CEO of AQRate comments on amended B-BEEE codes

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The Revised Codes were launched on Friday.  The most important facts to be aware of for the moment are the following:


1.            Effective Date

It will only come into effect in 1 year from the date of its gazetting  i.e. 11 October 2014 (Updated to to the 30 April 2015)

.  The twelve months in between is commonly referred to as the transitional period.  It is important to understand that the Revised Codes has not come into effect yet.  Businesses are not merely allowed, as a concession, to somehow still be measured in terms of the 'old' Codes (Gazette 29167).   No, rather, the 'old' Codes is still the only legislation that is effective.  This might seem to be a question of semantics but the importance of this will become very clear in the discussion below.

2.            Impact on Sector Codes

Businesses falling within any of the sectors for which there exists a Sector Code such as the Construction-, Financial Services-, Tourism-, Transport-, Forestry-, CA profession-, etc. sectors will not be allowed to be measured against any codes other than their respective Sector Code.  This means that the revised codes and its new thresholds will not be applicable to them. Another very important consequence of this is that the old general Codes (Gazette 29617) will, until the sector codes are aligned to the Revised Codes, remain the basis for resolving ambiguity, uncertainty or gaps within any particular Sector Code even after the effective date of the Revised Codes.  We anticipate that this will extend the impact of the existing Codes well into the next three years.

3.            Changes to EME's, QSE's and Large Enterprise Thresholds when Revised Codes become effective

                The new thresholds determine that businesses with a turnover between:

3.1     R0  to R10 mil  will be EME's

3.1.1 Only an affidavit attesting to the turnover and black ownership of the business will be required as proof of evidence for the business's EME's status.  All EME's will automatically qualify as an Empowering Supplier.   EME's will also have an automatic Level 4 BEE Status.   If in addition to their turnover level being below R10 mil they are also 51% or 100% Black Owned their automatic BEE Status level will increase to Level 2 or Level 1 respectively.

               3.2     R10 mil to R50 mil will be QSE's

3.2.1 QSE's will be measured against the exact same elements as Large Enterprise and no distinction is made between the QSE and Large Enterprise scorecard. 51% or 100% Black Owned QSE's will receive an automatic Level 2 or Level 1 BEE Status respectively.  Only an affidavit attesting to the turnover and black ownership of the QSE will be required as proof in these cases.  No QSE irrespective of its black ownership status will qualify automatically as an Empowering Supplier.

                3.3    R50 mil and larger are Large Enterprises

4.            The Concept of Empowering Supplier

21 points of the overall scorecard relate to procurement from Empowering Suppliers.  An Empowering Supplier is:

"B-BBEE compliant entity, which is a good citizen South African entity, comply with all regulatory requirements of the country and should meet at least three if it is a large enterprise or one if it is a QSE of the following criteria:

(a)    At least 25% of cost of sales excluding labour cost and depreciation must be procured from local producers or local suppliers in SA, for service industry labour cost are included but capped at 15%.

(b)  Job creation – 50% of jobs created are for Black People provided that the number of black employees since the immediate prior verified B-BBEE Measurement is maintained.

(c)     At least 25% transformation of raw material/beneficiation which include local manufacturing, production and/or assembly, and/or packaging.

(d)    Skills transfer – at least spend 12 days per annum of productivity deployed in assisting black EMEs and QSEs beneficiaries to increase their operation or financial capacity.

All EME's automatically qualify as an Empowering Supplier.

5.            No distinction between QSE and Large Enterprise scorecard

The Revised Codes has no separate scorecard for QSE's like is the case with the existing Codes.  They have to comply with the same onerous scorecard the Large enterprises has to comply with.  The only concession in this regard is to 51% or 100% Black owned QSE's that will, as indicated above,  be awarded an automatic Level 2 or Level 1 BEE Status upon making an affidavit to attest to their black ownership status and turnover.  51% or 100% Black Owned QSE's will however not earn their clients any recognition, irrespective of their Level 1 or Level 2 BEE status, if they (the QSE) are not also classified as an Empowering Suppliers.   As can be seen from the requirements to qualify as an Empowering Supplier above it will require a separate verification all on  its own to verify those facts and for this the QSE will undoubtedly be required to furnish a B-BBEE certificate to attest thereto.  The impression that the Revised Codes attempts to create by allowing 51% and 100% Black Owned QSE to only furnish an affidavit is therefore a misnomer.  All QSE's will require verification.  51% and 100% Black Owned QSE's will at most be exempt from verification on the scorecard, but will still require verification with respect to their Empowering Supplier Status.

