Changes to laws governing black economic empowerment will be highly beneficial for small, black-owned companies but not for underperforming big ones.
Changes to the laws governing black economic empowerment announced on Thursday by the department of trade and industry will spell out reprieve for small, black-owned companies and punishment for "underperforming" larger ones.
Minister of Trade and Industry Rob Davies announced good news for small black-owned businesses at the inaugural National Summit on Broad-Based Black Economic Empowerment (B-BBEE) on Thursday afternoon.
Companies that are completely owned by black South Africans and have an annual turnover of R10-million or less will now be automatically awarded a "level one" B-BEE status, the highest level that can be obtained.
Companies of the same size that are at least 51% black owned will be recognised as "level two" B-BBEE contributors. These companies will merely be required to produce an affidavit as proof of their B-BBEE status.
The new ruling comes with the final revision of the B-BBEE Codes of Good Practice (the framework governing the implementation of Black Economic Empowerment) which has been completed and will be gazetted next week.
The announcement was greeted with applause by small and medium sized enterprises, which have long pinpointed red tape as one of the most significant barriers to growth. Compliance with B-BBEE legislation is required by companies wishing to tender to government, and companies with better B-BBEE status levels score higher points in the tender process.
This is a significant easing from the current B-BBEE codes, which awards companies with a R5-million turnover with a level three status, and only once they have undergone a formal verification process through an accredited B-BBEE verification agency.
It follows a lengthy revision process to the laws governing black economic empowerment, which began in 2011.
President Jacob Zuma, addressing the conference in his role as the president of the BEE Advisory Council, said the changes were in response to a realisation that BEE had not achieved its aims.
BEE 'not meaningful'
Despite the fact that about R600-billion has been exchanged in BEE transactions since 1995, much of the country’s wealth remained in the hands of the white minority. "While we’ve made strides in BEE, we are still faced with unacceptable levels of poverty," he said.
"The income of [South Africa's] white households remains six times that of our black households."
Davies agreed, saying that the benefits of BEE were merely cosmetic in many cases. "There is far too much passive BEE shareholding and far too little meaningful black ownership," he said.
In addition, BEE fronting – the false representation of black South Africans as benefactors to BEE deals or senior management positions – had become more rife and increasingly sophisticated, said Nomonde Mesatywa, director of B-BBEE at the department of trade and industry.
"Fronting has reached catastrophic levels," she said, with many companies seeking to ways to earn BEE points without really transforming.
In trying to address these ills, the department of trade and industry has hiked up requirements for large companies wishing to gain B-BBEE recognition while providing the announced relaxation for smaller companies.
A 'stick to beat' nonconforming companies
A new sub-minimum threshold will be applied in three areas of the B-BBEE score card for companies with an annual turnover of more than R50-million. Companies that do not reach the minimum levels for all three areas will automatically be dropped down one status level.
Companies will be required to score a minimum of 40% in specified areas of black ownership, skills development and supplier development in order to maintain their levels.
The change will see thousands of companies in the country dropping a B-BBEE status level. It will also require organisations to put significantly more focus on these three areas in order to achieve the same levels that they did previously.
This decision, made public on Thursday for the first time, is less stringent than the draft revision of the B-BBEE codes put forward by the department near the end of 2012.
In the suggested legislation, the department of trade and industry proposed that companies failing to reach the sub-minimum levels should drop by two status levels. In response to public outcry, the department decreased the so-called "discounted levels" to one status level drop.
Hard to drop a level
Industry practitioners said the new requirement would nevertheless be a difficult one for South African companies to work towards. "A B-BBEE status level drop is a lot. Even losing one point is a lot for large companies," said Alasdair Yuill, managing director of B-BBEE software company Mantis Networks.
"It is going to be hard to drop a level. This is the beginning of the stick that [the department of trade and industry] will use to beat companies for noncompliance."
But the department felt the decision to penalise nonperformers was warranted. "I feel it's fair," Mesatywa told the Mail & Guardian. "We feel that we've bent over backwards on the discounting issue. The culprits didn't want to do transformation. How much time must we give them to really acclimatise?
"If we were to do away with the discounting altogether, I would say they [the public] were asking us to somersault."