How to keep costs to a minimum while ensuring compliance
Grant Thornton’s latest International Business Report (IBR) research* shows that the B-BBEE Amended Codes of Good Practice have resulted in increased costs for almost two thirds (65%) of South African businesses.
More than three quarters (76%) of those reporting 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 report also shows that 61% of businesses have been motivated by the B-BBEE Amended Codes of Good Practice to work with new, additional or alternative SME businesses to improve their ratings in the category of Enterprise Development.
In addition, 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 B-BBEE Amended Codes of Good Practice had resulted in their company changing some suppliers to improve their overall BEE score – i.e. to buy from 51% and over black-owned suppliers. 55% said yes, while 39% said no.
So the findings reveal no great surprises. But what do the new codes actually mean, and how should you be positioning your business to keep costs to a minimum while ensuring compliance?
The tougher scorecard will result in many companies dropping three or four levels and in some cases, becoming non-compliant under the amended codes. This will reduce the points allocated for BEE status when scoring for a tender. However, smaller companies with a turnover of under R10million, and particularly those with at least 51% black ownership, will now automatically comply with a higher BEE status.
The introduction of the Empowering Supplier measurement is a significant challenge for larger companies, particularly those in manufacturing that import a large percentage of their components or inputs. For companies unable to meet the Empowering Supplier requirements, BEE certificates will not be counted towards their customers’ BEE scores and they will therefore, in essence, be seen to be non-compliant.
What exactly is an Empowering Supplier?
An Empowering Supplier is a B-BBEE-compliant entity, that is, a good citizen South African Entity, complying with all the regulatory requirements of the country. These include employment equity reporting, tax compliance, skills development levy compliance and possibly others, still to be confirmed by the dti.
An Empowering Supplier should meet at least three of the following criteria if it is a large enterprise (with a turnover exceeding R50 million), or one of them for Qualifying Small Enterprises (QSEs) (with a turnover between R10 million and R50 million):
- at least 25% of cost of sales, excluding labour cost and depreciation, must be procured from local producers or suppliers in South Africa; for the service industry labour costs 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 includes local manufacturing, production and/or assembly, and/or packaging;
- skills transfer –spend at least 12 days per annum of productivity deployed in assisting black Exempt Micro Enterprise (EME) and QSE beneficiaries to increase their operations or financial capacity; and
- a fifth criterion was gazetted on 6 May 2015, as follows: “Amended Code Series 400, paragraph 3.3 is hereby amended by the additional criteria that reads as follows: at least 85% of labour costs should be paid to South African employees by service industry entities”.
Exempt Micro Enterprises (EMEs) and start-ups are automatically recognised as Empowering Suppliers.
It comes as no surprise that 55% of companies have changed some of their suppliers to improve their overall BEE score.
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 of 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. 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 potentially be manufactured locally, companies are now required to create a localisation plan to show how they will 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. Stationery, security and cleaning companies are currently the big winners here.
61% of businesses reported that the B-BBEE Amended Codes of Good Practice motivated them to work with new, additional or alternative SME businesses in order to improve their ratings in the category of Enterprise Development.
Contributions towards Enterprise Development, and the new sub-element, Supplier Development, make up 15 out of the 109 points on the new scorecard.
These two sub-elements fall under the old Preferential Procurement element, which has been renamed “Enterprise and Supplier Development.”
An Enterprise Development or Supplier Development beneficiary is one that has at least 51% black ownership and a turnover of under R50million. To score points for these elements, businesses are required to make contributions to qualifying beneficiaries in the form of grants, loans, discounts or time, for example, to enable them to become financially and/or operationally sustainable.
The challenge is this area is finding or creating these beneficiary suppliers and growing them, with the potential conflict of not wanting them to grow over the R50million threshold as they will then no longer qualify as beneficiaries.
Increased cost of compliance
The B-BBEE Amended Codes of Good Practice have resulted in increased costs for 65% of local businesses. The cost of compliance has increased over the years and now, more than ever, proper planning is required to ensure you maximise the return on every cent spent on BEE.
The days of handing over responsibility for BEE compliance to an HR intern or procurement officer are over. The BEE agenda has to be driven by those with authority to influence internal policy and spend.
The key is to understand the inputs into each element. Many companies are already incurring costs that can be claimed on the BEE scorecard, but are unaware of this and making additional investments.
The increased costs 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 verification agencies are required to implement under Amended Codes audits.
The cost of non-compliance, however, should not be underestimated.
For companies relying on BEE scorecards to tender or apply for dti grants, compliance has always been an imperative. More and more, however, we are seeing these companies pass the buck to their suppliers, who in turn, pass it on to their suppliers.
If your customers cannot use your BEE certificate towards their BEE scores, expect a call from them soon - and be prepared to share your plans for keeping them as customers.
How should your business go about reducing costs and maximising return on investment?
First, understand where you are right now. Second, understand the inputs and analyse your current spend in all areas to identify those that already qualify for BEE. Third, calculate the gaps towards the target and implement corrective action. Fourth, monitor constantly towards compliance.
These steps, managed internally by a transformation manager and tracking software, or through external consultants, need to be part of your strategy at board level. Only then can you make a cost-effective difference to your business’ scorecard.
* The International Business Report (IBR) from Grant Thornton provides tracker insights from around the world on a quarterly basis. These findings are from the IBR’s second quarter tracker data for 2016 to end June, revealing findings from business executive interviews held during May and June 2016. The survey presents perceptions into the views and expectations of over 10 000 C-Suite executives in privately-held and listed businesses, across more than 36 economies (2500 interviews per quarter).
Regional and national perceptions are also researched every quarter for South Africa, from 400 SA privately held business executives annually (100 executive interviews per quarter) regarding crime, service delivery, B-BBEE and political climate.
To discuss your BEE certification requirements, please contact: Jenni Lawrence