Game has just begun

The game has started, but goals have not been scored. Since the department of trade and industry started to accredit verification agencies to formalise broad-based black economic empowerment (BBBEE) in February 2007, employment equity has quickly gained importance.

But it remains to be seen whether the rating scheme will truly manage to redress economic disadvantages. ‘If BEE were a sport, we would be five minutes into a 90-minute football match,” says independent BEE consultant Michael Bullock.

‘The rules of how to play the game are laid out and the referees are in place, but the game has just begun.” He believes South Africa will see a slow but steady change in its business landscape: ‘Everyone clamours for quick results, but it’s still early days. It will take time to see broadbased change.”

Andrew McGregor, managing director and son of Robin McGregor, founder of business guide Who Owns Whom, agrees that BBBEE ‘hasn’t optimally delivered” yet, but says the BEE verification process has already contributed to speeding up economic transformation.

‘Companies take far more responsibility because they now have a scorecard. It’s self-interest-driven. If you don’t have a good BEE rating, you have little chance of getting a public tender in South Africa any more,” he says.

Many companies have started to recognise that it makes business sense to transform. ‘Soon it will be commonplace to ask for a company’s BEE rating right after asking for the price of a service or product,” says Bullock.

As a result most enterprises will have to get a BEE rating or risk losing business. But at the moment BEE compliance remains largely optional. Only the South African government has a legal obligation to consider a supplier’s BEE status when procuring goods and services. Another hurdle to making BEE truly broad-based is that most South African companies remain exempt from the verification process.

Firms with a revenue of less than R5-million are automatically rated level four, or 100% BEE compliant, in an attempt to boost small business operations and avoid bogging them down with legal requirements. This is 87% of the country’s enterprises, which means that only about an eighth of all businesses, with a turnover of R5-million and above, are affected by the legislation.

‘Government decided to leave the threshold fairly high before you have to engage with BEE,” Bullock says, sceptical of the scope of the scheme. Companies can be assessed only by verification agencies that have been certified by the South African National Accreditation System (Sanas), a unit at the department of trade and industry that ensures it is objective.

Since the practice was put into place two-and-a-half years ago, Sanas has accredited more than 20 agencies, which use the BBBEE codes of good practice as their legislative and policy framework, based on the BEE Act, No 53 of 2003.

‘The [department] has done well in terms of creating a well-balanced scheme,” says Bullock. ‘If you make it too easy [to get a high BEE rating], there will be no transformation; if it’s too difficult, there will be no engagement from businesses.”

Every six months Sanas reviews verification agencies’ accreditation. ‘Sanas checks up on our actual work, examines our files and ensures that the agencies are clean,” says National Empowerment Rating Agency (Nera) chief executive Ebrahiem Mohamed. He believes that to be able to compete in South Africa’s economy in the long term, companies have to get an official rating from a certified verification agency.

‘Self-assessments are not accepted any more by the market,” says Mohamed. ‘The BEE Act is designed to place commercial pressure on companies. If you don’t have an official BEE score, nobody wants to use you.”

So far most companies seem to be content with the service they have received from the verification agencies. ‘The process is quite easy if you have the correct channels in place,” says Muriel Jansen, managing director of cartridge manufacturer and reseller Tracktone.

The BEE rating of the medium-sized business took about a month and five site visits, during which a verification agency interviewed management and employees and assessed a wide variety of factors, including employment equity, shareholding, top and midlevel management structures, skills development programmes, procurement partners, enterprise development and corporate social investment (CSI) initiatives.

The rating process is based on an incentive system whereby companies gain points on a BEE scorecard in each field. Ratings are valid for 12 months. ‘Having a good rating is invaluable. It’s a requirement to stay in business,” says Jansen.

Chris Chapman, managing director of graphic design company Artworks, agrees: ‘You can’t run a business without a BEE rating any longer, because with every job we pitch for we have to supply our BEE credentials.”

Jansen believes the verification process is relatively easy and fair. ‘At first it’s quite a mission to get all the required documents together, but it’s much easier in subsequent years. The assessment is thorough. They make sure what you claim is genuine,” she says.

Verification agencies vow their ratings are accurate. ‘We follow the verification manual issued by the department of trade and industry and effectively audit the performance of a company.

We don’t use self-determined criteria,” says Steven Hawes, manager of research and development at Empowerdex, one of the country’s top verification agencies. ‘Everything is backed by hard and fast documentation. If you can’t prove that something exists, we don’t give you points for it.”

Companies have contested the rating in only a few instances, he says. ‘Some companies appeal their rating. If they can substantiate their complaint, we will look into it and review our decision.” Ownership of a company is carefully analysed, says Hawes.

‘We look at who the shareholders are, what dividends they have received and for how long. We even go through board minutes. It’s an intensive exercise.”

He believes falsifying one’s BEE status is extremely difficult. ‘If someone really wants to cheat, he or she would have to be truly fraudulent and probably in cahoots with the auditors. It would lead to an investigation by the [department], legal recourse and huge reputational damage,” he says.

But Hawes acknowledges that some claims remain difficult to prove, for example if someone holds shares as a proxy. ‘It’s not possible for us to look at those things,” he says. ‘In the past we had a few cases where shareholding was not legit, for example when a company retains unlimited options to buy back shares. But if we have doubt, we don’t recognise it.”

Some economists believe ‘windowdressing”, a strategy that places formerly disadvantaged people in management positions as figureheads to gain BEE points, is now largely dealt with. ‘Compared with 10 years ago, window-dressing seldom happens,” says Bullock.

But others are less optimistic and convinced that loopholes continue to exist. ‘People know how to beat the system. There is still lots of windowdressing, because it can be very difficult to truly assess shareholding,” says If BEE were football, we’d be five minutes into the match.

Kristin Palitza reports Miracle Ntuli, economist at the Wits school of economic and business sciences. ‘Verification agencies can’t get to the bottom of everything based on the information they are given.”

She is sceptical of the ability of BEE verification to realise wideranging employment equality and economic empowerment. ‘It won’t achieve the long-term objective of empowering all previously disadvantaged people,” Ntuli says.

‘People who are already in top positions are not that disadvantaged and those truly disadvantaged don’t get those opportunities. BBBEE doesn’t do anything for the ordinary man.”

She believes that although BBBEE creates racial diversity in the business sector it doesn’t give muscle to those who haven’t made it yet. ‘People are left behind. If we want empowerment to become more broad-based we need more skills development, mentoring and capital injections,” says Ntuli.

Hawes agrees that South Africa needs more than a rating system to achieve all-embracing change: ‘BBBEE drives black entrepreneurship, but it can’t address everything. It doesn’t change social inequalities.”