Text: Keith Levenstein, CEO of EconoBEE. Article from the Oct/Nov 2012 issue of SA Guide to Business Opportunities Magazine.
How do I create a scorecard, what about fronting?
EconoBee – a B-BBEE advisory firm, comments on the lack of understanding of B-BBEE at the grassroots level and how small start-ups and existing SMEs can benefit from the B-BBEE Act.
In South Africa, although B-BBEE (abbreviated to BEE), as a policy is not legally enforced, the need for businesses to comply with BEE requirements is becoming a major determinant in getting or losing business.
The B-BBEE Codes are intended to make it easy for new and small businesses to comply. Businesses with an annual turnover of less than R5-million (depending on industry) or startups are defined as EMEs or Exempt Micro Enterprises and are automatically allocated a very good score of BEE level 4 (if they are majority White-owned) or level 3 if they are majority Black-owned. They will need to prove their turnover figures or new business status and an auditor’s letter or similar certificate from a verification agency is acceptable.
A level 4 or level 3 EME should be able to “open doors” by using its BEE status. In addition, Government tenders are awarded by taking into account the BEE compliance of the tender applicant. Although having proof of BEE status is no guarantee that the company will win business, it enhances the chances over those companies without.
How can a small business take advantage of BEE?
1) Procurement
To best answer this, it is necessary to explain how B-BBEE works: BEE is measured by means of a points system and companies can earn points via a variety of activities such as ownership equity, management control, employment equity, skills development, preferential procurement, enterprise development and socio-economic development. When dealing with potential suppliers, preferential procurement comes into play.
Companies earn points on their own BEE preferential procurement scorecards by purchasing from companies that are BEE compliant.The level of compliancy of their supplier can make a big difference to the scorecard. In addition, large companies earn additional points by purchasing from EMEs. Large companies therefore look for suitable EMEs with a formal auditor’s certificate stating they are level 4 or level 3.
A small level 3 or 4 business should always be aware that their larger customers are trying to improve their own score. New businesses should take a proactive approach and market themselves using their BEE status. This can be achieved by including the BEE level on all or some of their marketing material such as receipts, invoices and letterheads. We even suggest that EMEs draft a BEE statement to their potential customers clearly explaining the BEE benefits their customers will gain via preferential procurement by supporting them.
2) Enterprise Development
Certain businesses can qualify for Enterprise Development support (ED). ED is worth 15 points to large businesses, who are always on the lookout for ED beneficiaries. If your business is an ED beneficiary then you can source additional support in the form of loans, grants, financing, mentorship and extended credit terms.
An ED beneficiary is one that needs assistance to become sustainable and financially viable, and is at least 25,1% black owned, but ideally more than 50% black owned. Those companies that qualify as an ED Beneficiary need to inform their customers or suppliers of their status in order to potentially receive benefits.
In the current economic environment corporates will likely be reluctant to assist small businesses financially without them getting anything in return. Thus an opportunity exists for new businesses to use their good BEE status when applying for financial or other forms of assistance to help them grow.
B-BBEE for Black Businesses
In a recently published business article the author commented that while large corporates generally have a good understanding of B-BBEE, people in township and rural areas have very little understanding of B-BBEE issues and how government’s B-BBEE policies can actually assist them when engaging in business.
BEE is a government economic policy that encourages economic growth and redresses the inequalities inherent in the economy. As a policy, it has the broad intention of improving all our lives and the economy. It is a macro-economic policy, not a micro-economic policy, aimed at assisting a specific person.
What some business people want to see is a direct link between, for example, being black and business flowing their way. B-BBEE is not a recipe for everyone to become hugely successful. However it does contain policies that encourage South African businesses and government to support certain businesses over others.
The seven elements that go into building up the BEE scorecard.
1) Ownership:
This refers to the ownership of the organisation. The BEE codes encourage black ownership of up to 25%, and especially favour black women. The codes award extra points for fulfilling the sale of the shares and paying for them in full.
2) Management:
The codes encourage the appointment of black directors, especially black women.
3) Employment equity:
This refers to all other employees in the organisation, and has no real impact on a black-owned company that wishes to go into business.
4) Skills development:
This refers to training of existing staff and any business that specialises in training of staff could raise their BEE status due to the extra emphasis placed by the codes on skills development.
5) Preferential procurement:
This refers to all spend by companies on procurement of goods and services. Businesses earn points by purchasing from other businesses that have a good BEE score. It must be noted that black- owned business do not necessarily earn more points than say white-owned business, or that black-owned businesses are exempt from all forms of BEE.
