Archive for category Interpretations
It sounds so simple. The measurement period is the period of your financial year under review, on which your verification will be based, and the measurement date is the last date of that financial year.
In practice it has become a minefield. Verification agencies do use financials, or in some cases management accounts for the preceding 12 months.
The difficulty comes in that they only use the financials for 4 of the elements:
1) Skills development: the actual spend during the financial period
3) Enterprise Development
4) Socio-Economic Development
For other three elements are verified, not at the end of the financial year, or any other time, but on the date of the site visit during verification. It can happen therefore that the financial period under review is 1st March 2011 to 28th February 2012, but the verification and site visit is only October or November of the same year. We have even seen verifications taking place up to 18 months AFTER the financial year end. So while procurement and enterprise development is based on data that is maybe a year old, ownership, management control and employment equity is verified on the date of the visit – a year later than the financials.
Key principle 2.3 of the BEE codes 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.
Key principle 2.7 of the BEE codes states:
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.
Principle 2.3 talks of “time of measurement” whereas 2.7 says you should be consistent.
We have been calling on the dti to give a better explanation on the measurement date for many years – see http://blog.econobee.co.za/2011/01/06/call-for-changes-to-bee-certificates/
In July 2012, the dti published a gazette 548 which stated:
“Furthermore. the dti seeks to advise that the measurement period means the immediate twelve (12) months preceding the measurement date.”
It did not clarify the measurement date, though it did imply that measurement activities should take place for exactly 12 months prior to the measurement date. Therefore if an agency believed that the measurement date was the date of verification, then it should based the measurement period on the 12 months preceding this date. This is obviously not what should occur and in practice nothing changed. Most agencies continue to base verification on whatever financials are available, but only award ownership, management control and employment equity points on the situation on the date of the site visit.
On 7th November 2012, the minister issued another gazette explaining what “measurement date” is. This notice states:
In terms of the Codes of Good Practice unless the context otherwise requires:
a) Measurement period is the period of 12 (twelve) consecutive months prior to the measurement date, for measurement and verification of B-BBEE Compliance.
This period may coincide with the measured entity’s financial period.
b) Measurement date refers to the date when the application/agreement to be verified was signed by the measured entity and the verification agency.
This does not make sense: Paragraph (a) says the period is the immediate 12 months preceding the measurement date. Paragraph (b) says the measurement date is the date on which the verification agreement was signed. If your financial year end is 29th February 2012, and you appoint a verification agency on 12th August 2012, then the measurement period is 13th August 2011 to 12th August 2012.
A bigger question now is what is the purpose of knowing the measurement date? Is this going to refer to the measurement period which is the period on which verification is to be based? Paragraph (a) seems to suggest so. If this is the case, then an entity will have to produce their audited financials based on the random date chosen by the transformation manager to appoint a verification agency, or else a company is going to have to appoint and sign the verification agreement on the exact same day that its financial year ends, e.g. end February. This is a ridiculous situation. Few companies will be happy to appoint an agency and pay a deposit up to a year prior to when the work actually starts. The agency may not even be in existence 12 months hence.
Measurement date should simply refer to the last date fo the financial period under review.
What the gazette has still not covered is that all elements should be verified based on a measurement on the same day, ie the measurement date. It should clearly state that all elements must be verified based on the same measurement period, a standard valuation method as per key principle 2.7. At the moment most verification agencies follow the rule that they use financials for verifying skills, procurement, enterprise development and socio-economic development, but use the date of the site visit to verify ownership, management control and employment equity.
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.
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.
The BEE Codes of Good Practice sets variable targets for employment equity and procurement. For all other elements, there is a fixed target e.g 3% of NPAT for enterprise development.
Employment equity and procurement have target that state “Years 0 to 5″ and “6 to 10″. The 6 to 10 target are higher than the 0 to 5. eg. senior management targets for 0 to 5 are 43% and 6 to 10 are 60%.
Since the codes came out there have been debate about when the new targets kick in. It was presumed that codes have a duration of 10 years as per paragraph 13.2 of code 000 and the new targets apply half-way through. The wording has been ambiguous enough for people to came up with various interpretations.