6.            Opt in provision

Businesses will  be able to opt into being measured under the Revised Codes during the transitional period.  We have already dealt with the black owned QSE's scenario above and why they will in any event require verification.  Consequently we believe a significant portion of business that would qualify as black owned QSE's in terms of the Revised Codes will decide to rather be measured in terms of the existing Codes for as long as they can.  The only businesses that, on the face of it, could be tempted to opt into the new dispensation would be businesses which are currently classified as QSE's with a turnover between R5 mil and R10 mil which will now be classified as EME's.  These business will however soon realise the following:

6.1   Compliance for QSE's and Large Enterprises in terms of the Revised Codes are extremely difficult if not impossible. The vast majority of these businesses (turnover above R10 mil) will therefor not opt into the new measurement system. 

6.2     That being the case they will apply the existing Codes which do not make provision for the thresholds and consequent classification or evidentiary proof the Revised Codes provides for. The existing Codes only recognises measurement in terms of itself.   In other words when these businesses have to calculate their procurement score they have to do it in terms of the existing Codes.  The existing Codes' classification and measurement mechanism of EME's, QSE's and Large Enterprises would therefor apply.  The cascading effect of procurement would result in private companies insisting on BEE certificates in accordance with the existing Codes and its aligned Sector Codes.  The minority of businesses that would have wished to capitalise on any advantage afforded them in terms of the new Codes would find themselves having to be rated on both sets of rules in order to meet the demand for their BEE certificate in terms of the existing Codes.

6.3    The Preferential Procurement Policy Framework Act 2011 Regulations have also not been amended to align to the Revised Codes and if past attempts to align the two is any measure to go by it won't be aligned for several years to come.  In terms thereof points are awarded to an entity based on the BEE Status level it achieved.  The BEE Status level in turn is currently based on the number of points out of 100 a measured entity scores on the BEE scorecard.  The revised Codes still has 9 BEE Status levels beginning with 'Non-Compliant' status and ending with 'Level 1', but you have to earn significantly more points than you did under the existing Code to achieve the same BEE status level.  Therefor even if Treasury wanted to align to the revised Codes they cannot do so until 11 October 2014 when it comes into full effect, because if it did it would not be comparing apples with apples when evaluating BEE Status Levels based on different legislative dispensations.  Government procurement will therefore still be forced to apply the existing Codes (Gazette 29617) and its aligned Sector Codes – rendering all certificates or affidavits in terms of the Revised Codes of no effect for purposes of government procurement.

6.4    The above will also mean that affidavits that are made by EME's and black owned QSE's under the Revised Codes will not be acceptable proof and that verification certificates will be required for at least the next 12 months and most probably beyond that.  Also, even though an affidavit might be acceptable proof in future of these entities’ BEE status we anticipate that the private sector procurement departments will insist on verified EME certificates in order to mitigate their own risk of misrepresentation and the draconian consequences of that in terms of the new Act.  An EME verification certificate also reflects more professional than an affidavit and we anticipate several businesses would continue to utilise certificates in stead of affidavits.

6.5    White owned businesses with a turnover between R5 mil and R10 mil will, at least for this year, have no incentive to be measured as an EME because it will only achieve a level 4 BEE status whereas a Level 3 and up are very achievable if it measures as a QSE in terms of the existing Codes.

Comment by Chris van Wyk, CEO of AQRate Verification Services – follow him on Twitter (@thebbbeeguy) to keep up to date with the latest BEE news, comment and information.

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