Yes, business is to blame
Posted by Keith in Economics, True Empowerment on January 11th, 2011
We have supported transformation since the day it was genuinely proposed. We have rejected enrichment, and tenderpreneurs, but always felt, and known that economic transformation was needed. Our country’s history was such that the vast majority of the population were denied access to the economy, and a change of government, and allowing all people the vote ensured political transformation, but did nothing for economic transformation. While 80% of the people who have the political power only own 20% of the economy (rough estimates), this country is a powder keg.
Almost every political party or pressure group agrees that economic transformation must take place. The ANC offered B-BBEE. The DA’s policy is “broad-based economic empowerment”. Even Afriforum agrees that some form of transformation must take place. The best thought out is definitely B-BBEE, but not properly implemented.
Unfortunately, not enough economic transformation has taken place. The media, their readers and the general population are more interested in discovering faults with the system, than proposing a better alternative. To generalise, all we have had in the past couple of years are complaints about anyone who become wealthy through government contracts. The companies who have made serious efforts at B-BBEE are ignored or even criticised.
So, why is business to blame? Well, the direction that government is taking with economic policy and jobs is not one that I can fully support. The President, in his recent address spoke about the need for government to create jobs and transform the economy. For many years the B-BBEE act was expected to do that exact job, and for many reasons it did not achieve all that was expected. One big reason is given above. Business did not support it sufficiently. My fear was always that if business did not transform properly and voluntarily, government would step in and start doing the job for them. This is now happening.
I am a strong supporter of a freer economy. The free enterprise economy is more likely to help grow an economy than leaving it in the hands of the government. All governments throughout thew world create laws and the B-BBEE act was not different and no more harsh than any of a thousand laws here and elsewhere. Yet, the B-BBEE act and its codes were more often criticised. Companies did front, companies did ignore the codes, companies did ignore the charters. Every time the President or government made a comment about transformation there is some rude comment or cartoon ridiculing him and our government.
Did those people not realise that economic transformation WAS going to follow political transformation? Did they really think that B-BBEE was going to fall away? Did they think that the level of economic inequity would result in a stable country? Now, by rejecting B-BBEE, and again I’m generalising because many companies have made good and far-reaching efforts, government is moving towards a more controlled economy.
The President now wants to create more jobs via government. Government already accounts for about one third of the economy. It looks like the President wants government to become an even bigger player in the economy. The free market economy relies on less government, not more, so I would have liked to have seen less government. However since we do need economic transformation, and business made every effort to resist it (and let’s not hold government blameless either), it is no surprise that if government, and the people do not see the positive results of true transformation, it is obvious that they are going to try another approach. This approach is asking government to directly intervene to create those jobs.
Wouldn’t it have been better for the country to have encouraged private enterprise to grow the economy. Wouldn’t it have been better for private enterprise to have taken the initiative? Instead we have a man whom most people love to hate – Julius Malema – accusing white males of dominating the economy. He is of course 100% correct. His proposed solution is incorrect – that of nationalization. From his point of view too little economic transformation has happened so we need an alternative policy. It would have been nice if business, and government had done the right thing, and rendered Julius’ comments obsolete!
Call for changes to BEE certificates
Posted by Keith in Accreditation, BBBEE Knowledge, True Empowerment, Verification on January 6th, 2011
Currently all BEE certificates contain an item called “Date of issue”. This represents the data on which the verification agency issued the certificate. All certificates are valid for a period of one year from date of issue.
The codes talk of a “Measurement period”. This represents the period under measurement. This would be the financial year on which the verification is based. Typically this is used to provide turnover figures. It is also used for procurement, skills development spend, ED and SED spend and net profit after tax.
Verification can take place many months, or even years after the end of the financial year. Most verifications make use of audited financial statements, and producing audited financials can take anywhere between 3 month and more than a year.
Verification can take many months from the initial appointment of the agency, to gathering the information, verification, queries and appeals until the final certificate is issued.
It sounds wrong that a certificate that is based on financials for the year ended 2009 can be issued today (6th January 2011), and it remains valid for the rest of 2011.