1) New targets apply for all verifications as from 9th February 2012
2) New targets apply for all verification as from 9th February 2013
3) New targets apply after the 5th verification that a company undergoes.
4) New targets apply for companies whose rating period ends after 9th February 2012.
In May 2011 we wrote to the dti asking for clarity and pointing out that if the minister were to issue a new interpretation, it may have be issued in terms of 9(5) of the act giving the public 60 days to comment before the final gazette would be issued well before 9th February 2012. This is no longer possible.
The new targets will have a very serious effecton your scorecard – there can be up to 15 points difference if you use the old targets.
Latest news from the dti is they are looking at option (4) above as their understanding on the codes. This means if your rating period ends after 9th February 2012, then you will use the the new targets. A rating period generally refers to your financial period, or financial year. So, a company that has a financial year that ends in December 2011 will be rated on the old targets, even if the actual verification takes place in October 2012. A company whose financial year ends on 28th February 2012, and uses that as their rating period will be verified on the new targets, even if that verification takes place in June 2012.
Key principle 2.3 of the codes state:
The basis for measuring B-BBEE initiatives under the Codes is the B-BBEE compliance of the measured entities at the time of measurement.
There has been much debate over the concept of the time of measurement period or rating period. Is it the date on which you are being verified, or the period during which your scorecard is being calculated? Financials form a large part of the BEE scorecard so companies generally use their annual financials as the basis for measurement. It does happen that due to delays a company will submit its 2010 financials for verification in 2012 because its 2011 financials are delayed. In this case the old targets would be used. A more diligent company that produces its financials on time will have to use the new/higher targets.
Another issue is many verification agencies do not respect the rating period for their EE, management and ownership calculations. Your measurement period may be 2010 to 2011, but the agency will insist on measuring you on EE, management and ownership as at the date of verification. Under these circumstances we wonder which target the verification agency will use?
The solution is for the minister to issue a gazette or regulation outlining exactly how the new targets will work. It would have to encompass better interpretations around the measurement period.
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.
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
A key principle of government’s economic growth policy is to encourage the development and growth of small businesses and entrepreneurs. One of the initiatives is to reduce red tape for those small businesses. Recently the National Treasury issued new procurement regulations that were intended to reconcile B-BBEE with government procurement via the PPPFA (Preferential Procurement Policy Framework Act).
These regulations stated that the PPPFA would use B-BBEE principles in evaluating all government tenders. It also meant that a small business could obtain one B-BBEE certificate and use it for both their private enterprise customers, as well as for submission with government tenders. Small businesses, with an annual turnover of less than the threshold are defined as Exempt Micro Enterprises (EMEs) and are exempt from all forms of B-BBEE. This means they do not need to go to the effort and expense of building up a B-BBEE scorecard.
If they are in the tourism industry this threshold is R2.5 million. If they are Built Environment Professionals the turnover threshold is R1.5 million. For all other industries the current threshold is R5 million. This is set by the minister of trade and industry and can be changed by notice in the government gazette.
They do need to prove to both their private enterprise customers and government that their annual turnover is below their threshold. The B-BBEE codes state that:
“4.5 Sufficient evidence of qualification as an Exempted Micro-Enterprise is an auditor’s certificate or similar certificate issued by an accounting officer or verification agency”.
Typically an auditor will check the financials of the company and if its turnover is less than the threshold will write a letter to this effect. Most verification agencies will do the same task. These “EME certificates” are then given to the company’s customers, and to government as required by the new regulations. To date there have been some queries about the issuing of these certificates. We ourselves have queried a number of certificates, mainly on the basis that the company was lying about its turnover, or that the auditor or verification agency did not apply the correct industry thresholds. In some cases private enterprises rejected auditors’ or accounting officers’ certificates and demanded that the certificate be produced by a verification agency. It took some harsh words from us to those companies to get them to recognise that an EME certificate issued by an auditor or accounting officer was acceptable. This was based, not only on the codes but correspondence with the dti who confirmed that both auditors, accounting officers and verification agencies could indeed issue EME certificates.
