B-BBBEE codes

How Corporate South Africa can support SMME Development

How Corporate South Africa can support SMME Development

by Karabo Mashugane for IOL, sourced by Fariba Bowen

A 2018 IOL opinion article by Karabo Mashugane argues that the BEE codes are hindering SA’s SME development. The Enterprise Development (ED) scorecard was introduced to drive entrepreneurship and SME development. These became accepted as key drivers of economic growth and job creation. ED requires corporates to invest 3% of Net Profit After Tax (NPAT) on developing SMEs. Unfortunately, most corporates simply donated the required money without bothering much about the development impact realised. What mattered was that the compliance box was ticked.

The amended B-BBEE Codes were introduced in 2013 and ushered in Supplier Development. Corporates were now required to spend a portion of the 3% (ie 2% of NPAT) on the development of black-owned SMEs from whom they procured goods and services.

The logic was that corporate companies would open market opportunities to SMEs and use the 2% of NPAT contribution to capacitate those SMEs. It was hoped that this would encourage entrepreneurship, increase the number of SMEs, drive economic growth and ultimately create jobs.

In the amended B-BBEE Codes, small businesses were split into two categories to ensure the codes really had a broad-based reach. SMEs with annual turnover below R10million were categorised as Exempt Micro Enterprises (EMEs), and those between R10m and R50m labeled as Qualifying Small Enterprises (QSEs).

Corporates are required to spend 15% of their procurement spend with each SME category (30% in total). For large corporates with billions in annual procurement, this created a serious headache. Corporates struggled to meet the targets and some simply gave up.

Unfortunately, those who succeeded were faced with a dilemma. The SMEs which they developed and gave market opportunities might grow turnover beyond the stipulated categories. If that happened, the corporate would not be able to claim the BEE points they sought in that category.

For example, issuing an EME with a contract for R20m per annum increases the EME’s turnover above the R10m threshold. When this happens, the corporate can no longer claim BEE points on that procurement spend in the EME category. It thus risks non-compliance despite acting in the true spirit of BEE.

The result is that, to maximise B-BBEE compliance, corporates avoid developing SMEs or issuing them with large contracts even when it is feasible. The SMEs only receive small purchase orders designed to keep them as unsustainable “one-man” businesses.

As a possible solution, Mashugane suggests corporate tax incentives to encourage corporates to issue large long-term contracts to SMEs (Business Report Opinion&Analysis, April 5). Treasury can lean on its years of experience with tax incentives to design a framework that would keep negative unintended consequences to a minimum. In addition to the tax incentives, another amendment should be introduced to the B-BBEE Codes.

The amendment should allow all procurement spend on a contract issued to an EME to be claimed in the EME category for the duration of that contract. This should remain, even if that EME grows turnover above R10m. Equally so with QSEs that grow above R50m.

For example, a corporate entity issuing a 5-year contract of R20m per annum to an EME should be allowed to claim R20m each year in the EME category on its B-BBEE scorecard. This must continue each year over the 5-year period, even though the turnover of that SME would obviously grow above R10m. This amendment would encourage corporates to issue large long-term contracts to SMEs. It would then lead to more meaningful SME development, economic stimulation and accelerated reduction in unemployment and poverty.

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B-BBEE: Is Your Strategy Transactional or Transformational?

B-BBEE: Is Your Strategy Transactional or Transformational?

by Anusha Mariemuthu

Are you shifting paradigms, changing behaviour, and making valuable long-term strategic contributions to the economy or are you just transacting on your scorecard on an operational level to achieve the required points in your organisation?

Is your organisation a good corporate citizen who continuously contributes towards South Africa’s progress as a country, economically and socially through empowering communities, small businesses, individuals and creating jobs?

Companies must understand that economic transformation is a national economic priority, and that B-BBEE (Broad-based Black Economic Empowerment) is every South African corporates’ responsibility.

A company’s transformation initiatives at a high level needs to focus on the below broad areas

  • Ownership : Ensuring that equity are made available to black communities and assisting them access financing/ funding to fund their equity.
  • Skills Development : Empowerment through education and creating opportunities for previously disadvantaged employees and youth, through accelerated skills development programmes (learnerships, apprenticeships, internships, bursaries and employment opportunities).
  • Employment Equity: Employees must be afforded the opportunity to advance their knowledge, skills and abilities in order to be promoted. This process should be linked back to Talent Management and Succession Planning and not tokenism. Employment Equity and your employees should be viewed an integral element of a company’s overall transformation strategy for the removal of the economic legacies of structural inequality. 
  • Procurement : Procuring goods and services from South African black-owned enterprises, who are EME’s and QSEs while working with them to develop their businesses.
  • Responsible sourcing: According to the International Chamber of Commerce is “a voluntary commitment by companies to take into account social and environmental considerations when managing their relationships with suppliers”.
  • Small business Development and Communities : I​nvesting in communities, in black entrepreneurs and in projects that support small business growth and development thereby stimulating economic growth

So how do we start doing this?

Before you even begin this journey, chose a good change management model , like ADKAR to enable your business transformation to take place.

The first step is to establish a B-BBEE related Organisational Transformation Strategy, that is aligned to your business Strategy. Talk to business through their Profit and Loss (P and L) and show them how transformation makes good business sense.  Below is a high level view of how this journey in your business should look like. Create a road map for a  successful Transformation journey , by showing people how to make this transition as  a company together.

  • Shared Vision: Within your company, co-create and establish a Shared Vision for an organisational transformation related to B-BBEE.
  • Establish leadership over the process and ensure ownership, responsibility and accountability is in place so that your people can make this happen.
  • Knowledge  is powerful and an enabler: Create capacity in the Leadership and support functions by sharing information and ensuring that they acquire the required level of knowledge and skills to be able to implement the organisational transformation vision (Use Change management programmes, like ADKAR to achieve this).
  • Ensure Ownership is shared by key individuals in strategic positions across the business by ensuring that they have B-BBEE related Key Performance Indicators (KPIs) and that these individuals cascade responsibility into their respective areas in order to ensure accountability can be held.
  • Good Governance: Align all related operational governance which will empower and enable all related business managers to support the implement the organisational transformation process. Create an effective monitoring, measurement and reporting structure to ensure accurate visibility is achieved and maintained allowing for effective performance management over the process, show progress on the B-BBEE objectives and to manage the associated risk.
  • Ensure the transformed organisation is maintained through periodic assessments of the levels of compliance with the Compliance Framework and the progress of the company’s B-BBEE Score.

Lastly, keep your people informed (through townhalls, performance reviews, newsletters), get feedback and tell them how this journey is proceeding. This will keep them engaged and energised to make it a success.  Make B-BBEE Transformation part of your company DNA.

More importantly, keep the passion.

Anusha Mariemuthu is a passionate, seasoned Transformation and Human Resources professional with a myriad of experience that spans across all pillars of the scorecard. For more information on our B-BBEE consultancy services, contact us here.