26 Jan
2015

The New B-BBEE Codes – Why a QSE means no EAP


By: Oriole Consulting ABC OF BEE

 

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10TH October 2014 nearly a year after the release of the revised Broad-Based Black Economic Empowerment (B- On BBEE) Codes of Good Practice, the Department of Trade and Industry (DTI) has released further amendments which include the much awaited amendments to the Qualifying Small Enterprises (QSE) scorecard for public comment.

What We Already Know

  • The previous seven elements have been reduced to five elements
  • The new elements are Ownership, Management Control, Enterprise and Supplier Development, Skills Development and Socio-Economic Development.
  • The new Management Control element incorporates the old Employment Equity element
  • The new Enterprise and Supplier Development element incorporates the old Preferential Procurement and Enterprise Development elements
  • The new Enterprise and Supplier Development element contains three categories, namely; preferential procurement, supplier development and enterprise development
  • The old Employment Equity, Preferential Procurement and Enterprise Development elements, as stand-alone elements, have fallen away
  • Qualifying Small Enterprise (QSE) – medium to large companies with an annual turnover of between R10m – R50m per annum
  • A QSE must be measured under all five elements
  • Priority elements apply to the QSE scorecard – QSE’s need to comply with ownership and one other to avoid discounting.
  • QSE’s need to comply with the requirements for empowering suppliers

Priority Elements, Sub-minimum and Discounting Principles:

When it comes to Priority Elements and sub-minimums, QSE’s only have to comply with Ownership and one other Priority Element i.e. they have to meet the sub-minimum for Ownership and the sub-minimum for Skills Development OR Enterprise and Supplier Development. Not reaching the sub-minimum of required of any of the Priority Elements will result in the enterprise or measured entity’s rating level automatically being discounted by one level.

Empowering Suppliers:

In simplest terms an Empowering Supplier is a company which is “a company which is compliant with South African legislation, procures locals produce, employs local people, manufacture locally and assist small black businesses increase their operational or finical capacity, gives back to the local community in a committed and sustainable way”

In more complex B-BBEE terms, an Empowering Supplier must meet certain criteria. A QSE it must meet one of the following criteria:

  • At least 25% of its Cost of Sales (excluding labour costs and depreciation) must be procured from local producers or local South African Suppliers – for the service industry labour costs are included but capped at 15%
  • 50% of the jobs created are created for black people, provided that the number of black employees since the previous rating is maintained
  • At least 25% of the transformation of raw materials which include local manufacturing, production and/or assembly and/or packaging;
  • At least 12 days per annum of productivity are given to assisting Black QSE’s and/or Black EME’s to help increase their operational or financial capacity.

What’s New

  • Weighting and Scoring:

The amended QSE scorecard is as follows:

Element 2007 Codes 2013 Codes
Ownership 25 points 25 points
Management Control 25 points 15 points
Employment Equity 25 points
Skills Development 25 points 25 points
Preferential Procurement 25 points
Enterprise and Supplier Development 30 points
Socio-Economic Development 25 points 5 points

 

There are no bonus points on the QSE scorecard.

Ownership

There are no substantial changes under the ownership element. The following sub-minimums apply to Ownership

  • the sub-minimum requirement for this element is 40% of Net Value this is what percentage of shares are actually owned in full by black people.

Management

The biggest and most important changes under this element are that:

  • only management employees are measured and not all employees, and
  • a big advantage for QSE’s is that the demographic representation of black people according to the Economically Active Population are NOT applicable to the QSE Scorecard.

Skills Development

The biggest and most important change under this element is that the demographic representation of black people according to the Economically Active Population is NOT applicable to the QSE Scorecard.

Under each Priority Element, there is a sub-minimum which is required by measured entity’s to achieve, if they do not achieve this sub-minimum the entity will drop one B-BEE level. The following sub-minimums apply to Skills Development

  • the sub-minimum for this element is 40% of the total weighting points (40% of the 25 points)

Enterprise and Supplier Development

The following sub-minimums apply to Enterprise and Supplier Development:

  • the sub-minimum for the element is 40% of each of the three categories, namely; preferential procurement (40% of 20 points), supplier development (40% of 5 points) and enterprise development (40% of 5 points).

Socio-Economic Development

It should be noted that more points are now required, compared to the 2007 Codes, to be recognised as a certain level of B-BEE Contributor, for example, a Level Three Contributor required between 75 and 85 points in terms of the 2007 Codes, now the points required are between 90 and 95.

BEE Status Qualification BEE recognition level
Level One Contributor > 100 points on the Scorecard 135%
Level Two Contributor > 95 but <100 points on the Scorecard 125%
Level Three Contributor > 90 but < 95 on the Scorecard 110%
Level Four Contributor > 80 but < 90 on the Scorecard 100%
Level Five Contributor > 75 but < 80 on the Scorecard 80%
Level Six Contributor > 70 but < 75 on the Scorecard 60%
Level Seven Contributor > 55 but < 70 on the Scorecard 50%
Level Eight Contributor > 40 but < 55 on the Scorecard 10%
Non-Compliant Contributor < 40 on the Scorecard 0%

 

On calculation if a QSE entity does not have Ownership, this leaves the total available score at 75 points, a level 5 in the 2013 Codes. This means that should a company score full points in all other elements they would reach a level 5 and then be discounted to a level 6. As most QSE companies have the same Shareholder’s and Directors, this would result in the maximum score being 68 points, a level 7 which would then be discounted to a level 8.

Further QSE’s still have to comply with an empowering supplier category if they are not a manufacturing company, or have high staff needs they will have to do an assessment on their percentage of cost of sales procured locally, if this is not an option they will be required to spend 12 days per annum on increasing the capacity of small black owned companies.

As with the Generic Scorecard any entity measured after 1st May 2015 will have to comply with amended QSE scorecard and while the amendment is still open for comment we do not anticipate many substantial changes to the amendments.

Although the QSE scorecard does give QSE’s advantages; specifically not being required to measure black people according to the Economically Active Population, the discounting principles and empowering supplier requirements will apply.

It is advised that QSE’s complete an initial assessment before the end of their next financial year end, to achieve a comprehensive B-BEE status of the Company, and this will enable them to implement strategies to achieve their desired B-BEE score under the new Codes.

 


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