On the other hand a certificate issued in March 2010 based on the same financial period is valid from March 2010 until 2010.
Some verification agencies, wrongly, use current information for some of the other indicators including ownership, management and employment equity. One of the key principles of the codes (2.2) is “The basis for measuring B-BBEE initiatives under the codes is the B-BBEE compliance of the measured entity at the time of measurement”. In the case of financials it is the period used for the financial statements. It would not make sense to use disparate measurement periods, like 2009 for financials, but 2010 for ownership.
We would propose that the measurement period and validity date of the certificate be aligned. A new certificate based on two year old data is not an accurate representation of the BEE status of the measured entity, certainly not as it stands today, yet that certificate is regarded as valid because it was issued today and is valid for another year.
One option we have considered is that the certificate validity period be one year after the end of the measurement period: If your year-end is December 2010, then your certificate issued based on that period is valid for a year until 31st December 2011, no matter when the certificate was actually issued. If a measured entity delays getting its financial statements until October 2011, then its certificate will only be valid for 2 months.
This sounds a bit harsh, and it is impossible to obtain audited financial statements on the last day of the financial year. The JSE and SARS gives deadlines as to when financial statements should be issued, and we suggest this be incorporated into certificate validity dates, for example give a leeway of six months. so, if the financial year end is December 2010, then the measured entity would have a gap until June 2011 to get its financial statements and obtan a verified certificate. That certificate would be valid until June 2012. If the entity was only verified in December 2011, then its certificate is also only valid until Jun 2012, and not December 2012.
This will encourage entities to be verified as soon as possible after year-end, and to use current information. It will also ensure that the certificate is a more accurate representation of its BEE status.
It should be noted that audited financial statements are not a pre-requisite for verification. Signed management accounts are also acceptable – though the verification agency will have to perform extra checks to confirm some data. Therefore undue delays in preparing financial statements is not a good excuse for not obtaining an accurate and up to date verification certificate.
FSC gazetted as per Section 9(5) of the act
Statement by Keith Levenstein, CEO of EconoBEE.
The dti minister, Dr Rob Davies has issued a new draft of the Financial Services Charter. The FSC is gazetted in terms of 9(5) of the B-BBEE Act. This means that the public has time to comment on the charter, and the minister can shortly – in as little as 3 to 4 months time issue the charter as a sector code. When it becomes a sector code it will apply to all in the financial services industry – banks, insurance companies, brokers, bond originators etc. Until it is gazetted as a sector code, those affected companies will use the code of good practice.
The FSC is being gazetted in two phases, and only phase 1 has now been gazetted.
A detailed scorecard will be published in phase 2.
One of the controversies around the gazetting of the codes was the ownership level, where targets have been set at both 15% (direct ownership) and 25% (indirect ownership). 25% is the target used by the codes of good practice.
The FSC creates the concept of a QSFI – as opposed to a QSE. A QSFI is a qualifying small financial institution with an annual turnover of less than R35 million or investments of less than R50 million. QSFI’s must choose 5 of the 7 elements.
The EME concept remains – turnover of less than R5 million.
“We welcome the issuing of the FSC. It removes confusion about the status of the sector codes. The phrasing shows that the FSC is now becoming more true to the codes – which was not the case with older drafts. The differences are based on specific differences in the financial sector, which is exactly the purpose of the sector codes. We hope that this will encourage true transformation, and at the same time eagerly await the reconciling of the PPPFA with the B-BBEE codes as this will remove the last major hurdle in implementing empowerment and B-BBEE properly.
Categories of B-BBEE Compliance
Posted by MPUMULO MAPHOSA in BBBEE Knowledge, General, Interpretations, Scorecard points, True Empowerment on November 26th, 2010
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 eme@econobee.co.za or 0861 11 3094
Consistency in Verification
Posted by Keith in Accreditation, BBBEE Knowledge, Interpretations on November 22nd, 2010
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.
