On 10 October 2014 the DTI issued the draft Amended BBBEE Codes of Good Practice (Amended Codes) in relation to Qualifying Small Enterprises (QSE’s) for public comment. The Amended Codes are not yet in force, but we foresee only minor changes to be made to the final publication. Any QSE certificate issued after 30 April 2015 must be issued in terms of the Amended Codes. If one analyses the effect of the Amended Codes on QSE companies it is safe to say that QSE’s and especially small QSE’s will be hard hit by the new BEE provisions. We herewith analyse the severity of the blow and provide some first aid advice for recovery.

When we refer to QSE companies to be hard hit, we are specifically referring to those companies that have an annual turnover of between R10 and R35 million - they are thus above the R10 million threshhold for qualifying for an exempt certificate in terms of the Amended Codes and below the R35 million threshhold for Generic companies in terms of the Current Codes.

These companies do not have the experience of having to report under all seven elements as Generic companies under the Current Codes have had (ie. above R35 million turnover) and will now essentially be in very similar situation to even the largest of companies, as any company above R10 million turnover must (save for a few exceptions) report under all 5 of the scorecard elements under the Amended Codes.

The newly introduced Priority Elements (relating to Ownership, Enterprise and Supplier Development and Skills Development) will also apply to these companies and will penalise a QSE with a drop in level if it does not comply with Ownership and one of the other two Priority Elements (Enterprise and Supplier Development or Skills Development).

BEE compliance in the past was a relatively simple exercise game for a shrewd small QSE company and most QSE’s could achieve anything from a level 4 to a level 1 without too much of an effort. Because a QSE could choose its best 4 elements, the actual BEE spend (and effort) was normally limited to donations (Socio Economic Development), Procurement and Enterprise Development initiatives (such as the paying of a black supplier’s invoices within 15 days). These companies did not really have to even consider Black ownership or management.

If one views the elements and points allocation of the Amended Codes, it however clearly illustrates a dramatic change in the level of compliance for QSEs.

To better understand the nature of these implications, it requires unpacking each of the 5 Elements to understand the most important changes:

Ownership

• Ownership is a Priority Element that must be complied with in order not to drop a level.
• Companies must achieve a minimum of 40% of Net Value points to not be penalised by a drop in level which equates to just over 10% Black equity.

Management Control

• Management Control is a consolidation of the old Management and Employment Equity elements.
• Employees in management positions (junior, middle and senior management) are now included in the main element.
• No Adjusted Recognition for Gender as a specific category for Black Woman is created.
• A distinction is made between Executive (presumably Board representation) and Non-executive Management (presumably other forms of management not falling under Executive).

Skills Development

• Skills development is also a Priority Element (optional) and QSE’s must achieve a minimum of 40% of the points.
• The compliance target has been increased from 2% to 3% of the annual employee costs of the company (essentially the company payroll).
• SETA requirements such as the submission of a Workplace Skills Plan and Annual Training Report must be complied with.

Enterprise and Supplier Development

• Enterprise and Supplier Development is the third Priority Element (optional) and at least 40% of the points must be achieved.
• This element is a combination element which consists of the following sub-elements namely Procurement, Supplier Development (a new addition) and Enterprise Development.
• Supplier and Enterprise Development beneficiaries must be at least 51% black owned, with a differentiation made between beneficiaries in your supply chain (Supplier Development) and beneficiaries not in your supply chain (Enterprise Development).
• Companies must also qualify as an Empowering Supplier with a failure to qualify for this status rendering a company’s BEE certificate effectively void.

Socio Economic Development

This element remains largely unchanged with a greater focus being placed on donations with the specific objective of facilitating income generating activities.

The effect of all of the above mentioned changes brought in by the Amended Codes, together with the higher amended BEE Recognition Levels, will be that a large number of small QSE companies will struggle significantly to obtain a compliant BEE certificate let alone a competitive BEE certificate.

We suggest the following as a general plan of action to assist in your preparations:

• Ownership:  If a QSE do not have black ownership it will stand to lose 25 points as well as a drop in its overall level (Priority Element). The net effect is dramatic and the QSE will struggle to obtain a compliant certificate without addressing ownership.
• Timing:  Make sure that you know when your current certificate expires and ensure that you make the required spend within the applicable financial year. Most companies will have to make the required spend for their first verification under the Amended Codes before the end of their 2015 financial year to be able to be verified in terms of the Amended Codes during the course of 2015/16.
• Knowledge and advice:  See to it that you get up to speed on the Amended Codes. If necessary obtain specialist support to assist you with your planning and putting the appropriate measures timeously in place.
• Budget:  BEE compliance under the Amended Codes will necessarily carry a significant cost escalation from that of the Current Codes and you will do well to establish what you should be budgeting for and do so on an annual basis as part of the measures put in place to address the new BEE requirements.

It is no longer business as usual with regards to BEE and small QSE companies will need to make a mind shift regarding BEE and take action as soon as possible to absorb the hit of the Amended Codes.

Written by Danie Krige, Associate, Phatshoane Henney Attorneys: Commercial Department