A BB-BEE Follow Up

It appears that my last post on the lack of alignment of the BB-BEE codes of practice and the procurement policies of organisations arose from my ignorance! First, some background for those who are not familiar with the objectives of the South African government to address the inequalities of the past.

South African government policies exist to encourage companies to employ previously disadvantaged individuals (PDI, this is also known as affirmative action) and to contract black economically empowered (BEE) companies to provide services. The core of the latter policy is the Broad Based Black Economic Empowerment (BB-BEE) codes of good practice (see http://en.wikipedia.org/wiki/Broad_Based_Black_Economic_Empowerment for a brief description).

But the government has other targets too, in particular the promotion and support of small, medium and micro enterprises (SMME). The two objectives are complimentary and laudable. However, it does put non BEE SMMEs at a disadvantage.

In terms of the codes of good practice, SMMEs with a turnover of less than 5 million rand are deemed "exempt" from complying with the codes. This is an attempt to encourage the growth of small businesses. That means that direct empowerment objectives (PDI ownership and management) and indirect empowerment objectives (employment equity, skills development, preferential procurement, enterprise development and corporate social investment) can be ignored in the interests of building a viable business. Once that has happened,� these objectives will need to be addressed for the greater good.

However, there is an inconsistency. If, as an SMME, your market is business to business (B2B), in particular with businesses which are required to comply with the codes of good practice, you have a problem. One of the elements of the BEE score card is Enterprise Development. The purpose of this measure is to evaluate a company's total spend on "qualifying" BEE enterprises, and the definition of "qualifying" is the issue. The inconsistency is that "exempt" does not equal "qualifying". Although as a SME with a turn-over of less that 5 million, you have "exempt" status, it is completely meaningless as you are not a "qualifying" enterprise for the purposes of Enterprise Development scoring unless your SME has 50% PDI ownership. Hence, without being a qualifying enterprise, any money spent on your services cannot be used in the calculation of the Enterprise Development score for the contracting company. With a large number of corporate companies, this is a problem.

If a large corporate is trying to boost its' overall BEE scorecard by achieving maximum points in this section (as I believe they are for a number of reasons), a qualified enterprise is far more likely to be appointed than a merely exempt organisation.

Note that in calculating the score for the Enterprise Development, the corporate can claim money spent for level 1 compliant (i.e. fully empowered enterprises) service providers at R135 for every R100 spent. For a qualified level 4 enterprise, this claim is R100 for every R100 spent. The fully empowered organisation will always win if that corporate is serious about improving the Enterprise development score. By not being qualified, there is effectively 35% less chance of being appointed.

How to fix this? - find your niche where there are no competitors, or find a PDI partner