The points mean something
Posted by Keith in BBBEE Knowledge, General on November 16th, 2010
Imagine watching your team play rugby and at the end of the match, a panel of experts gather to decide which is the better team. They then award the World Cup trophy to the team they think is best. It would be ridiculous. Rugby is a game with rules. The rules are enforced by the referee. Each team, and coach works out strategies beforehand to find weaknesses in the other team to find a way to score points. Depending on the team, conditions and players your team will win the game by scoring the most points – be it via tries, conversions, penalties or drop goals. A game has a specific duration, rules, players and methods of scoring. To score points takes 5 or 10 minutes, or more and is earned by following the required strategies.
Let’s look at B-BBEE: B-BBEE has many more ways of scoring points, 7 elements and over 30 indicators, all of which contribute towards earning points. Some commentators have been saying that points are not a good measure of transformation. They see companies chasing points instead of transformation. The point (pun intended) they miss is that points are an excellent indication of transformation. The only way to earn points is to follow transformational guidelines. Anyone who says that the points don’t matter has no real understanding on the intricacies
You don’t earn points by “giving your business” to someone else. You don’t earn many points by doing “non-transformational” activities. The only way to earn lots of points is by following transformational principles. To earn points shows commitment to many aspects of society and the economy – that is why it is called “broad-based”. It shows commitment to charitable institutions, to helping grow businesses, to training your staff, to improving employment equity, to finding ways of helping suitable business people get involved in ownership. While it may sound complicated, the rules for points even include involving women and disabled. To say that this is not true transformation is not true.
In a way B-BBEE is therefore similar but more complex than a simple game of rugby. It has to be – it has to try to improve the lives of all South Africans. Anything less than using a scorecard would not be able to measure the impact of various activities.
Many management experts have used the phrase: “If you can’t measure it, you can’t manage it”, and in the case of B-BBEE, this is very applicable. One company that achieves a level 3 can be fairly regarded as having a better B-BBEE score, and better credentials than a level 4.
The points do matter. Points are an excellent way to monitor and manage transformation.
Suspect scorecards – is Serra Fronting?
Posted by Keith in Fronting, Verification on October 31st, 2010
Serra® Services is a company that provides washroom products and services. According to their web site,
“the company was established in 1985 and grown to create a competitive position in the washroom industry. According to independent market surveys, Serra® branded products are the preferred choice in seven (7) out of ten (10) “A” Grade buildings.”
I cannot find a definition of an A grade building but it appears to be similar to premium, top class office blocks etc. For example in March 2010, Redefine (a leadng property company issued a press release that it had acquired R520 million worth of A grade buildings), and there are hundreds of such properties.
Serra ® Manufacturing is part of the Serra®Group. It manufactures the washroom equipment that Serra® Services sells to these “A” grade buildings, and probably to lower grade buildings as well. They are the preferred choice in 70% of A grade buildings.
I know they offer services that include replenishing washroom supplies like soap dispensers etc and have monthly income from some of these customers.
Yet both Serra® Services and Serra ® Manufacturing state they are EMEs – i.e each entity, Serra ® Manufacturing and Serra ® Services has an annual turnover of less than R5 million – less than R416 000 per month!
Is this suspect?
1) Note how both scorecards use the same company registration number, even though they have different company registration numbers.
2) Both certificates are produced by SEIFSA, a non-accredited agency. The certificate produced in July 2010 is signed by the “analyst”, Charl Cilliers, but there is no signature of an officer from Serra ® or their accountant. The codes are clear: Only an accredited agency or the companies auditor of financial officer may sign EME certificates after 1st February 2010. The certificate is therefore invalid.
3) I do not believe that this company, that boasts of having its products in 70% of all A grade buildings is an EME in the first place. Note how they have even trademarked their company name. A R5 million per annum company does not do this.
This looks very much fronting, and joint blame must lie with Serra ® and SEIFSA which did not check with their accountant, or even use any initiative to decide if the company can indeed have a turnover of less than R5 million per annum. SEIFSA deserves criticism for continuing to sign verification certificates when it has no mandate to do so.
We have written to Serra ®, querying their turnover. There has been no response.
More suspect scorecards and fronting practices
Posted by Keith in Fronting, Interpretations on October 29th, 2010
Fronting is defined as misrepresenting your BEE score. There is another method that people are using to front. In many cases people think that if they give a scorecard that on the face of it is correct, it will not be fronting.
