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TOP 10 B-BBEE STRATEGIES TO IMPROVE YOUR RATING
TOP 10 B-BBEE STRATEGIES TO IMPROVE YOUR RATING
The Broad-Based Black Economic Empowerment (B-BBEE) strategy was published in 2003 as a precursor to the B-BBEE Act 53 of 2003 with the aim of advancing economic transformation in South Africa.
B-BBEE aims to ensure that South African citizens who were previously excluded can now have meaningful participation in the country’s economy. In line with this, a major objective of the programme is the creation of capacity at all levels through employment equity, socioeconomic development, preferential procurement and skills and enterprise development.
Former Minister of Energy Jeff Radebe echoed this sentiment at the Black Business Quarterly Awards: “Transformation is well recognised as a change management strategy, which aligns people, processes and technology initiatives – irrespective of the industry – in order to survive and evolve in a business environment. Changing the structure of the South African economy will result in it being more inclusive and sustainable, with opportunities for all, integrated value chains and less barriers to entry. In South Africa, the transformation agenda is critical in all our endeavours and decisions.”
PROPOSED AMENDMENTS TO THE B-BBEE CODES OF GOOD PRACTICE
The Department of Trade and Industry (dti) proposed a number of amendments in 2018, including the following:
YOUTH EMPLOYMENT SERVICE Youth Employment Service (YES) companies are entitled to increase by one or two B-BBEE recognition levels, says Erika Holmes, partner and head of B-BBEE at Shepstone.
“To move up one B-BBEE level, the YES company must meet the target and achieve 2.5% absorption rate. To move up two B-BBEE levels, the YES company must meet double the target and achieve a 5% absorption rate,” Shepstone concludes.
TO QUALIFY, THESE ENTITIES MUST:
• Meet the 40% sub-minimums for each priority element or, if a generic company, meet an average of 50% across the three priority elements or, in the case of QSEs, an average of 40% in two of the priority elements, including ownership.
• Improve its B -BBEE score each year
• Score full points on the skills development scorecard (if a generic company).
• Give 12-month full – time employment contracts to black youth (18–35 years) as determined by the higher of:
• 1.5% of the last year ’s headcount
• 1.5% of average net profit after tax in past three years converted to headcount by dividing by R55 000
• A target set in a table based on annual revenue or headcount
The table below outlines the numerous levels ofB-BBEE recognition achievable through the YES initiative, provided the preconditions are met.
AUTOMATIC RECOGNITION FOR LARGE BLACK-OWNED COMPANIES
Automatic recognition levels will be given to 51% and 100% black-owned large entities with annual turnovers of more than R50-million, the same as has been given to Exempted Micro Enterprises (EMEs) and Qualifying Smaller Enterprises (QSEs).
This means that if a company is 51% black-owned, it will qualify for a Level 2 BEE status. If the company is 100% black-owned, it will qualify for Level 1 BEE status.
EXPERT INSIGHTS
“A Level 1 B-BBEE accreditation has a positive impact as it supports governmental initiatives for transformation. Economically, it allows companies to improve their business development, client relationships as well as brand awareness, which ultimately leads to companies being positive contributors to the economy.” – Joe Ndala, MD of AECOM South Africa.
“B-BBEE is more than just getting the best possible level by ticking off compliance checkboxes to avoid penalties and secure contracts. It’s really about meaningful transformation and providing an opportunity for companies to play a greater role in the overall development of South Africa.”– Renai Moothilal, Executive Director at NAACAM.
“Building a globally competitive South Africa requires business leaders and managers to move beyond the current guilt-tax approach to B-BBEE and reconnect with the spirit and intention of the codes of good practice.”– Luvuyo Madasa, Executive Director of ReimagineSA.
“Real economic transformation will result in the visible and tangible inclusion of black people in the mainstream economy across all sectors. That, in turn, will mean greater economic growth that will benefit allSouth Africans.” – Zodwa Ntuli, Commissioner.
1. SKILLS DEVELOPMENT IS ABOUT LEVERAGED TRAINING AND BUILDING A SCORECARD
Spending approximately 15% of your total skills budget on short courses would give only about one point for the skills development element. On the other hand, a well-planned strategy working with leveraged programmes and Sector Education andTraining Authority (SETA) funding that requires a 15%net contribution could result in more than 90% of the points, if not all of them.
A proper strategy would include a focus on people with disabilities and programmes that allow for salary inclusion as well as maximise tax breaks, subsidies andSETA funding. Yet many companies get this wrong and do not optimise their training. Even if companies can afford the full 6% of skills development of black staff, with optimization, there would be enough budget left to train all staff.
2. B-BBEE SCORECARD AND BUSINESS BENEFITS ARE NOT MUTUALLY EXCLUSIVE
Too many companies still regard BBBEE as some form of poorly conceptualised tax. There is a moral wake-up call here in that if we do not all do our part to make the country work, we may not have an economy left.The B-BBEE Codes provide structure regarding how businesses can contribute.
Most companies in the business-to-business sector have some level of pressure from their clients to present a good scorecard. We have found that if you really look at it, the business benefit of a good scorecard vastly exceeds the risk and downside related to ignoringB-BBEE. This pressure will continue to increase, but with some honest assessment, the return on investment could actually be quite high – especially if you align your BBBEE strategy with your business strategy.
