THE TOP 10 CHALLENGES TO B-BBEE

THE TOP 10 CHALLENGES TO B-BBEE

For most companies the effective grace period before having to implement enhanced B-BBEE initiatives has now come to an end. In the case of almost all companies their 2016/2017 financial year will be measured in terms of the amended generic or some sector specific codes. Implementation therefore has to commence as a matter of urgency.

THE COST OF B-BBEE

B-BBEE is a significant cost to a company. Although l would like to replace the word ‘cost’ with ‘investment’, l have come to see that for some companies the one applies and for others, the other. If the company is very empowerment sensitive because of dealing directly with government or having corporate clients with strict B-BBEE requirements, the ‘investment’, if it results in a competitive status level, should render a decent return in the form of market share increase and revenue growth. For other companies, where the main aim is to retain current market share only, unfortunately B-BBEE is more of a ‘cost’ than an ‘investment’.

Each element on the scorecard has a cost attached. In the case of ownership it is the cost of structuring and financing an equity transaction. Under management control it is the ongoing cost of recruiting the right people in specific managerial positions. Skills development is by far the most expensive area as the spend targets in the codes are excessively high. Having to replace suppliers’ impacts supply efficiencies and carries a definite cost. Having to develop one or more other black-owned businesses will take time and money. Donating to the poor is still a cost to the company.

My advice is that the total overall cost of (or investment into) B-BBEE be properly determined before deciding if the company should be empowered in the first place. Then, if B-BBEE needs to be part of the business strategy, each individual initiative should be properly analysed to ensure that it has a return on investment.

CHOOSING THE RIGHT EQUITY PARTNER

This has historically proven to be easier said than done. Would you sell shares in your company in the current economic conditions if B-BBEE didn’t exist? Maybe, if you were approached by a buyer willing to pay what you thought the shares were worth. At the moment, shares in private companies are worth less than we probably think. But B-BBEE is asking that you sell shares right now to someone you don’t know at a price you don’t want to sell at. It goes against everything we’ve been taught. What this demonstrates to me is that a B4BBEE transaction is everything but a ‘traditional’ share sale transaction. It therefore  must be treated as something out of the ordinary and selecting who the empowerment party will be is therefore of utmost importance. It is for this reason why many companies are opting for a broad-based partner where the benefits of the ownership will flow to classes of previously disadvantaged people and hopefully make a difference in their lives.

In my opinion, the largest risk associated with B-BBEE is selecting the wrong partner. When values, business vision and a decent contribution to the company is unlikely, B-BBEE ownership could be a recipe for disaster – as has been the case with the downfall of many a company in the past. Lf natural persons are selected as your new shareholders, unless they will be active participants with the relevant experience, in my opinion their shares should be held in trust for as long as they have proven their loyalty to the company and have obtained the required experience.

THE OWNERSHIP STRUCTURE

It is vital that the terms of a B-BBEE transaction are customised to incorporate the elements unique to B-BBEE. I often see structures where standard contract templates have been used making very little provision for the various ‘What if … ‘scenarios that will most likely arise in the case of a B-BBEE deal.

One of the things to consider is the various tax consequences of the different structures. For example, a sale of shares has different tax implications than an issue of shares. The value at which the transaction takes place also determines the type of tax that could be triggered. Having your tax practitioner review the transaction will be worth your while.

As existing equity has been built up by the existing shareholders, l am of the opinion that, unless fair value is paid by the black party, such equity should never simply be ‘given away’. An equity transaction should not be a donation! Also, provision should be made for the unlikely event of the B-BBEE legislation being repealed and the even more likely event of the black party having to or wanting to exit sometime in the future.

EMPOWERING SUPPLIER STATUS

Qualifying as an empowering supplier as defined, is a pre-requisite to implementing B-BBEE in a company. There are five criteria to qualify as an empowering supplier. For some companies, such as those that primarily import goods or services or are manufacturers, meeting the relevant criteria could be very difficult without some pre-planning. The criteria must be met within the measurement year, so early planning is vital. If a company is not an empowering supplier, its customers will gain no recognition for buying from it, effectively rendering its B-BBEE certificate almost valueless.

This is one of the first reviews that companies should be doing as a matter of urgency to ensure that they qualify during their 2016/2017 financial year. With some planning these criteria are not impossible to meet.

OVERALL COMPLEXITY OF THE CODES

The reality is that the codes are very technical and complex. Not everything in the codes is applicable to your company. In practice, what a company must do is look at each scorecard element to determine which provisions apply to their business. I recommend agreeing on a single strategy for each scorecard element that will have high impact and is clearly defined. The past practice of ‘business as usual ‘and ‘hoping for the best’ will unfortunately not suffice any longer. Companies must know exactly what they will be doing and when they need to do so in order to be sure that the initiative will result in the points expected. If in doubt, run the initiative by your verification professional before implementing it.