As always there are complications: In 2009 the minister created the concept of “accredited” verification agencies and “non-accredited” verification agencies. In December 2009 and January 2010 we wrote to the dti and SANAS asking them for the definition of a non-accredited verification agency and received an unsatisfactory answer. In 2009 SANAS began accrediting verification agencies. On the letter of accreditation it clearly identified the type of work, i.e for which code the agency was accredited. We picked up that SANAS had not stated formal accreditation for codes 000, 800 and some of the sector codes. At our insistence SANAS re-issued their accreditation certificates formally allowing verification agencies to accredit for example QSEs (codes 800). They never issued formal notification to accredited verification agencies in terms of code 000. Code 000 is the statement that sets out key principles, defines EMEs and even defines specialised entities.
This is why all EME certificates issued by accredited verification agencies do not bear the SANAS logo because officially they do not have rights to produce EME certificates, and they do not have to follow the verification guidelines, which would include site visits and automatically increase costs. However certificates issued by accredited verification agencies tended to become acceptable, even to the extent that some companies even insisted upon it. The dti and SANAS never had a problem with verification agencies issuing EME certificates as it was in line with paragraph 4.5 of the codes above, and they still do not. As recently as 23rd September, in the notice issued by the dti minister regarding accreditation to IRBA, he re-iterated that paragraph 4.5 still remains valid for EMEs.
The new PPPFA regulations issued on 8th June 2011, and coming into effect on 7th December 2011 are intended to ensure that government procurement follows B-BBEE principles. Basically they state that adjudication of tenders submitted will take into account your own B-BBEE certificate issued in terms of the B-BBEE codes. The higher your BEE level, the more likely you are to win the tender. In the case of EMEs, they automatically qualify as level 4 ( a good level) or even level 3 (a better level) if they are more than 50% black owned. For small tenders, with a value of less than R1 million, a level 3 certificate can contribute approximately 16% of the entire tender adjudication, so it becomes essential for EMEs especially to obtain a valid EME certificate.
The new PPPFA regulations issued by the finance minister chose to use different wording to paragraph 4.5. Their paragraph 10 states:
Broad-Based Black Economic Empowerment Status Level Certificates
10. (1) Tenderers with annual total revenue of R5 million or less qualify as Exempted Micro Enterprises (EMEs) in terms of the Broad-Based Black Economic Empowerment Act, and must submit a certificate issued by a registered auditor, accounting officer (as contemplated in section 60(4) of the Close Corporation Act, 1984 (Act No. 69 of 1984)) or an accredited verification agency.
(2) Tenderers other than Exempted Micro-Enterprises (EMEs) must submit their original and valid B-BBEE status level verification certificate or a certified copy thereof, substantiating their B-BBEE rating.
(3) The submission of such certificates must comply with the requirements of instructions and guidelines issued by the National Treasury and be in accordance with notices published by the Department of Trade and Industry in the Government Gazette.
(4) The B-BBEE status level attained by the tenderer must be used to determine the number of points contemplated in regulations 5 (2) and 6 (2).
We have already highlighted the mistake made by the finance minister in that he defines an EME as being one with an annual turnover of R5 million when that is not currently the case in all circumstances. Their paragraph 10.1 also uses the wording “accredited verification agency”. Effectively 10.1 is incorrect and probably unconstitutional. We had hoped that reading paragraph 10.3 would sort out the problem as it uses the words: “…be in accordance with notices published by the Department of Trade and Industry”. When we wrote to the Treasury Department they told us any interpretations regarding the BEE codes, i.e the entire section 10, should be referred to the dti as they are the gatekeeper.
However, on Tuesday,15th November, SANAS put out the following notice to all verification agencies:
Please familiarize yourself with the newly gazetted PPPFA Guidelines, according to these guidelines EME certificates cannot be issued by Verification Agencies, a letter confirming turn over below R5 million per annum must be written by either an Accounting Officer or an Auditor. There is even an attached format of how this letter should be written. Make sure that you do not mislead the public by issuing these certificates as though they will be acceptable in public service because all these complaints will come back and flood my system.
