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.

Measurement period:
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.

1. Exempted Micro Enterprise
2. Qualifying Small Enterprise
3. 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 eme@econobee.co.za or 0861 11 3094

In addition we also look to see if this ideal BEE partner themselves have a BEE certificate, and invariable they do not. As far as I am concerned a company that sets itself out to be a BEE Partner, should also make the effort to obtain their own BEE certificate. Unfortunately this seldom happens. We could name hundreds of companies that think they are an ideal BEE partner, because they are majority black owned, but if they don’t bother to get their own BEE certificate, I have to suspect that they are not genuine about transformation and B-BBEE. If they were genuine surely they would want the whole world to know what their own BEE credentials are. In many cases they have not even bothered to do a self-assessment.

Often the company web site talks about empowerment, but seldom do they put their own BEE Certificate on the site, yet they use their “empowerment” credentials to get business, and to make deals.

If you do not have a BEE certificate showing at least level 4, you do NOT have good empowerment credentials.

Try the following exercise: Google “Black owned investment company”, and then look at each of their web sites, and see how many businesses are hoping to be BEE partners, but have no BEE certificate on their site.

Like any growing economy we have a very poor sector – in our case the income differential is larger than most other countries. We have some very wealthy people, and some who are poverty stricken. We have people who want to go into business, but lack the knowledge, life skills and capital to start and run a business. We have a severe skills shortage. I have repeatedly said that we don’t have as much an unemployment problem as an unemployable one. We have other economic, social and political issues to solve.

B-BBEE was designed to address all these issues.

Like it or not when one refers to the poverty stricken, squatters, we are in the main referring to black people. When we see a big income differential the lowest paid are black South Africans. The previous government, in the past specifically targeted black people, thereby exacerbating the situation. To call a policy broad-based black economic empowerment, when it specifically is aimed to address the problems I have highlighted in the previous paragraph is simply stating the truth.

The DA has a policy called broad-based economic empowerment that has similarities with B-BBEE. They choose to ignore the word “black”, probably to satisfy their voter base.

The best part of B-BBEE is the approach used as an economic policy: The designers/economists decided to identify those many aspects of the economy and society that need remedial action. They called those aspects “elements”, and identified 7 elements. Within those 7 elements they decided to work out an objective way of measuring how well the policy is working. They created the concept of a scorecard. Without an objective measurement, it is impossible to state clearly how this is affecting the economy. We cannot use subjective measurements – it has be be based on empirical evidence. A good analogy is a rugby and soccer match that has a winner when the winning team scores more goals or points. In rugby it is possible to score more tries and still lose the match. Spectators like to see tries scored, rather than penalties, but the team that wins, i.e is best is the one with the most points. The scorecard works on the same basis.

The scorecard concept of B-BBEE was a mark of genius.

Better was to come:

The scorecard alone does not explain why it is so good. The designers came up with an even better plan: In many other economies governments increase tax and uses that money for economic growth, education and training, offers tax incentives to growing business and helps the very poor with housing, water, health care etc. South Africa does this, but as an additional point, and instead of further raising taxes, which are not very high compared to Europe, the designers of B-BBEE decided to ask corporate South Africa to contribute. The incentive offered is more government business: The companies that score highest on their B-BBEE scorecard will stand a small chance of getting more government business than those who don’t. This incentive should encourage businesses to comply, i.e. earn as many points as possible on the scorecard and achieve the objective of the act. It was an unusual step to ask corporate South Africa (not force) them to contribute towards B-BBEE. It had to be done that way, because some of the problems of our society like racial intolerance can better be addressed at work, than yet another law. You cannot force someone to like someone else – you have make the conditions conducive. Governments still do use the stick approach, and the tax approach. Recently carbon tax was implemented to try to make South Africans more aware of the damage that fuel guzzling cars do to the environment. In the case of the B-BBEE scorecard, one of the very clever elements was preferential procurement which has the affect of increasing a company’s own B-BEE score if it procures (purchases) from other companies that themselves have a good B-BBEE scorecard. Corporate SA has made good strides in encouraging their own suppliers to become complaint – i.e. follow a scorecard that has some very good intentions.

I have previously stated that the theory behind the B-BBEE codes deserves a Nobel Prize for economics. I like the clever way that they have developed the combination of an objective measure of broad-based principles, the scorecard, the approach to rewarding corporate SA fro doing what they should be doing anyway, the procurement approach to widening the net to include smaller businesses that are suppliers to the bigger businesses. They have thought it through very carefully by making compliance easier for smaller business, and even reward smaller business more than larger ones. I stand behind my call for the economists to be recognised for designing this excellent policy.

Earlier I mentioned that the whole policy is based on corporate SA standing a chance of getting more government business.

