fixed up the errors we identified, and which we had requested them to change – i.e. EMEs that fall into the Tourism or Construction sectors have different EME thresholds. In the original regulations it did not specify that certain sector have different thresholds – it made the blanket statement that EME’s have a turnover of less than R5 million, but did state that the regulations are in line with the B-BBEE Codes.

They have now clarified that an EME is one with an annual turnover of less than R5 million, unless you fall into the tourism sector where the threshold is R2.5 million and the Built Environment Professionals sector where the EME threshold is less than R1.5 million

The second issue relates to acceptable certificates:

The guidelines relating to verification agencies state that certificates will be identifiable by a SANAS logo and a unique BVA number. All certificates bear this logo, other than EMEs, because SANAS has not accredited any agencies to issue certificates for EMEs. No EME certificate issued by a verification agency is allowed to carry the SANAS logo.

The guidelines also do mention with respect to EMEs that “Sufficient evidence to confirm a qualifying EME is a certificate issued by an Accounting Officer (as contemplated in the CCA), a similar certificate issued by a Registered Auditor or a Verification Agency.”

We have spoken to Treasury and they confirm that the intention is for an EME certificate, like all certificates to carry the SANAS logo. While there could well be a legal challenge to the slight ambiguity in the guidelines, there is no doubt that every procurement officer affected by the PPPFA is going to look for a SANAS logo, and if one is not present on the certificate, they will automatically reject it.

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Proposed amendments to the B-BBEE Act

Proposed amendments to the Broad-Based Black Economic Empowerment Act (B- BBEE)

Cabinet approved the publication of the Broad-Based Black Economic Empowerment Act (B-BEE) Amendment Bill for public comment.

The proposed amendments to the Act intend to achieve the following objectives:

(a) Align the Act with other legislation impacting on the B-BBEE and with the codes

(b) Establish the B-BBEE Commission to establish an institutional environment for monitoring and evaluation broad-base black economic empowerment

(c) Provide for the regulation of the verification industry by the Independent Regulatory Board of Auditors

(d) Deal with non-compliance and circumvention by introducing offences and penalties

The proposed changes to the B-BBEE codes of good practice:

(a) Enterprise Development (ED) and Procurement to be elevated with each requiring sub-minimum and enhanced recognition for ED targeted at key sectors in IPAP and the New Growth Path

(b) Penalty provision for non-compliance with Enterprise Development and Procurement elements of the B-BBEE scorecard, and discount from overall score

(c) The points of ownership element should be broadened to include designated groups in the main points, creating greater incentives for genuine broad-based ownership such as employee share ownership, co-operatives and community ownership

(d) Setting sub-minimums/threshold for each element of the scorecard save for the adjusted ownership element

(e) The Qualifying Small Enterprises scorecard will be adjusted and certain elements made mandatory.The thresholds for Exempted Micro Enterprises will be reviewed

(F) The Employment Equity element to receive adjusted recognition and to be aligned to the Employment Equity Act (targets, Reporting and Definitions).

(g) Skills Development Element to be aligned to the New Skills development Strategy and the New Growth Path and

(h) Targets in the Ownership Skills Development Procurement and Enterprise Development will be adjusted.
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Comments:

In general, EconoBEE welcomes the proposed changes. We need to see the actual bill to analyse it in more detail, but in general, all the recommendations we have sent to the dti and BEE Council have been addressed.

We like that B-BBEE is being aligned with other acts, in particular the PPPFA which comes into effect on 7th December 2011.

More than a year ago we recommended to the minister that he establish an office of the BEE Ombudsman, to handle issues of interpretations, valid certificates, fronting, disputes. This is now being done via the establishment of a commission.

We also welcome IRBA as the overall regulatory body for verification. The verification industry has always had problems, starting with ABVA, and subsequently SANAS has struggled to handle our volume of enquiries and sort out various issues. We hope that IRBA will be fully staffed to handle the increased workload.

We were one of the first companies to raise the issue of invalid certificates, fronting and other non-conformances. We therefore welcome the approach that fronting will be penalised, and that the B-BBEE Commission will be tasked to investigate this.

In principle,we also welcome any proposed adjustments to the weightings and targets of the elements or the definitions. We have always like the fact that B-BBEE stands for “broad-based” implying it affects all aspects of the economy, and not necessarily only narrow based ownership.

We look forward to seeing the proposed bill and will make representations

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