The guidelines of course refer to the entire Regulations, especially section 10. The email above states that EME certificates issued by verification agencies to private companies remains valid. However if the same EME wishes to submit documentation to “public service”, they will need to get another certificate, this time issued by an auditor or accounting officer. The many EMEs that currently have valid EME certficates produced by verification agencies are going to have to pay twice to get a second EME certificate. As noted above some private companies are INSISTING on certificate issued by verification agencies, while govt is now insisting on certificates to NOT be issued by verification agencies. The dti is happy with one set of certificates, while PPPFA is unhappy with it. The only way to win is to spend time and money, and red tape producing the same certificate twice. Apparently PPPFA is now interpreting the codes and insisting both SANAS and accredited verification agencies are following their rules. Even more confusing in our discussions with senior directors at Treasury, their had no idea of the policy as explained in the email above.
The problem could have been avoided if SANAS had issued full accreditation for code 000 to all agencies. It could also be avoided if the dti minister were to issue a ruling that overrides the Treasury’s requirements, or whoever is objecting to verification agencies issuing EME certificates.
At the same time we are well aware that some agencies, and accountants do not perform rigid checks on turnover and simply issue certificates on the basis of a faxed document purporting to be accurate financials. In many cases the company has a turnover of well above the threshold and is deliberately supplying ncorrect information, which is fronting and which the new regulations are trying to stop.
This issues raises more questions than answers.
1) What if a company accepted agency EME certificates in its own verification, and earned procurement points on those certificates. Surely this company’s certificate could not be used by the PPPFA because they used different rules in calculating their certificate?
2) Code 000 also states that all public entities, govt departments, State owned enterprises must obtain their own B-BBEE certificate. The new regulations emphasise this in their conditions by stating that if one agency procures from another the same 90/10 or 80/20 rule comes into affect and each government agency must supply a valid B-BEE certificate. Each government agency must use the specialised scorecard – because they do not have ownership. If the whole reason for excluding verification agencies from verifying EMEs is because they do not have accreditation for code 000, then they also do not have accreditation to verify specialised enterprises either! Therefore, at this point there are no agencies nor auditors able to issue valid certificates for any government enterprise or organ of state.
Minister Davies spoke about B-BBEE during his budget vote: He said the following:
“Regarding economic empowerment more generally, the BEE Codes of Good Practice were promulgated 4 years ago and we are now in a better position to assess their impact. The Presidential Advisory Council has made several policy recommendations to allow for greater participation by black people in productive activities and to tackle what is now emerging as increasingly complex practices of fronting. To this end, the dti and the Presidential Advisory Council are focusing on reviewing the BEE Codes of good practice and possibly amending the BBBEE Act. This could entail, amongst others, refinements to ensure greater policy coherence in the application of BBBEE across government and to strengthen access to procurement opportunities through the now approved and aligned PPPFA regulations. We are also looking at ways to strengthen our efforts to combat the fraudulent practice of fronting.”
Business Day – 20th April 2011 is reporting as follows :
“Department of Trade and Industry acting director-general Lionel October said yesterday the recommendations of the advisory council — now being considered by the economic cluster of government departments — would shift the focus of BEE away from equity investment and ownership towards productive activities.
Currently, companies scored high marks on the BEE scorecard for black ownership, which gave them a high overall score even when they performed poorly in areas such as enterprise development and procurement.
A proposal being examined by the economic cluster is that minimum scores would be required for enterprise development and procurement — or the overall score would suffer. This would compel companies to aim for achievement in all areas.
Mr Davies said what was under consideration was that points would be deducted from the overall score if minimum scores for enterprise development and procurement from small companies were not achieved.
It would also not be enough to merely hand over money for an incubator or enterprise development project. Companies would have to be actively involved in fostering small businesses.
“In Asia, small and big businesses have a symbiotic relationship where big business gets a lot of input from small business and works hard to ensure that it has the required capacity and the technology,” Mr Davies said.
