by Loni Prinsloo, 21 October 2012
* This article was first published in Sunday Times: Business Times
GOOD intentions by the government to increase the efficiency and sustainability of black empowerment policies through proposed code amendments could lock entire industry sectors out of the mainstream economy, according to experts.
The amendments aim to cut out undesirable aspects such as fronting, increase local procurement and place a stronger emphasis on black ownership.
Those who misrepresent their broad-based black economic empowerment (BBBEE) credentials could end up behind bars for 10 years or incur hefty fines of 10% of turnover.
The draft for the amended codes put out by the Department of Trade and Industry earlier this month is in many places unclear. More stringent targets and minimum requirements to what is termed “priority elements” could result in companies that have high levels of compliance falling two to three levels down and could drop other companies into total non-compliance.
Webber Wentzel partner Safiyya Patel said a company’s empowerment status could instantly drop by up to two levels if it does do not comply with three priority elements, which include ownership and the development of suppliers and skills.
Companies now have to find a further five points to add to their ownership structures and maintain an unencumbered black shareholding of 10%. This means that companies that have until now overlooked black shareholding requirements and instead focused on other elements of BBBEE will be adversely affected.
“For example, a large company that may have 7% black ownership but is a level three contributor, will be automatically reduced to a level five contributor because it does not meet the 10% minimum black ownership target,” said Ms Patel.
Companies are required to themselves be, and to procure their goods and services from, what is termed a “value-added supplier”. According to the definition in the new codes, this is an entity whose combined net profit before tax and labour cost makes up more than 25% of its turnover. Effectively this is a business that spends more money on its staff and labour, such as a media or services company. But with businesses in, for instance, the retail sector this is difficult to achieve.
It essentially means a large retailer and employer, such as Shoprite or Pick n Pay, would have to add about R5bn to its labour bill to be a value-added supplier, which would have a reciprocal effect on profit and turn these companies into loss-making businesses. Also, in line with the proposed changes for socioeconomic development, companies will now only be able to donate money to causes where beneficiaries are 100% black. For example, if a company assisted an orphanage with two white children, it would not count towards the company’s BBBEE compliance points.
While South Africa’s segregated past made it necessary for the government to bring in corrective policies aimed at reintroducing black people into the economy, some of the proposed amendments need a second look, according to many commentators.
“The devil lies in the detail,” said Anton Baumann, MD of the National Empowerment Rating Agency. The revised codes are open for comment on the Department of Trade and Industry website.
A survey conducted earlier this year among European companies operating in South Africa found that BEE legislation was one of the biggest obstacles preventing further investment and job creation. The revisions might further deter investment.
“EU companies appreciate the need to achieve social transformation in South Africa; however, they experience cost and practicality barriers in complying with BEE legislation. These companies often feel hamstrung by a combination of being prohibited or financially unable to sell equity stakes or implement equity equivalents, and struggle to hire BEE candidates who are either suitably skilled or affordable.
“When EU companies make efforts to comply, they find it difficult and expensive, yielding little to no commercial benefit. Ironically, this low commercial benefit is often experienced in the course of competing for business within the public sector, where BEE is purportedly most rigorously and consistently applied,” says the survey.
Corrective policies are said to have helped change the all-white face of business in South Africa, after black people had been exluded for more than 60 years.
In the past 18 years South Africa has produced 178 black millionaires — according to their shares listed on the JSE — and about 4-million black people are now considered middle class, living in households that earn R300,000 to R500,000 a year. However, a third of the population, mainly black, lives below the poverty line.