There is nothing wrong with the policy. What is terribly wrong is government, whose procurement is central to the entire success of this excellent policy, has chosen not to follow B-BBEE. That is why we hear of the tenderpreneurs, and so much unhappiness is generated over the issuing of mining licenses, and deals. We hear of people, even government complaining that B-BBEE has not been implemented properly. That is true, but it should not detract from the good policy that it is. We should rather condemn those who choose not to follow it or implement it.

We put “our money where our mouth is”. We have now asked the Public Protector, whose job is to safeguard the constitution and the laws and ensure government follow all laws, to investigate why government is choosing not to follow the B-BBEE act, and to issue a directive that they do so. See http://blog.econobee.co.za/2010/09/02/econobee-submits-complant-to-public-protector/

If they call it a BEE deal or a BEE company but it does not sound like a BEE deal or a BEE company, then it is not a BEE deal.

I’ve said this hundreds of times, and the media, commentators, businesspeople and government still insist on calling it BEE even if it is not BEE.

B-BBEE was created and defined by the Broad-Based Black Economic Empowerment Act, 53 of 2003. It defined a set of codes that set up a system of measuring B-BBEE complaincy. That system is called the scorecard. The scorecard measures various indicators against targets, and assigns weightings to each indicator which convert to points. The final result after doing all the calculations is a B-BBEE scorecard. The scorecard needs to be verified (checked) and a certificate is issued. That valid certificate is the ONLY measurement of B-BBEE compliance. If someone talks of a BEE deal, or a BEE company, the only question to ask is “How many points does this deal earn/has this BEE company achieved? ” If there is no answer, or the answer is zero, there is no B-BBEE compliance, and no one may call this a BEE deal.

Even if they say it is BEE, does not make it BEE.

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BR: Some of the BEE score agencies rate it as not a particularly good deal with low scores.

SZ: I suspect that they have jumped the gun, in terms of the value in empowerment hands. I doubt there are many deals that would surpass this one. Number one, the empowerment shareholders, in terms of how the deal has been structured, is guaranteed the minimum returns. And most of the empowerment deals there is almost like speculation as to in five years’ time, in seven years’ time, how much money am I going to make? When the share price collapses, a deal that was deep in the money suddenly is getting wrecked. We have removed that uncertainty in this transaction. And I think that’s a very positive attribute, so it’s very empowering. I think also we have a further share in the upside in the share price of ArcelorMittal as it goes up, and we expect it to go up, of course up to a certain cap. We’ve agreed to that. But there’s further upside and that’s very important for empowerment, and therefore it’s a very empowering deal. Now the people who have actually gone further to score it using the balanced score card, I suspect they have jumped the gun in my opinion. Because a balanced scorecard would want to explore the issues of contribution towards (indistinct)… We want to explore the issues of skills development, management control. I’m not so sure how those have done that without having spoken to us as Ayigobi as well as the management of ArcelorMittal.

BR: Have you done your own scorecard or had it done on your behalf?

SZ: The transaction is not completed, that’s the problem. As ArcelorMittal has indicated, they have only now just commissioned a rating agency to do their scoring. This thing is not an overnight thing, it’s a process, and in the fullness of time I think people will be very pleased indeed that this transaction would score highly.
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Our comment as the BEE consultancy that broke this story:
Yes, of course we did a quick assessment. It’s not jumping the gun, but doing a quick analysis, in the interests of B-BBEE and the shareholders.
What continues to give us concern is that ArcelorMittal did not evaluate the deal BEFORE signing it, to maximise the points. To state that they have now called in a rating agency is of course the wrong organisation to call in. A verification agency’s job is to verify the points earned, not award and calculate the points for them. They should have done this already! The Verification Manual repeatedly mentions that the task of the verification agency is to RE-CALCULATE the score, clearly implying that the measured entity should have a score, and evidence or suitable documentation to justify that score. If they don’t then zero points must be allocated or else they could be accused of fronting!

The most concerning part is Mr Zungu is a member of the BEE Council, and should know all this.

I reflected a bit and then explained:

How do you measure empowerment in a company? Do we just ask each company if they are empowered, and based on their very subjective answers decide if they are empowered? In the case of B-BBEE the architects of the policy realised than a subjective answer would not be fair, and difficult to evaluate. They decided on a scorecard. The higher the points earned, the more empowered the company would be. To give an analogy: Who is the better rugby team? In the last World cup, the British press thought it was England. South Africans thought it was South Africa. Would either side have been objective? When we played in the final, South Africa scored more points, in a game with specific rules, and adjudicated by the referee. At that point it was agreed that the Springboks were best. The Bulls have scored more points in the Super 14 final in the past two years and are therefore the best Super 14 team. In economic policy this was quite a step forward – to find a way to objectively measure companies via a scorecard.
The next point I had to make was that the scorecard fairly represented “empowerment”. If the scorecard was based on only ownership, it would not have encompassed all aspects of empowerment. The authors of the B-BBEE codes realized this and looked at all aspects of economic and social activity. By taking into account all seven elements, they took a further step forward. They decided upon indicators within elements which will give an even more accurate measure of empowerment.
The man I was speaking to initially felt intimidated by the amount of calculations. I pointed out that the architects and designers of the policy had managed to identify less than 40 indicators with associated targets, which is not a huge amount of data to gather and calculate. However this is sufficient to very accurately and objectively evaluate a company’s empowerment performance.