Complex forms of fronting also had to be addressed.
“We have seen that people who participate in ownership deals imagine that they have one thing, but then when they look at the fine print, they have something else,” Mr Davies said.
“There is now a whole industry of lawyers and accountants who are structuring these deals in particular ways.”
The above is not too different from our crystal ball gazing in our previous newsletter. This is what we said:
The dti has been looking at revising the codes, and recently issued a tender for companies, presumably law firms to take this further. Once the service providers are appointed, the process will take many months or even years to evaluate and then re-evaluate the B-BBEE codes. We are quite sure that this will not result in “canceling” B-BBEE, but gazing into a crystal ball we expect in one or two years time to see the following:
Ownership indicators will change to award more points to broad-based and employee ownership schemes. Individual ownership will be awarded less points. Less emphasis will be placed on direct voting rights and more emphasis placed on a new form of economic interest to ensure that new owners get direct benefit out of their investment. To date many companies do not declare dividends so a minority owner has no benefit, other than when he sells his shares, and in private companies there is no good way to value shares like the JSE does.
Will be worth less points than present. Currently one new black director can be “worth” up to 6 points. This is seen as only benefiting a few, it is not broad-based enough. Management may be reduced to 5 points or even consolidated into the Employment Equity element reducing the number of elements to 6.
Definitions will be cleared up. Allowing a significantly more objective measure of “senior, middle and junior” management employees. More points will be awarded. There is a possibility to have the definitions expanded to broaden the reach of the management levels. It should be noted that as from next year the targets for EE go up anyway.
Skills is anticipated to be the biggest beneficiary of the re-evaluations and will certainly be worth more points. Additional indicators, similar to the excellent construction charter will be created. This will include a more detailed breakdown including mentorships and bursaries. The cost of Skills Development will not be a major discussion point, rather what does that spend get used for. The cost will therefore be targeted in more specific and beneficial areas.
As from next year the targets for procurement go up anyway. Definitions and interpretations, especially around exclusions – imports, third party will be cleared up. The procurement element cannot change substantially as it is the theoretical driver behind Black Economic Empowerment.
Points may drop slightly. More indicators like those in the construction charter will be added. Some “easy” points, may decrease in importance. Mentorships for developing enterprises will be added. Increased emphasis will be placed on the type of beneficiary ensuring better Enterprise Development opportunities and not generic spend with any qualifying beneficiary.
Points may drop slightly in favour of the EE and Skills elements.
QSEs may find that the “easy” points on ED and SED will have less value.
The thresholds on EMEs will rise.
The charters will also have to be re-evaluated, so there may be a recommendation to decrease the number of gazetted charters
Let’s re-look at this in two years time and see how accurate we were.
The dti, gatekeeper of the BEE codes has wasted an enormous amount of taxpayers money in setting up the BEE codes, and the sector codes. Latest rumours are they are about to dump the sector codes.
Way back, before the B-BBEE act was gazetted, the financial sector came up with its financial sector code, and other sectors stated following suit. The B-BBEE codes specifically made allowances for sector codes. Many sectors, believing that they were being steamrolled into following a charter spent huge amounts of time and effort to try to create their charter, mostly without success. At the time we are totally anti the charters, as we said that it would cause more confusion and costs and not contribute towards transformation. At the time we were criticised by the dti.
It turns out were correct all the time: The sector codes have proven a total waste of time and money. Industry bodies, government and private enterprise have wasted our money, to create a non-functioning sector codes process.
The minister did indeed gazette four sector codes, construction, transport, tourism and forestry back in 2009. All four came into effect on the date of gazetting, and only one had a transitional period – but implying that all had to be followed from the date of gazetting. In 2009, no one bothered to follow those charters.Around about 10 other charters have been or are still in the process of gazetting including covering Financial services, ICT, property, accountants and legal.
