The priority elements under the new BEE codes: Easy pickings or a game changer?

Since the advent of BEE legislation, businesses have become more aware of the importance of complying with BEE requirements. Yet, under the old BEE Codes of Good Practice, many businesses still managed, without too much effort, to meet the basic requirements for compliance, and often did not embark on sustainable procedures to become actively involved in transformation and BEE compliance. The amended BEE Codes published in October 2013 have changed this with the introduction of priority elements with which businesses must comply.

The amended BEE Codes were gazetted to address these gaps and exert greater pressure on businesses to become more actively involved in BEE development. Accordingly, the priority element concept was introduced, with the following three elements being identified as priority elements:

1. Ownership
2. Skills Development
3. Enterprise and Supplier Development

In terms of the amended BEE Codes an enterprise with a turnover of above R50 million (“Generic enterprise”) is required to reach sub-minimum targets in respect of all three of the priority elements and an enterprise with a turnover of below R50 million but above R10 million (“QSE”) is required to reach the sub-minimum targets for the ownership element, as well as one of the other two priority elements. If enterprises do not comply with these requirements, they will be penalised by automatically being discounted one BEE level.

Ownership

The sub-minimum requirement for ownership is 40% of the net value points of the Ownership element. The effect of this is that an enterprise which scores full points under all other elements, but does not report under ownership will only be able to score a maximum of 75 points (100 points minus the 25 points available under ownership). The best level that such an entity can then reach with 75 points is a level 5, from which they will further be penalised a level for failing to reach the sub-minimum requirement, taking it to a level 6. The Ownership element has thus become a vital element to be addressed under the amended BEE Codes.

Skills Development

The sub-minimum requirement for skills development is 40% of the points available for skills development. Entities must take note that the target for skills development has been increased dramatically and specific skills development programmes must be put in place as early as possible in its financial year to achieve the sub-minimum targets.

Enterprise and Supplier Development

The sub-minimum requirement for enterprise and supplier development is 40% of the available points for each of its sub-categories, namely Preferential Procurement, Supplier Development and Enterprise Development. It must be noted that most of these targets have been substantially increased from the old BEE Codes and the value of certain types of enterprise development contributions, such as early payments, have also been amended, making it more complex to achieve points under these sub-categories.

Enterprises will have to revise their supplier and enterprise development lists in order to achieve the subminimum targets, with specific attention on identifying, developing and spending on black owned entities which carries a large portion of the available points.

BEE levels

In addition to the priority elements introduced, the scorecard point levels were also amended. The effect is that a business who previously achieved 65 points and would receive a level 4 BEE certificate with a 100% procurement recognition level, will now, if it is capable of achieving the same number of points under the amended BEE Codes, only qualify as a level 7 BEE contributor in terms of the amended BEE Codes. If that business did not comply with the priority element requirements as stated above, the business will then be penalised with a further level reduction and only receive a level 8 BEE certificate with only a 10% procurement recognition level. Clearly expectations as to what is a good BEE level will have to be adjusted both by businesses and organisations procuring from suppliers. Organisations will also have to rethink their procurement policies, as procurement recognition levels of current suppliers will invariably drop, reducing their ability to obtain scorecard points under Preferential Procurement.

Conclusion

Although the amended BEE codes will place a stiff challenge in front of all businesses, it also provides an opportunity for businesses that are committed and willing to take the necessary steps to meet the requirements of the amended BEE codes to differentiate themselves from their competitors. Many businesses that were able to achieve relatively good scorecards under the old BEE Codes will now experience a substantial reduction in their scorecard levels, possibly even face non-compliance. However, a business that starts its planning early may find itself being placed ahead of his competitors and being embraced by suppliers that now more than ever need to procure from businesses with a good BEE certificate.

The Department of Trade and Industry has provided for a transitional period until April 2015 to report under the old BEE codes, where after all enterprises will have to report under the amended BEE Codes. As businesses will report on its previous financial year and have to include spend on its BEE strategies in that financial year, it is important for businesses to finalize their planning and start to implement new structures immediately. So make sure you understand the requirements of the amended BEE Codes and where necessary, obtain advice to ensure that your BEE strategies are sound and sustainable and provide you with the necessary results on your scorecard.

May 6, 2014

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