The draft Amended BEE Codes (“Draft Codes”) were published in October 2012 for public comment. These contain major and potentially controversial amendments to the current BEE Codes which, if approved in its current form, will seriously affect almost all businesses and their current BEE compliance processes and require a substantial rethink and even restructuring to ensure compliance.
Errors, omissions and ambiguities
Apart from numerous errors and ambiguities in the Draft Codes there are also some glaring omissions. The preamble of the Draft Codes informs the public that a Technical Assistance Guide has been included in the published document but this guide appears not to have been published.
In addition, a separate set of Codes, often referred to in the Draft Codes, namely the QSE Codes (a set of rules applying to companies with an annual turnover above R10 Million and below R50 Million in terms of the Draft Codes) was also not published, leaving a key segment of businesses in the dark and having to guess as to their future compliance requirements.
Revised scorecard and threshold requirements
The 7 scorecard elements have been reduced to 5 elements, with “Employment Equity” and “Management” merged into one new category termed “Management”, and “Preferential Procurement” joining with “Enterprise Development” to form the new element of “Enterprise and Supplier Development.”
Apart from EME’s (currently businesses with a turnover under R5 million), all businesses now need to comply with all 5 elements. Current QSE’s (businesses with a turnover between R5 million and R35 million under the current BEE Codes) will no longer have the advantage of choosing their 4 best elements to report under and will now have to report under all 5 elements.
The new scorecard’s allocation of points is much stricter, which means that many businesses will automatically drop a few levels on their BEE certificates as soon as the Draft Codes are finalised. An entity who is currently a level 4 contributor to B-BEEE in terms of the current BEE Codes may for example, in terms of the points allocation under the Draft Codes, achieve only a level 7 contributor status.
The minimum requirements / general thresholds are increased under the Draft Codes as follows:
- EME’s will be businesses with an annual turnover of less than R10 million
- QSE’s will be businesses with an annual turnover of between R10 million and R50 million
- Generic Companies will be businesses with an annual turnover of R50 million and more
The Draft Codes create certain priority elements, namely “Ownership”, “Skills Development” and “Enterprise and Supplier Development”. QSE’s will have to comply with 2 of the priority elements, one of which needs to be Ownership, while Generic Companies (currently with a turnover above R35 million) will have to comply with all 3 priority elements. QSE’s that do not satisfy the minimum requirements of the priority elements will automatically be penalised with one level, while Generic Companies will be penalised with 2 levels.
This means that all entities that do not have at least some form of “Black” ownership stand to lose even further levels of compliance in addition to levels lost because of the revised scorecard elements.
Value Adding Suppliers
The new procurement calculation states that procurement from only value-adding suppliers may be recognized for scorecard purposes. A value adding supplier refers to an entity registered as a vendor under the Value-Added Tax Act, whose Net Profit Before Tax summed with its Total Labour Cost exceeds 25% of the value of its Total Revenue. Complying with this definition may be nigh on impossible for companies in certain sectors (such as entities in the petroleum industry) which have high turnover percentages in relation to their profits and labour costs. This may result in voluntarily non-compliance by these companies as they would not be able to qualify as value-adding suppliers and their scorecard would accordingly not have value for procurement consideration by other entities.
Initially the Draft Codes contained a statement that only donations to charities or Non Profit Organizations of which all the beneficiaries are black will count toward points under the Socio Economic Development element of BEE. After a media uproar regarding this statement, the Department of Trade and Industry has retracted the statement.
For now it will be a waiting game to establish how the Draft Codes will develop. Judging by the amount of commentary on the Draft Codes submitted to the Department of Trade and Industry it may be some time before these codes see the light of day as new law. Prudence however dictates that businesses generally should take note of the direction of proposed changes and start their planning early to ensure their future compliance. There may be many questions surrounding the Draft Codes but what is clear is that there won’t be a quick fix for businesses that did not start proactively planning to meet these new BEE requirements.
Written by Maureen Wessels, Candidate Attorney, Phatshoane Henney Attorneys Commercial Department