Also in 2009, the minister stated that BEE certificates would only be valid if produced by a SANAS accredited verification agency. His initial notice gave a deadline of 31 July 2009. We pointed out to the minister that at the time SANAS did not have a methodology to accredit agencies based on the sector codes. It would imply that every company in the affected industry would be unable to produce a valid certificate. The minister then delayed the deadline to 1st February 2010. Even with this delay SANAS did not manage to accredit any agency to verify against the sector codes until March 2010. Only a small number of agencies ever managed to become accredited for the sector codes.
It did not really matter – most companies in the affected industries continued using the generic codes and passing that certificate off as a valid certificate – contrary to the regulations of SANAS and the codes. One need only look at certificates produced in 2010 for transport companies, hotels, freight and all the other affected industries to see that the sector codes and the minister’s notice was being completely ignored.
The rumours around BEE from SANAS is that “the dti may make a pronouncement as there have been complaints from the industries saying they should have a choice of utilizing the sector codes. Apparently the DG is aware of the complaints. There was a meeting in Cape Town last week where this was discussed, and from the SANAS point of view they will not view this as a non-conformance until clarity is given by the DTI.”
So legislation is being run by the DG “being aware of problems”, and SANAS, four years after the codes were gazetted is still waiting for clarity on an issue they have been accrediting agencies to do for over a year.
Is there anyone at the dti or SANAS who has the faintest idea of what is going on?
We knew this would happen. SANAS and the dti were unable to keep up with the sector codes. Most agencies did not even know about the sector codes, and failed to check the industry of their client when the client requested verification. Each sector code requires the formation of a sector council, so for example the Tourism Sector Council was formed to manage and report back on the progress the sector has been making in accordance with the sector codes. To date, no sector council has reported back to the minister of the BEE Council as to the progress made. It would be quite easy to do so: They would say “NO PROGRESS”. Every sector council is therefore in breach of their own sector code. If the dti, SANAS and sector councils can’t manage the process, it is not surprising that most measured entities have no idea what is going on, and their level of compliance is lower as a result.What is quite ironic is that even companies that were signatories to the sector codes have not even bothered to use them. For example both York Timbers and Hans Merensky were signatories to the forestry charter. Neither even follow the forestry charter.
It is exactly as we said many years back – sector codes are a waste of time and will result in lower levels of compliance. However, once the sector codes did come out we supported them, because that is what the codes say we must do. We are the consultancy raising these issues with the dti and SANAS. We are the people identifying the errors and inconsistencies. We are the people confronting the verification agencies, measured entities, the dti and SANAS about which scorecard to use.
The problem is that until the minister issues a notice removing the sector codes, any company in an affected sector that issues a certificate that bears the SANAS logo as its official BEE status will be misrepresenting its BEE status. The codes say that deliberate misrepresentation constitutes fronting and is fraud.
A COMPANY THAT ISSUES A CERTIFICATE CARRYING THE SANAS LOGO FOR THE WRONG SCORECARD IS FRONTING.
This is the beginning on the end for the sector codes, and I’m not sorry about that. I have to state that the only high profile person who agreed with us about the useless sector codes was Jimmy Manyi! Even as late as the end of last year Thabo Masombuko of the dti angrily confronted anyone who said that the sector codes serve no purpose. Well, his own DG had has to be brought into the fray, and SANAS, the organisation appointed by the dti still don’t know that a certificate issued in terms of the wrong scorecard is non-conformance.
What I am genuinely sorry about is if this debacle by the dti and SANAS is anything to go by, it looks like the B-BBEE codes could die a similar death. Many people will be only too happy to see the BEE codes go the same way. To them I say “Be careful what you wish for”. (I’ll explain this last statement in a future blog.) We personally will continue to support the codes until the very end.
The minister has gazetted proposed changes to the B-BBEE Codes of Good Practice.
The proposals are gazetted in terms of Section 9(5) of the act, which gives interested persons the opportunity of commenting for a period of 60 days from the date of publication of his notice. (18th February 2011).
The proposals affect enterprise development (codes 600/806) and socio-economic development (codes 700/807).