The requirement to produce a scorecard only kicks-in once turnover exceeds R5-million per annum. So, being a black-owned start-up business will benefit your customer’s own procurement score substantially.
In addition, the procurement calculation offers additional points to companies that purchases from black owned (50%), and especially black women-owned (30%) businesses.
6) Enterprise Development:
This BEE element encourages large companies to spend 3% of their net profit after tax supporting small black-owned businesses. This is closely aligned with element 5 – Procurement. Many black- owned businesses have benefited by the support of larger businesses that have assisted them in various ways – cash grants, discounts on products purchased, loans and loans with preferential terms, shorter payment periods to suppliers, coaching and mentoring, professional services provided, even encouraging investments in the smaller black-owned business.
7) Social economic development:
This BEE element refers to contributions towards socio economic development and has no direct benefit to a black-owned business.
B-BBEE Fraud and Fronting
Fraud and fronting are quite prevalent in the B-BBEE environment. The expectation initially was that it would be self-regulating, but the B-BBEE act and codes do not make sufficient allowance for legal regulation. Anyone who issues an invalid B-BBEE certificate or misrepresents their B-BEE position would be guilty of fronting.
The dti and National Treasury have threatened to create a blacklist of such companies, but this has not worked to any great extent. There is no doubt that B-BBEE fronting is fraud. A company that deliberately issues an incorrect BEE status can be charged with fraud, or even in terms of the corruption act, if they intended to use their BEE certificate in an illegal manner to make profits.
If a BEE certificate is presented to a company, it is usually accepted without question. In some cases companies check the information, and may reject the certificate. Few however bother to investigate and report this to the dti.
The proposed B-BBEE Amendment Bill, expected to be passed in parliament shortly, does indeed criminalise fronting. The bill establishes the office of a B-BBEE Commissioner who is empowered to investigate and prosecute offenders.
Types of fronting – Companies are guilty of many types of fronting:
Ownership:
Shares are sold/given to a black partner who is unaware of their duties/rights or even that they are shareholders. In some cases the black partner has been forced to sign a sale agreement to enable the company to “take back” the shares when they wish.
General misrepresentation:
Companies give incorrect information to the verification agency about turnover, management and employees.
Exempt Micro Enterprise (EME) fraud:
An EME is one that has a turnover of less than R5-million (depending on industry) and is automatically allocated level 4. Many companies deliberately understate their turnover in order to qualify as an EME.
Qualifying small enterprise fraud (QSE):
A QSE is one that has a turnover of between R5-million and R35-million (depending on industry). Companies use the same fraudulent mechanism as for EMEs above.
Unaccredited verification agencies: A certificate is only valid if produced by an accredited verification agency. Agencies are accredited by SANAS or approved by IRBA. Many unscrupulous unaccredited agencies offer to produce genuine looking certificates without following any verification procedures. Often companies will call in these con artists because they know they will not perform verification checks.
Responsibility to report Fronting:
The dti Code obligates companies and verification agencies to report fronting. Reporting is towards SANAS (who do try to take action where the offense is related to SANAS), IRBA (who are new in the arena and tend to take less action), the sector councils (who seem to feel they have little power to investigate or take action), and the dti (who also feels that they have too little power).
The reality is that the current B-BBEE act requires that government “take into account and where possible apply” a BEE certificate when awarding tenders, concessions, licenses or similar activities.
For more information on benefitting from the BEE Act as a an SMME or SME contact EconoBEE on (011) 483 1190 or www.econobee.co.za
About EconoBEE
BEE is a complex business task which consumes a considerable amount of time and resources. It needs a strategy planned with commercial logic, which is then properly implemented and monitored in a way that makes complete business sense.
Choosing the appropriate competitive B-BBEE strategy is a sophisticated endeavor requiring knowledge and familiarity with the minute intricacies of the B-BBEE Act and Codes of Good practice. The lack of expertise in many companies countrywide hampers the successful implementation of the B-BBEE Codes in their operations.
Issued by:
Sha-Izwe/CharlesSmithAssoc
On behalf of Econo BEE
Further information:
Charles Smith TEL: (011) 781-6190 FAX: (011) 326-4760 Email: charles@csa.co.za www.csa.co.za www.Sha-lzwe.co.za
OR
At Econo BEE: Keith Levenstein
TEL: (011) 483-1190
FAX: (011) 483-1195
Email: info@econobee.co.za
www.econobee.co.za
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