I am in awe of the design of B-BBEE as an economic policy that so effectively measures empowerment. I concluded my meeting by stating that the overall design of the B-BBEE codes, the indicators, weighting, and broad sprectrum of data gathered is worthy of a Nobel prize!

A key principle (para 3.1.2) is that “qualifying enterprise development contributions of any measured entity are recognisable cumulatively:
- from the commencement date of this statement, or an earlier date chosen by the measured entity (the inception date), until the date of measurement.

Our interpretation is that the “commencement date of this statement” is 9th February 2007 – i.e. the date that the codes were released.
We also see the generic target of 3% of net profit after tax as being the average net profit after tax from that date.

So if your net profit after tax from
9th Feb 2007 to 8th Feb 2008 was R10000
and from
9th Feb 2008 to 8th Feb 2009 was R12000
and from
9th Feb 2009 to 8th Feb 2010 was R15000
then your total or cumulative NPAT over the three years is R37000, and the average NPAT is R12333.33
Note: The codes do discuss issues where you do not make a profit (indicative profit), but this is not discussed here as it is not relevant to the specific point being made in this article.

What does seem clear is that your spend needs to be looked at from 2007 (9th February) onwards.
There are issues around this:
What is a company did not start its ED activities in 2007, or did not even get a scorecard for 2007?
What about a QSE that did not choose ED as an element in 2007 or 2008 or 2009. Must it go back 4 years to start earning points?

However, the dti, and some verification agencies do not look at it this way. The dti, according to some verification agencies has told them that a measured entity can choose the starting date for ED contributions, even if they are after the inception date of the codes, e.g 2009. This is a huge benefit to an company just starting our on their BEE journey. They do not need to “make up” the shortfall of having to spend money in 2007,2008,2009. At the same time it sounds quite unfair to companies that did spend the money in the earlier years, in that with hindsight it was not necessary to have spent that money (unless of course they did get a valid scorecard during those years).

Is this right?

No, not according to the codes! The codes are clear that the inception date is the commencement date of the statement or before, but not after, ie. 9th February 2007, and the dti does not have the discretion to arbitrarily change the codes. The minister certainly does have the right to make decisions, by gazetting changes to the codes, which has has not done in this instance. Reports are that the dti will be issuing yet another interpretative guide in January 2010. (This article is written on 17th February) and nothing has been issued so far.

Commentary

What we find very disturbing is that the dti makes decisions, and in some cases clarifications, but does not publicize them or issue them as an official statement. We have noticed for a while now that some verification agencies were using the current year for calculating ED points. Yet, nowhere does the dti document their decision, neither does SANAS issue any updates as to how to do the calculations. We also find it very disturbing that the dti seems to be circumventing the codes in this instance.

Strategy

If a company that did not ED until now is lucky enough to choose a verification agency that “knows” the dti’s new ruling, then they will benefit, otherwise they may lose up to a 75% of their ED points – 11.25 points! This is two levels.

Steps to a successful BEE Scorecard:
The rationale: Each business needs a BEE scorecard because their customers need a scorecard.

Start with a simple solution – understand the scorecard in its simplest form

• The elements
• The indicators
• The targets
• How the scoring works

This works really well and certainly encourages more businesses to comply. The difficulty though is not only producing a scorecard that satisfies everyone but also finding cheap and easy points that help you beat your competitors score.

The next step: Earning cost effective and easy points

• Track the areas where you have already earned points – ie Skills Development
  
• Find creative ways of earning additional points

Finally prepare a report. Make sure you have a competitive score. If it is below your competitors score, make sure that your score is at least compliant and then use your competitors score to benchmark your next years target score.

A word to the wise. BEE contributions are taken retrospectively like an accounting audit. If you did not reach your target this year you will have to wait until next to improve you score. Unfortunately you can’t wait until you have an audit to reach your targets.

Normally I praise any company for making any effort towards transfomation, but I expect more of TELKOM. It took ages for them to issue a certificate, ostensibly because of their difficulty in identifying their shareholders, but assured us they were compliant in other ways. To push procurement at the expense of enterprise development is not a good strategy. and to care so little for their community that they do not reach targets on SED is unforgiveable. It should be remembered that both ED and SED are based on cumulative spend since 2007, so it is likley that TELKOM have never met targets on both those items for that past 2 years, and to reach targets in 2010 will be that much harder.