1) Enterprise Development – Shorter payment periods:
Change in shorter payment periods: The existing codes state that you can earn ED points by offering shorter payment periods to suppliers. The codes say that if you pay COD, you can claim 15/15 (i.e 100%) of the value of the payment. If you pay one day after receiving the invoice you can recognise 14/15th of the value. If you pay 5 days after receiving the invoice you can recognise 10/15th , ie. 66.6% of the payment value and so on. The old codes stated that you cannot go beyond 10 days for your payment.
The actual formula used is (15 minus number of days from date of invoice)/15
The proposed amendment allows you to take as long as 15 days to repay. It should actually be only 14 days though!
If you take 14 days to pay then you can recognise (15-14)/15 of your payment: ie 1/15th of the payment – 6.67% of the payment.
If you take 15 days to pay, the formula is (15-15)/15 = 0% which is why we stated that it can only be 14 days!
This is an extra dispensation given to companies and public enterprises that find it difficult to arrange payment as fast as 10 days. The extra benefit is very small though. If you take 12 days to pay an invoice to an approved beneficiary, you can only recognise 3/15th, ie 20% of your payment spend.
What is more interesting is the fact that the minister has given this dispensation on the shorter payment periods. Without doubt shorter payment periods is the most controversial ED activity. In the past many agencies used to regard only a small portion of the shorter payment as being recognisable ED spend. They use the formula of (15 – days to pay) as a percentage. so, if you paid COD, ie zero days, they saw it as (15-0)% of the payment = 15% of payment. We had asked the dti for an explanation and they gave us the interpretation as we have always used. Recently ABVA issued practice notes reverting back to the old arrangements. Fortunately only a few verification agencies are following this incorrect method.
There must be a reason for the dti emphasising shorter payment period, and maybe this is it. In our own submission, we will recommend that the dti issue a very specific explanation and worked example to ensure consistency.
2) Enterprise Development/Socio-economic development – Change from average annual spend to annual basis:
The codes state that ED and SED contributions are measured cumulatively (average annual) from date of inception of the codes, or even up to 5 years prior to the codes (which were issued in 2007.). This means that if your NPAT (net profit after tax) in 2007 was R1m and R1.5m in 2008, R1.3m in 2009 and R2m in 2010, then for your ED calculation our target is set at 3% of the cumulative profit of R5.8m = R174 000.
Your spend is also cumulative so if you spent R24 000 in 2007, R100 000 in 2008, R50 000 in 2009, then you would have reached target in 2010 by 2009 already, and would earn full points in 2010. We used to use the phrase “you can bank your overspend”, so if a company had overspent one year, the overspend would be carried forward to the next. There are good reasons to use the cumulative method: No one really knows what their net profit after tax will be until after their audit and their tax assessment. The best they can do prior to the year-end is use estimates and budgeted figures. With the new proposal, to be on the safe side, a company will have to overspend slightly just in case it turns out that their net profit after tax is higher than expected. The overspend will be lost next year.
Many companies have not yet begun their empowerment journey. Some have spent no money on ED or SED, so they would have had to make up a huge amount of spend if the cumulative had applied. This could have been asking them to spend 12% of NPAT on ED and 4% on SED over the past 4 years. Since the majority of businesses are not yet compliant they will be happy with the new proposed ruling. Businesses that have overspent on their ED and SEC will be unhappy.
Transitional period: There is no direct transitional period for the proposed changes. Paragraph 5 of code 600 and code 700 does state: “The Minister may from time to time by notice in the gazette revise or substitute the Benefit Factor Matrix. Any changes will only be applicable to Compliance Reports prepared for a measured entity in respect of the first 12 month period following the gazetting of a revision or substitution.”
The benefit factor matrix (annexe 600 (a)) lists the various types of contributions that can qualify as ED (and similar with SED). Paragraph 5 states that any changes to this annexure comes into effect only after 12 months. The Minister’s proposed changes however affect both the benefit factor matrix – the early payment periods , and the actual code 600 – the change from average annual to annual.
The shorter payment period will therefore only come into operation in 12 months time, but the change from cumulative to annual would come into effect as soon as it is gazetted.
