B-BBEE: Focus on new Codes: What exactly is an “Empowering Supplier?”

The new Codes of Good Practice are here to stay and will come into effect in October 2014. We have presented a series of seminars to clients providing an overview of the significant changes under these new Codes. In our next few newsletters we will be taking a more in-depth look at certain key aspects of the new Codes, which we hope will raise awareness and highlight the difficulties with this very ill-considered and haphazard piece of legislation.

In this first article, we take a look at the new concept of “Empowering Supplier”, which is central to the Enterprise and Supplier Development element of the scorecard. Under this new element, which consolidates the old elements of Preferential Procurement and Enterprise Development, much emphasis is placed on procuring from “Empowering Suppliers” – in fact 21 out of the 27 points for the procurement section of this element is awarded only for spending with Empowering Suppliers and 2% of a measured entity’s Net Profit After Tax must go towards Enterprise Development with Empowering Suppliers. But what exactly is an Empowering Supplier? The official definition in the codes is as follows:

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

• At least 25% of cost of sales excluding labour cost and depreciation must be procured from local producers or local supplier [sic] in SA, for service industry labour cost are included but capped to 15%;

• 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;

• At least 25% transformation of raw material / beneficiation which include [sic] local manufacturing, production and / or assembly, and / or packaging;

• Skills transfer – at least spend 12 days per annum of productivity deployed in assisting Black EME’s and QSE’s beneficiaries to increase their operation or financial capacity.”

This definition may seem simple at first glance, but closer scrutiny reveals just how problematic some of the requirements are. First of all, it is not clear what evidence a measured entity will have to furnish to show that it “complies with all regulatory requirements”. This is an incredibly wide definition and could involve aspects such as Income Tax and VAT, compliance with legislation such as FAIS and FICA, the Companies Act, Health and Safety legislation, labour legislation, municipal by-laws and assessment rates and a whole range of other legislation and regulatory requirements. The problem with this wide definition is that compliance testing will ultimately fall in the hands of verification agencies, who will have to decide, without any legislative guidance (and without any legal authority to do so), what constitutes compliance with this criterion. In other words, legislative power is essentially given to entities that have absolutely no constitutional authority to make such decisions. It furthermore leads to a lack of consistency, as some verification agencies will no doubt require more evidence of compliance than others.

A second problematic aspect is the job creation criterion. A closer look at the wording reveals that this requirement actually amounts to what we like to call the “hydra principle” – like the mythical monster of ancient Greece, for every black employee that a company retrenches or dismisses two new black employees will have to be recruited to remain compliant with this requirement. While this is a noble goal, it fails to take into account the practical aspects of the work environment. A company that is retrenching employees simply will not be able to comply with this criterion – how does one go from retrenching one person to hiring two new people?

The third difficulty with this definition is the 25% transformation of raw material requirement. It is completely unclear as to how this 25% should be calculated. Does it mean that 25% of turnover must be spent on transformation of raw material in South Africa? Does it mean for every tonne of raw material, 250 kilograms must be transformed here? How will a company dealing with intellectual products, such as a law firm or financial advisor comply with this criterion?

The irony of this definition, apart from the fact that it will make it impossible for some companies to remain compliant, is that it also applies to black-owned companies. Businesses that are 100% black-owned and that are not Exempted Micro Entities will also be required to be rated and confirmed as Empowering Suppliers, even though 51% black-owned QSE’s automatically qualify for Level 2 recognition, without having to go through a verification. This seems somewhat contradictory and it is doubtful whether many black-owned businesses will want to go through the effort of a full verification just to be confirmed as Empowering Suppliers.