New, tougher BEE rules are hitting SA companies hard
The B-BBEE Amended Codes of Good Practice have resulted in increased costs for almost two thirds (65%) of South African businesses according to second quarter research from Grant Thornton’s International Business Report for 2016.
More than three quarters (76%) of the businesses that reported increased costs have had to employ outside consultants; 44% appointed an in-house B-BBEE team; and 41% enlisted specialist service providers to assist with procurement as well as enterprise development requirements.
“Our survey shows that many companies are now turning to specialist consultants to reach compliance, while a number have actually gone as far as to appoint internal specialists and transformation managers to monitor, target and track compliance internally,” said Jenni Lawrence, managing director: Verification Services at Grant Thornton Johannesburg.
The survey presents perceptions into the views and expectations of 400 SA privately held business executives regarding crime, service delivery, B-BBEE and political climate.
“The days of handing over responsibility for BEE compliance to an HR intern or procurement officer are over,” said Lawrence. “The BEE agenda has to be driven by those with authority to influence internal policy and spend.”
She noted that a key positive outcome here, though, is that businesses are clearly taking their B-BBEE compliance very seriously, and ensuring that it’s done properly.
Increased costs for business executives come from two main areas:
increase of spend targets under skills and procurement; and
increase of implementation costs in terms of specialists, service and solution providers, as well as internal capacity.
The cost of verification has also increased, mainly due to the increased complexity and additional procedures which verification agencies are required to implement under Amended Codes audits, Grant Thornton said.
“The cost of non-compliance, however, should not be underestimated, particularly for companies relying on BEE scorecards to tender or apply for dti grants,” Lawrence warned.
B-BBEE codes have affected SA business
More than half (55%) of local companies reported that the B-BBEE Amended Codes of Good Practice have affected their business in terms of tendering or proposing for new business with private or government related entities, while 38% said there was no change.
Very similar results were obtained when companies were asked if the Amended Codes had resulted in their company changing some suppliers to improve their overall BEE score, that is, to buy from 51% and over black-owned suppliers.
Fifty-five percent said yes, while 39% said no.
“The tougher scorecard will result in many companies dropping three or four levels and in some cases, becoming non-compliant under the Amended Codes,” said Lawrence. “This will reduce the points allocated for BEE status when scoring for a tender. However, smaller companies with a turnover of under R10 million, and particularly those with at least 51% black ownership, will now automatically comply with a higher BEE status.”
Lawrence said that the focus of the procurement scorecard has altered significantly towards purchasing from black-owned suppliers. Under the “old” codes, BEE spend was measured out of 20 points, with three of those coming from spend with companies that were 50% black-owned and two points from at least 30% black-owned suppliers.
“Under the amended codes, BEE spend is measured out of 25 points, with nine being allocated towards companies that are at least 51% black-owned and four points for suppliers with at least 30% black women ownership, an increase in emphasis of 27%.”
It has become crucial for businesses to get this right, particularly as procurement is now a newly-designated “priority element” which requires a 40% sub-minimum achievement to avoid a level drop.
“Changing supplier base is not an overnight process, especially for companies that are part of a larger group,” Lawrence warned.
“In certain industries, suppliers and components are mandated by multinational parent companies. Imported mandated items add additional complexity to procurement. The old codes allowed for the exclusion of most imports from the procurement target but this has been tightened up in the Amended Codes.”
“To exclude items that could be manufactured locally, companies are now required to create a localisation plan to show how they will eventually produce these items locally going forward.”
Proactive companies are taking a good look at their supplier bases and changing to black-owned suppliers for non-core items to create quick wins, Grant Thornton said.
“Stationery, security and cleaning companies are currently the big winners here,” noted Lawrence.