We do not disagree with the proposed amendments, though we will recommend that the minister allow a transitional period for those companies that have overspent on their ED and SED targets. We welcome the fact that the minister is issuing amendments, proving that B-BBEE is still top of mind. We still have huge problems with lack of standards, fronting and lack of clear interpretations of the codes. Even these proposed changes will not clear up many issues and we will be issuing our comments to the dti recommending that when they issue this amendment, they clarify some of the issues referred to.
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The Codes of Good Practice provide for 3 categories of broad-based Black Economic Empowerment compliance and the only criteria used to define these categories is a measured entity’s total annual revenue. The listed categories therefore include:
- Exempted Micro Enterprise
- Qualifying Small Enterprise
- Generic Enterprise
In this article we will focus on the first category; Exempted Micro Enterprises.
What Is An Exempted Micro Enterprise (EME)?
Measured entities with less than R5m annual turnover are accordingly exempted from producing a BEE Scorecard. Annual turnover thresholds for the Tourism and Construction (Built Environment Professionals) industries is R2,5m and R1,5m respectively. Qualifying entities are therefore regarded as Exempt Micro Enterprises (EMEs) and are deemed to be automatic level 4 (four) BEE Contributors. Any qualifying purchases from such an enterprise can be claimed at 100%. In a scenario where black ownership is more than 50%, such an entity is deemed as a level 3 BEE contributor whereupon Procurement Recognition is at 110%.
Start-up companies are regarded as EMEs for the first year following their formation regardless of their expected revenue with the exception of tendering for contracts above R5million.
What Does an EME Need?
An EME must obtain the relevant documents as full proof for their status. At EconoBEE this is a very short and simplified process, which has a turnaround time of 2 working days. For further information, please contact us at email@example.com or 0861 11 3094
I think that consistency is one of the most important aspects of verification. The whole aim of verification is to give confidence to any company that their supplier’s scorecard is accurate.
One of the key paragraphs of the Verification Manual is the Purpose of Verification which states:
The overall aim of verifying is to give confidence to all parties that rely on upon the score set out in the verification certificate that the information on which the certificate is based has been tested for validity and accuracy
Verification is intended to reduce the risk of misstatement of individual scorecard elements to an acceptably low level, and to provide an assurance of the integrity of the information on which the Verification is based. An acceptably low level of risk is achieved if a reasonable person with sufficient knowledge of the Codes will be able to arrive at a similar conclusion based on the same set of information.
Unfortunately this is often not the case. Different verification agencies continue to differ by up to 20 points on the companies they verify. Each agency has a different interpretation of the codes – moreover they change their minds each year, and each verification analyst has his/her own interpretation. It is becoming a lottery as to what score any measured entity is going to achieve. The agencies unilaterally ignore directives from the dti, from SANAS, and even their own policies. The peole toblam must be SANAS and the dti. It is SANAS’ job to accredit agencies, and this has to entail giving direction as to how to go about the actual verification. In practice SANAS is more worried about issuing a non-conformance due to a mis-hanging certificate, or unlocked filing cabinet than in assuring consistency in the industry. Even when they are made aware of specific issues and queries, different SANAS analysts have different rules they want verification agencies to follow.
The dti hardly fares better: They do sometimes give interpretations, but don’t care to follow up on queries, probably because they are far too busy.
The third organisation, ABVA does no better. ABVA says they represent most verification agencies and even have a disciplinary process – in theory.
In the past weeks the minister has been complaining about fronting taking place in the industry. He is right to complain, but his own department is slow to react. One of the key fronting indicators occurs when different agencies award vastly different points. In the past weeks we have come across agencies that use the wrong scorecard or charter to verify. Not only is this inconsistent but is contributing to fronting. We have seen verification agencies award EME certificates to companies that have turnovers far exceeding R5 million.
In all cases, it guarantees that other agencies will NOT come to the same conclusion based on the same data. It guarantees that no one can have confidence in any certificate.
The whole aim of verification was to achieve consistency. It has not worked out this way.