Revised codes could be counterproductive

A general pall of discontent hangs over the empowerment sector as it awaits word from the department of trade and industry on submissions made on the draft revisions to the broad-based BEE codes of good practice.

The revisions were published late last year and interested parties were given until December 2012 to submit their comments and suggestions on changes that could have significant implications for organisations wishing to comply.

By many accounts, this desire to comply may well be the biggest casualty if the codes are implemented without taking into consideration the concerns of industries.

"The reason BEE has been successful is that the market has adopted it willingly in the absence of strict legislation — it has been a highly voluntary process," said Steven Hawes, manager for research and advisory at Empowerdex.

"The revised codes create a stick versus carrot approach, and we don't need to create a more technocratic system, but [rather] one that is more enabling and encouraging instead of punitive.

"In our opinion, this could result in organisations throwing their hands in the air, which will have the effect of people giving up instead of trying harder."

Emphasis on ownership
Fundamental changes to the scorecard proposed by the department place greater emphasis on ownership. The proposed scorecard also folds employment equity and management control into a single measure, as has also been done with enterprise development and preferential procurement.

So, although the number of measures have fallen from seven to five, attaining the targets is going to be significantly more difficult, resulting in a direct impact on companies's ratings.

Empowerdex said in its submission to the department of trade and industry that its calculations showed that, on average, companies would drop at least three or four levels on their scorecards if the proposed changes were implemented.

"As such, those entities, which were positively embracing broad-based BEE and performing well, will automatically be regarded as performing badly," it wrote.

The Association of BEE Verification Agencies (Abva) highlighted similar concerns in its submission. It also noted unintended consequences, ambiguities, conflicting statements and unclear terms and omissions.

The association agreed with Hawes's view that a punitive environment is likely to discourage compliance, to the detriment of the aims of broad-based empowerment.
Abva suggested that the department reconsider negative scoring to enforce transformation. It recommended minimum thresholds for each element, "whereby companies cannot score at all on such an element without reaching at least the minimum score".

The composition of the preferential procurement measure in the proposed new codes is one area that has come in for particular criticism by virtue of the changes that exclude the so-called "non-value-adding enterprises".

The danger of exclusion
The definition of such entities is drawn from the VAT Act; it refers to companies with a yearly turnover of less than R-million. Industry commentators say it could be very damaging to exclude these companies.

"By excluding companies that do not meet the current definition of 'value-adding supplier' from contributing on the preferential procurement scorecard, more companies will not even try to comply with empowerment regulations. BEE compliance is driven by the supply chain and to exclude all non-value-adding suppliers from this meassure will defeat the purpose of procurement-driven BEE compliance," Abva warned.

Livia Dyer, a BEE regulatory expert at law firm Bowman Gilfillan, supports this view, saying the case for adopting broad-based empowerment falls away for companies whose investments in their supply chain are not recognised in the new codes.

"This enterprise and supplier development element is proposed to be the most heavily weighted of all the elements and will be responsible for 40 points out of a possible 105 points," she said.

She has a rather pragmatic approach to the proposals on minimum thresholds, viewing them as a policy decision by government on how it wishes to measure transformation levels.

"We can't say it's good or bad how government wants to measure it. It does indicate a policy shift from the 2007 codes, whose intention was a commercial incentive because companies that want to do business with government were incentivised to improve their BEE score," she said. "It would now be a little more pressing for companies to improve their BEE score across a range of issues instead of just a few."

More work still needed
Dyer acknowledged that the draft revisions to the codes still need some work to make them workable and acceptable. One issue raised by industry participants is the need for greater clarity around certain provisions, as well as definitions and omissions from the draft seen last year.

"Inevitably, in any legislation there are going to be issues around practicalities, and even the current codes are not clear," she said. "But market practices have arisen through bodies such as Abva that have published practice notes in terms of how they translate the provisions.

"This was a valuable opportunity for the department of trade and industry to clarify issues, but this has not been done in the draft codes. There are some things in our view that could have been done, but you have to recognise that it's not an easy task."

Hawes conceded that the proposed changes are not entirely unwelcome and that a number of positive initiatives have been introduced, such as recognising the training of unemployed people under the skills development measure.

"This is a very big plus; however, the onus of the tracking of what happens to those people as they enter the labour market falls to those organisations, which won't be easy."

Their reservations about the proposed changes notwithstanding, industry players support the need for economic transformation, tinged with a sense of practicality and understanding of the added pressures these changes will bring.

The issues at play are complex, with far-reaching implications that should be managed in a manner that does not devalue the years of work that many companies have invested in the process to transform.

"The primary issue is that companies are being forced into certain areas of BEE, and will be punished for failing to meet the minimum requirements on certain aspects," said Hawes.

"The thinking points to a planned and constructed economy, rather than a free-market system."

He acknowledged that government clearly feels the desired levels of transformation have not yet been achieved, but Hawes warned that the proposed changes may end up achieving quite the opposite.

Although this article has been made possible by the Mail & Guardian's advertisers, content and photographs were sourced independently by the M&G supplements editorial team. It forms part of a larger M&G Most Empowered Companies supplement.

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