Dti provides clarity on the Revised BBBEE codes and the QSE scorecard -updated 03 March 2014

Posted by Transcend
Tuesday, 18 February 2014  |  Comments

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One of the fundamental changes to Broad-based Black Economic Empowerment ("B-BBEE") legislation introduced by the revised generic Codes of Good Practice (government gazette 36928 of 2013) ("RCoGP") is the introduction of "Priority Pillars". Ownership, Skills Development and Enterprise and Supplier Development have each been designated as Priority Pillars. Entities are required to meet the 40% sub-minimum threshold set in respect of each of the Priority Pillars, failing which they will be discounted by one level rating. Generic entities are required to comply with all three Priority Pillars whereas Qualifying Small Enterprises ("QSE's") are required to comply with two of the three Priority Pillars (one of which much be Ownership). The QSE is not exempted from complying with the pillar that it chooses not to apply as a Priority Pillar; compliance with such pillar will just be without the application of the sub-minimum.

Since the promulgation of the RCoGP on the 11th of October 2013, uncertainty has existed as to the application of the sub-minimum threshold(s) and whether an entity will be discounted a level for each sub-minimum it fails to meet. At a day long workshop with representative of the different Sector Charter Councils on Wednesday 12 February 2014, the Department of Trade and Industry (the "DTI") provided clarity on this uncertainty.

Ownership

The DTI confirmed the interpretation of paragraph 3.3.1 of statement 000 which provides that the sub-minimum requirement for Ownership is 40% of the Net Value calculation. The Net Value calculation is informed by two formulas. We will explore the workings of this calculation in a separate article but note for now that the Net Value target increases every year.

Skills Development

Paragraph 3.3.2 of statement 000 provides that the sub-minimum requirement for Skills Development is 40% of the total weighting points of the Skills Development scorecard. In other words, an entity must attain at least 40% of the total 20 points available (excluding the bonus points) (ie 8 points). Paragraph 4.1 of statement 300, however, contradicts this provision in that it provides that "a measured entity must achieve a minimum of 40% of the targets set out in the Skills Development Element" (our emphasis). The conservative view in the market has been that an entity will be discounted a level should it fail to, by way of example, spend 40% of 6% of its leviable amount on training black people or should it fail to engage that number of black people equaling at least 2.5% of the number of its total employees on learnership, internship or apprenticeship programs.  The liberal view in the market has been that an entity will be discounted a level only should it fail to earn a minimum total of 8 points on the Skills Development scorecard.

The DTI advised that correct application of the sub-minimum target is according to paragraph 3.3.2 of statement 000; an entity will be discounted a level only should it fail to earn a minimum total of 8 points on the Skills Development scorecard. We note by way of interest that the DTI did not shed light on the formula provided in the RCoGP for determining the target for each racial sub-group within the definition of "black". We are of the view that the formula, as currently provided, is mathematically flawed and also encourages training behavior that is contrary to the spirit of B-BBEE. More analysis on that another day...

Enterprise and Supplier Development

The Enterprise and Supplier Development pillar has enjoyed the most debate (most times emotive debate!) as to the application of sub-minimum threshold. Paragraph 3.3.2 of statement 000 provides that the sub-minimum requirement for Enterprise and Supplier Development is "40% of the for each of the three categories within the Enterprise and Supplier Development element, namely preferential procurement, supplier development and enterprise development". Confusingly, paragraph 3.2.1 of statement 400 provides that "a measured entity must achieve a minimum of 40% of each of the targets set out in ... [Enterprise and Supplier Development] Element" (our emphasis). Similar to the views held in respect of the application of the sub-minimum threshold in the Skills Development pillar, conservative and liberal views exist with regards to the interpretation of the conflicting provisions of the application of the sub-minimum threshold in the Enterprise and Supplier Development pillar. The conservatives say an entity must meet 40% of each of the indicators set out in the preferential procurement category of the Enterprise and Supplier Development scorecard. Many a company has, for example, despaired over where they will find 30% black-women owned suppliers with whom they can spend at least 4.8% of their total procurement spend, failing which they will be discounted a level. The liberals say an entity need only meet 40% of each of total target of the preferential procurement category, ie an entity must earn at least 10 points of the available 25 points. The application of the sub-minimum threshold to the supplier development and enterprise development categories is without debate as no sub-categories exist within these categories.

The DTI advised that the 40% sub-minimum threshold only applies to the first indicator of preferential procurement, namely at least 32% of an entities spend must be procurement spend with empowering suppliers. This clarification given by the DTI is not consistent with the provisions of paragraph 3.3.2 of statement 000 or with the provisions of paragraph 3.2.1 of statement 400!  Although it may bring a sigh of relief to most entities, the fact that this interpretation by the DTI is not provided for anywhere in the RCoGP, the question that begs answering is whether this interpretation is in fact legally correct and thus has any legal weighting and may be applied. We are of the view that an amendment to the RCoGP to provide basis for this interpretation is legally prudent and necessary. Whether such an amendment will in fact be made remains to be seen.

General

Lastly, the DTI confirmed what many have understood: an entity may only be discounted once. Accordingly, should an entity fail to meet one or all of the sub-minimum thresholds in the various Priority Pillars, the entity will only be discounted by one level. Considering that the majority of entities are expected to drop approximately two levels on application of the RCoGP, this clarity is a reprieve.

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