DEMOCRAPHIC REPRESENTATION

This refers to the fact that for large enterprises (generally with an annual turnover above R50 million) both the staff composition and the annual training spend are expected to be aligned to the national or provincial demographical statistics. This means that if your business is based in the Western Cape, it is expected that your employee profile and training spend reflects that of the province which would consist of a certain percentage African males, African females, Indian males, Indian females, Coloured males and Coloured females. Each of these ‘sub race groups’ has its own specific target in the codes. I don’t see a large enterprise in South Africa being physically able to score full points under either the management control or the skills development element without employing people and doing skills development for scorecard purposes only.

Other than a total corporate restructure, the only way to improve on the management control scorecard is to incorporate demographic representation into your HR policies in the long term. Despite the very high cost involved, a focused training strategy incorporating bursaries and accredited learnerships should result in good points.

WSP AND EEP COMPLIANCE

Annual submission of a company’s workplace skills plan (WSP) to the relevant Sector and Education Training Authority (SETA) and the employment equity plan (EEP) to the Department of Labour has become pre-requisites to B-BBEE compliance. If proof of submission of the WSP cannot be provided to the verification professional, the codes clearly stipulate that no points may be allocated to the skills development scorecard at all. Also, if proof of submission of the EEP cannot be provided, the company will be deemed to not be in compliance with ‘all relevant laws’ which is a requirement to be an empowering supplier. Both the above submissions have specific annual deadlines. It is imperative that companies do these submissions timely as we currently understand that late submissions are not accepted by either of these agencies.

SHORTAGE OF BLACK-OVVNED SUPPLIERS

In the case of a large enterprise, 9 of the 25 main points in the generic preferential procurement scorecard are dependent on spending 40% of total annual procurement with suppliers that are at least 51% black-owned. Another four points are dependent on spending 12% of total annual procurement with suppliers that are at least 30% black woman-owned. This means that 52% of the main preferential procurement points can only be scored by procuring from such suppliers. In some sectors such suppliers simply do not exist and will not exist in the foreseeable future. The result will be that especially large enterprises will in the next couple of years score very poorly on this element of the scorecard.

I understand that to address this dilemma, some corporates have outsourced their procurement arm to a separate legal entity. We can only assume that this was based on sound legal advice. In my opinion, besides such a drastic step, which is not a viable option for most companies, there are two other sustainable solutions to this. One is that existing business owners (suppliers) consider implementing 51% black ownership in their existing or newly created businesses. The other is to, in collaboration with experts in this field, work with your suppliers and assist them to transform over time to the target levels of black ownership. The latter is in my view the much more sustainable approach that will avoid unnecessary supply chain interruptions.

LACK OF TIME TO ASSIST OTHER COMPANIES

In these critical economic times just the idea of having to assist another small business to become financially and operationally independent, sends any business owner running in the opposite direction. We are often struggling to keep our own companies profitable,

Enterprise and supplier development (ESD) is vital for future economic growth and job creation. The question that still needs to be answered however is what the best route to impactful ESD really is. In the meantime, I recommend that a company carefully reviews the requirements in the codes outlining the types of qualifying ESD contributions that can be made and once a qualifying beneficiary business and/or supplier has been earmarked, that a highly focused initiative be implemented. Gone are the days of attendance registers and time sheets.

FRONTING

Last, but definitely not least, fronting poses a huge risk to companies thinking that there is any type of ‘quick fix’ to B-BBEE.

A B-BBEE commission has been established that has made it very clear that it is determined to investigate and uncover all forms of ‘fronting practices’ widely defined in the B-BBEE Act. A company director, procurement officer and even the verification professional is now subject to the applicable penalties. Soon a new B-BBEE verification regulator will be established in order to standardise and regulate the verification industry at a much stricter level. It is also proposed that all B-BBEE practitioners will be required to hold at least one of three formal accredited qualifications. And those that think that a sworn affidavit will be a way to side-step B-BBEE will, in my view, be taking an uncalculated risk. (Refer to the B-BBEE viewpoint article in this issue of ASA.)

We don’t have to give any recommendations in this regard other than: let’s just keep doing the right thing!

CONCLUSION

These are just ten of the more prominent challenges already experienced in practice. None of them are insurmountable. With a basic knowledge of the codes applicable to your specific business, the assistance of expert advisors and the help of a verification professional, any company that wants to commit to genuine empowerment will be able to do so successfully. And those doing so first will be the ones reaping the greatest rewards.

References: Anton de Wet