3. KNOW WHAT YOU NEED FROM YOUR B-BBEE PARTNER
What does a business really need from a B-BBEE partner? Is it just a competitive scorecard or meeting the minimum requirements of a tender? In many instances the answers are more subtle.
Most businesses would benefit from a more diverse strategic perspective. Many companies that have grown and evolved from small beginnings had to make place for more shareholders and investors.
In South Africa, we have the reality of a changing landscape. If you are clear on what you need from the partner, the next step is to check that it is realistic.If not, change your expectations. If it is, make sure that it is properly set out in a contract. Too many B-BBEE partnerships fail because there is a lack of agreement and common understanding of the value of the B-BBEE partner.
4. DO AT LEAST THE MINIMUM IN TERMS OF OWNERSHIP
If you really don’t want to do a B-BBEE ownership transaction, at least do the minimum. Typically, this is 10.1%. This can add between 14 and 16 points, and save you from dropping a level. For example, if you are stuck at 56 points and are categorised at Level 7 that will drop to Level 8 without B-BBEE ownership, it means you could have been a Level 4 with a properly structured 10% BEE ownership transaction. Properly structured full ownership at 25% would immediately raise the score to a Level 3.
5. PRICE YOUR B-BBEE OWNERSHIP DEALS RIGHT
Many B-BBEE transactions are priced at full realisable value to a willing buyer. It is a far more sound strategy to price a B-BBEE transaction on the same principles you would an agreement with a senior manager or new business partner. As a result, the principle would be based on mutual future benefit and not as if you sell to retire. Rather structure the deal for growth and expansion and plan to exit the business together at a later stage.
Under no circumstances should you feel pressured to “give your shares away”, but if the new investor cannot finance the deal from the deal itself, it is probably doomed to failure.
A lower and more realistic business value that secures profitable business growth and tempers risk will increase the likelihood of finding a partner that can help grow the business.
6. REACT QUICKLY WHEN YOU GET YOUR SCORECARD FOR THE PREVIOUS YEAR
The scorecard is often filed and not reviewed until weeks before the end of the next financial year. This is a big mistake. On receipt of the certificate and scorecard from the verification agency, immediately complete a corrective and a strategy review.
Make sure you understand every single point you missed. Then consider whether you could still do something to improve the existing If it is inevitable that a belligerent supplier has to be replaced, leaving it until late in the financial year will have limited scorecard benefits as there will simply not be sufficient procurement from a new and more compliant supplier.
You may want to identify junior staff with potential or recruit to meet your needs, but getting recruitment wrong can be detrimental for a business. Start early and leave yourself time to optimise.
7. IT DOES NOT HAVE TO BE DIFFICULT
With proper advice and a sound strategy, B-BBEE compliance can be much simpler than expected. For example, the codes allow for properly structured loans to be recognised for enterprise and supplier development. Ask yourself whether you would rather loan R200 000 to a qualifying beneficiary that will help transform and improve your value chain or give R140 000 every year for the next five years to some scheme with a fancy brochure?
8. HAVE A LEVEL 1 PLAN
Even if the business leadership has settled on a strategy to achieve a B-BBEE Level 5 or even a Level 8, it is imperative to have a plan to reach Level 1.
Many companies see this as an impossible task and deem it to be financially ruining. It’s only when each possible point in the scorecard is mapped to the advantage of the business and cost effectively that the real cost benefit of BBBEE can be derived. Level 1 may still be too expensive to pursue, but the most expensive points can be dropped for a sound Level 3 strategy, for example.
9. USE THE CORRECT RESOURCES FOR EVERY STAGE OF THE PROCESS
During the first half of the year, review, reset and plan properly.
During the second half, implement the plan and check the implementation at the last minute when the profit projections are clear. Then, after year-end, make sure the documentation is correct and up to date before you engage with a verification agency.
You cannot delegate the entire project to one person or department. We often find that leadership delegates B-BBEE too far down the chain of command from the key decision-makers and the plans are neither optimised nor properly funded. Each of the three pillars needs a different core team for B-BBEE transformation:
a) Proper planning and budget approval require top management. This is critical as it sets the scene for the year and frames many of the operational decisions, such as who to appoint and where to acquire products and services. A plan that has not been properly approved by the right decision-makers will fail.
b) Effective implementation requires line management. Line managers are often the lifeblood of a B-BBEE strategy. If they do not support it, they can kill or at least maim it. Their buy-in and clear role in implementation is critical for success.
c) Preparation for verification requires a strong admin team. This is not an afterthought but rather an ongoing process of collecting B-BBEE certificates, collating training documentation and keeping everything in the file. Without this, the verification will fail and points may be lost.
10. TAKE THE PAPERWORK SERIOUSLY
Even if the paperwork part of the project is delegated to an admin person or team, they need strong support and a clear mandate to build the file during the year. Too many companies have seen their scorecard crash and burn on impossible deadlines and poor paperwork.
BONUS STRATEGY: CONSIDER YES CAREFULLY
The recently launched YES initiative can be a great way for companies to improve their scorecard by one or two levels. It is, however, important to compare the cost and benefit as opposed to those involved with improving your BEE strategy. YES should be neither a first choice nor a strategy of last resort.
It should be viewed as a useful alternative and should be compared to the rest of the Level 1 plan. If the costing and the interest of your business is best served with the YES programme, it should be used. However, if it is more expensive than the Level 1 plan you already have, it may not be the best option.
