This article seeks to unpack some of the implications of the changes to the Codes of Good Practice (CoGP) if they were to be gazetted in their current draft format. We recognise that the draft Codes are offered as an initial salvo in the process of converging on improved legislations surrounding Broad-Based Black Economic Empowerment (B-BBEE), and we ask the reader to take this context into account in this review. The focus is not on the differences in the current and draft Codes but rather on the implications for the country and business in general if they were to be adopted in their current format. This article is technical in nature and assumes the reader has a good understanding of the current and draft CoGP.

Transcend Corporate Advisors welcomes the concept of changes to the CoGP, has concerns about the nature of what is being measured.

Minister Rob Davies, of the Department of Trade and Industry (DTI), made reference to different indicators which placed both the issue of strategic transformation as well as the success of the existing CoGP into context, when he launched the proposed amendments to the CoGP in October 2012. These were the requirement that Broad-Based Black Economic Empowerment (BB-BEE) align itself clearly with not only the government’s developmental objectives, but also the tools/initiatives which have been designed by government to achieve these developmental objectives such as the Accelerated and Shared Growth Initiative for South Africa, the National Development Plan, the New Growth Path and the Industrial Policy Action Plan. The developmental objectives include specific reference to skills development, job creation, localisation, and industrialisation and supplier development.

The proposed Codes have collapsed the previously accepted seven elements into five elements and retain much of the original terminology. With this structure, developmental objectives of job creation, industrialisation and growth are causal inferences. Would it not have made more sense to motivate companies directly around these key national objectives rather than rely on inferred inter-relationships between what is measured and what the potential impact might be? The old business adage  “what gets measured gets done”  should be front of mind.

We recommend that the synergy between various legislative interventions should be explored, as this lack of synergy has complicated the issue for business.

Priority elements

The proposed Codes have highlighted three priority elements in which businesses must meet a minimum threshold of 40% or be penalized. Concerns in the priority areas measurement are that companies might fall below the threshold in the short term.  Adjustments to business ownership take time and so we suggest that a window of migration be allowed for this adoption.

Management control

Calculating compliance in accordance with National Demographics

i)         Compliance targets for 2.3 (senior management) and 2.4 (middle management) are based on the demographic representation of black people as defined. For scoring purposes the targets are further broken down into the race sub-groups as defined in the Employment Equity Act.

The proposed formula implies that each race group has to be represented or points will be lost.  It also does not give recognition to companies that have achieved more than the stipulated requirements.

ii)       This formula is based on national demographics and not on provincial demographics, which will result in companies being unable to find employees of certain race groups in the areas where they are situated. The formula also tends to disincentive companies to hire African black employees as the targets are higher in their EAP and hence more difficult to achieve.

We understand that the objective of this change is to align the Employment Equity Act (EEA) definitions, and to encourage companies to recruit in proportion to the Economically Active Population (EAP). However, this proposal stands the risk of encouraging the opposite behaviour as companies could ignore the higher targets for African black employees and still achieve a significant number of points.

We recommend that the aspect of Employment Equity be solely driven by the Employment Equity Act and its processes and not specifically measured in B-BBEE for the next five years. Once the talent pool matures more significantly then the use of a Maslow’s rationale could re-shift the focus back to Employment Equity.

Skills Development

The DTI’s attempt to broaden the definition of learnerships is seen as a positive. Also a positive step is the broadening of the definition of skills development to include unemployed people.  The inclusion of apprenticeships and internships and the extension of the element to include unemployed people will broaden the beneficiary base and deepen the skills pool of the nation.

Learnership allowance and bonus points

i)         The removal of learnership salaries/wages from the skills spend will result in companies training for their own needs.  The value of the practical training will be lost to the industry pool.

ii)       It is recognised that on-going learnerships as a substitute for employment is unhealthy for the nation but allocating the bonus points achievement so that it is applicable only to the company and its industry will negatively impact on general skills transference.

We recommend that the learnership allowance should be retained, so that companies are incentivised to continue to develop B, C and D incumbents. We further recommend that the bonus points system is retained, where points are awarded based on the number of learners, up to the target of 5%. If the company chooses increase learnerships above the 5% target, they should not be negatively penalised.
The non-recognition of informal training would feel punitive in the light of the higher targets and we recommend that this element should be retained so that companies are incentivised to continue to develop and grow their human resources and knowledge capacity.

Enterprise and Supplier Development (ESD)

The redrafting of enterprise development towards Exempt Micro Enterprise (EME) and Qualifying Small Enterprise (QSE) beneficiaries is a positive refocusing as these categories of companies are the source of job creation in the country. We support this aspect of the draft CoGP as it reduces tactical behaviour in the market-place.

Value Adding Suppliers

If  a value adding supplier is to be a mechanism of job creation, then a dramatic redrafting of the current definition of  the term  “value adding supplier” is required as well as a description of how a value adding supplier and a BEE procurement recognition level become aligned. Based on the current definition, the smaller and more emergent QSEs and EMEs would be non-value adding and hence not supported in the Codes. This would result in reducing job-creation. Furthermore, companies in a commodity industry who generate small profits even if they are strong employers, would be defined as non-value adding.

Companies that are non-value adding would then be disincentivised to drive empowerment which would reduce transformation in the country. An analysis of 4000 current B-BBEE scorecards, showed 48% to be non-value adding. Hence half of the companies that currently produce scorecards and undertake transformation efforts would cease to do this. This would be disastrous for black economic empowerment.

We recommend that rather than dropping non-value adding enterprises, value-adding enterprises spend be significantly marked up and/or the definition of value–adding supplier be re-drafted. This will encourage the move to value-adding in a positive way and the targets could be adjusted accordingly so that momentum in this process is retained. We further recommend that the value adding definition not be applied to EMES, QSEs and black-owned businesses.

The deletion of permissible imports

The proposed legislation deletes paragraph 6.6, which will result in imports being included in the measurement of ESD.  This will add a cost to local manufacturing as often imports are cheaper or the material cannot be found in South Africa.  This will make the product more expensive and the South African consumer will be the victim.

While it is important to drive the localisation of the economy, this cannot be done in the isolation of a sound industrialisation strategy to build local supply. We believe the country is on track in this regard but the Codes need to recognise that there is a lead and lag relationship between effort and impact.

We contend that a blanket statement of inclusion of all imports effective one year after gazetting does not allow for sufficient time for the convergence of all these components.  The link to the national development objectives in this regard needs to recognise that IPAP2 is relatively new and needs time to provide a stronger enabling environment for localisation.

We recommend some time steps and that targets be created to aid the migration from international sourcing.

Conclusion:

We urge the DTI, in an economic and social environment that has seen a worsening state of inequality, to revise its efforts and focus wholeheartedly on promoting social inclusivity. In so doing the Codes will deal more effectively with different expectations in South Africa. We recommend a more explicit linkage and description be expressed of the relationships between the principles of localisation, job-creation and the reduction of inequality. These concepts should be measured and monitored as part of the B-BBEE process.

Written by Dr Robin Woolley , Executive Director, Transcend Corporate Advisors

Contact: Brian at Transcend Corporate Advisors
Tel: 011 442 2433
Email: brian@transcend.co.za