Revised Broad-based Black Economic Empowerment codes of good practice - a few more days to submit comments to the DTI

Interested parties have until 4 December 2012 to submit comments to the Department of Trade and Industry (DTI) on the Revised Codes of Good Practice (COGP), which were published in the Government Gazette at the beginning of October. 

According to Verushca Pillay, a director in the Corporate and Commercial practice at Cliffe Dekker Hofmeyr, every individual in South Africa should take the opportunity to comment on and thus contribute to improving the revised COGP.

“Failure to do so will result in a missed opportunity to ensure the COGP fulfill their mandate of transformation of individuals and development of the economy,” said Pillay.

Pillay noted that comments submitted to the DTI should highlight general errors in the Codes, impracticalities, impossibilities, ambiguities and unintended consequences of the Codes. Comments can be summited via email to xzondo@thedti.gov.za.

‘It is important that the submissions are constructive,” noted Pillay.

Lisa Tait, Chairperson of Transcend Corporate Advisors, said that the codes were broadly revised to address obvious errors in the existing COGP. However, there is also the need to make sure that the BEE is aligned to all of Government’s other strategy documents, such as the new growth path, which focuses on national priorities such as job creation, localisation and industrialisation.

“However, although Government has expressed its commitment to these broad developmental objectives little or no mention is made of these in the revised COGP.

“There is no recognition in the COGP for entities that create jobs, or procurement from other companies that create jobs. There is no mention of localisation, except in the Enterprise and Social Development Pillar, where importers are now included in the target, but there is no further incentive for companies in South Africa to produce or procure local content.

“With regards to Local Content, the DTI has attempted to incentivise this through the exclusion of all entities that are not Value-Added Suppliers (VAS) from participating in or being recognised by the COGP. However, the formula used is not appropriate and effectively keeps entire sectors out of the BEE Framework, which is of no benefit to anyone,” Tait said.

Pillay noted that one of the important changes to the Codes is that there are now three priority pillars: Ownership; Skills Development; and Enterprise and Supplier Development. A minimum 40% threshold applies to certain indicators in respect of these pillars, and failure to comply will result in companies being penalised. Companies not meeting the threshold of these elements will drop two levels if they are a large companies and one if they are a Qualifying Small Enterprises (QSE).

“The total BEE points for ownership has increased from 23 to 25, meaning that ownership continues to be a dominant feature on the generic scorecard. The minimum threshold applicable to ownership means that companies are required to do ownership deals or face the penalty. Existing ownership deals will have to be examined to understand the impact of the new Codes for the measured entity. 

“There could also be a potential contractual consequence if the measured entity had contractually undertaken to maintain its BEE status level, because the level might now drop based on the increased points allocation for BEE status levels. The DTI will need to clarify if companies will be given time and the ability to remedy this,” explained Pillay.

“It is worth noting that the pillar that relates to people, namely management control, and the only pillar relating to broad socio-economic inclusion, namely socio-economic development, are not priority pillars,” she said.

“We feel these pillars should more adequately reflect government priorities with regards to social development, job creation and the transformation of disadvantaged individuals,” said Pillay.

Pillay explained that the revised codes propose merging the elements of Management Control and Employment Equity into a single element referred to only as Management Control, and the elements of Preferential Procurement and Enterprise Development into a single element referred to as Enterprise and Supplier Development.

“The weightings under these five pillars have changed substantially and so under the revised codes, enterprises are likely to find it much more difficult to achieve and, possibly, retain their current (and perhaps, favourable) BEE status levels,” said Pillay.

“This effectively means companies that did nothing to become BEE compliant since the codes were adopted in 2007 are being rewarded, and companies that spent time and effort on BEE compliance and transformation are being punished because everyone will have to start again moving up the compliance ladder. We are not sure that this is positive for transformation in the future,” said Tait.

Pillay explained that proposed changes include a requirement that, for Management Control and Skills Development scoring purposes, account must be taken of the different racial sub groups (i.e. Africans, Coloureds and Indians) in an attempt to manage compliance according to national demographic indicators.

Pillay noted that formulae have also been introduced for calculating demographic representation in Management Control and Skills Development scoring.

“Besides the fact that the formulae seem to contain a number of errors, they also seems to be premised on the fact that there are or will be weighting targets for each of the racial sub groups. It is not clear precisely what how, and on what basis, such weighting should be determined, since no such weighting targets have been proposed. The application of the formulae could thus lead to anomalous results,” Pillay said.

“The concern with regards to racial sub groups is that is adds an additional layer of BEE compliance, creates complexity, and adds further pressure on companies to achieve BEE compliance. This could in turn stifle economic development,” explained Pillay.

“Enterprise Development and Supplier Development are now two separate concepts,” explained Tait.

“The Enterprise and Supplier Development Pillar is aimed at local supplier development and attracts the lion’s share of the points on offer for BEE compliance. This pillar offers bonus points for the annual value of all supplier development contributions made by the measured entities as a percentage of the target,” Tait said.

“We feel this point should include not only suppliers, which are upstream in the supply chain, but also customers and distributors, and is too narrow in its current form. Beneficiation, for example, sits downstream and it cannot be argued that companies should prioritise their suppliers over their customers and other businesses related to them. The codes need to be revised to reflect the reality that all businesses related to your company are equally important,” said Tait.

“There should also be more recognition for new business creation. Only one bonus point is given for job creation. The public should demand more recognition in the codes for companies that create jobs and support new business opportunities,” said Tait.

The new Socio Economic Development scorecard details that 100% of contributions must now benefit black people, whereas currently the Codes provide that in order to be fully recognised, at least 75% of the value of these contributions must benefit black people.

Tait said, “We feel it is inappropriate for government to ask that beneficiaries must be 100% black. They should rather measure the quality of output and value of these programmes. It also effectively excludes black people who benefit from non-racial programmes.” 

“We suggest a greater weighting for the Socio Economic Development Pillar – companies should be rewarded for the investments they make that benefit 100% of the population. There should be bonus points for companies who contribute to poverty alleviation, education at primary and secondary level and the strengthening of the health care system,” said Tait.

“The revised codes should be aligned with other pieces of legislation as well as the Government’s economic strategies such as the Commission for Employment Equity Report, the Industrial Policy Action Plan, the Competitive Supplier Development Programme and the New Growth Path. There is a disproportionate emphasis on ownership and senior management issues in the revised codes and inadequate incentives for employment creation and support for small enterprises and local procurement,” added Pillay.