Companies with holding companies are now beginning to use the scorecard from the holding company as their certificate. On the face of it this seems ok. The codes allow a consolidation and if they send a holding company’s scorecard, many people will regard it as perfectly correct. However a holding company is not the operating company and the codes allow a consolidated scorecard, not necessarily one from the holding company.
The problem with a holding company is its turnover is generally quite small. It receives dividends or management fees from its operating entities. It has large assets – being the value of the businesses it owns, but its turnover may well be less than R5 million. This is how people front. They produce an EME certificate showing the business to be an EME – level 4, and ignore the operating companies.
On the face if it the certificate is 100% correct. The holding company is indeed an EME. However, who is your supplier? The supplier is the name of the company and the company registration number that appears on the invoice supplied by the supplier to you. This is the operating company, not a holding company. The certificate you need is the one that uses the operating company’s data, which may well be a generic and non-compliant. When the company is confronted they often feign ignorance or apologise that they supplied the wrong scorecard, and promise to supply the correct one.
This is fronting. It is a deliberate attempt to supply a scorecard that misrepresents the true BEE situation. If you ask for a certificate from your supplier and they give you the wrong certificate, they are fronting and could be guilty of fraud.
Here is a good example: Look at www.zealous.co.za Their web site shows them to have at least two businesses: Zealous Automotive and Zealous Pressure Castings. The web site reports that Zealous Automotive alone employs 160 employees and the land is 12000m2 . The holding company is Zealous Holdings. The scorecard for Zealous Holdings (Pty) Ltd, same address, is that of an EME. They are trying to use this certificate as the valid one to all customers. They have to know full well that the holding company does not supply their customers and that it does not earn income.
Simple mistake or deliberate to misrepresent their BEE position?
Suspect scorecards
Posted by Keith in Accreditation, BBBEE Knowledge, True Empowerment on October 20th, 2010
We are seeing more and more queries of scorecards. Not because there is necessarily fronting but because more people are checking the scorecards.
We have been at the forefront of checking scorecards: we have discovered fronting and reported it. We have discovered mistakes, and asked the agency to correct it. We have raised queries that we satisfactorily resolved. We continue to try to check every scorecard received: We look at the entity – it is an EME, QSE or generic. Does it belong to a sector code and is it done correctly.
In the news lately has been the Kelly Group (www.kelly.co.za). Reports were that they changed/manipulated their employment equity credentials. Latest reports (http://www.fin24.com/Companies/Kelly-denies-fudging-BEE-status-20101019) are that they deny the charges.
This is the Kelly Certificate Expiry 19 May 2011-1 that was produced for them. On face value there is nothing wrong, other than it is surprising to see each element with a completely round number. We usually see ownership, employment equity and skills development calculated to two decimal places and in this case they earned 18, 10 and 12 points respectively for those elements. (They earned full points for procurement, otherwise we would have expected to see decimals as well).
We have asked them for their full report.
On a personal level, we sincerely hope that there is nothing to back up the allegations and we currently have no reason to believe that Kelly’s certificate is invalid. What we are pleased about is that people are checking certificates. This self-monitoring mechanism is what we always had in mind when we stated that the dti does not absolutely need another law to criminalise fronting. We stated that fronting IS fraud, and that it is not the customer or verification agency that will always catch fronting, but the opposition, or other involved people. Obviously the BEE consultant and then the verification agency is the first step to stopping fronting, or misrepresentation or even mistakes. Thereafter the media and other people will question the company’s credentials.
When someone talks of B-BEE, there is a distinct trend to looking at the scorecard or certificate. This is good news.
Make sure your prospective BEE Ownership Partner has a BEE certificate.
Posted by Keith in Accreditation, Fronting, Ownership, Scorecard points, True Empowerment on October 6th, 2010
We come across hundreds of black owned companies, all hoping to invest in your business. They tout themselves as being the ideal BEE partner. We have seen hundreds of deals, and companies advertising their new BEE partner. Our usual approach is to calculate the points they will earn as a result of the deal.
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.
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