As a consulting firm which supports organisations looking to deploy high impact Enterprise and Supplier Development (ESD) and Socio-Economic Development (SED) funding to tackle big issues in South Africa, the recent coverage by the Business Day gives us pause for thought.
In the recent article entitled: “Government readies revamped Transformation Fund offering big BEE points incentive” the publication reports:
“companies will be able to earn 30 broad-based BEE (BBBEE) points by contributing 3% of net profit after tax to the fund — double the points currently available for the same outlay under traditional enterprise supplier development (ESD) routes.”
Adding:
“The 30-point reward is large enough for many companies to move several levels on the broad-based BEE scorecard. For companies in the midrange, a single contribution could lift them into level 3 or higher, improving access to government and corporate procurement without changes to ownership or management.”
We reached out to our network of B-BBEE consultants, verification agencies and supply-chain / procurement experts and have collated feedback from ourselves and other stakeholders.
Thinking out the box should be applauded
Before we specifically dive into the questions our network asked, it is worth recognising policy-makers who are open to thinking a bit differently and showing a willingness to look at how they unlock value using the B-BBEE codes.
As was evidenced by the YES B-BBEE incentive, there are ways to get the public and private sector collaborating to tackle big issues in the country.
Caveats around the Business Day article
In framing this response, we are responding directly to information in the Business Day and are making certain assumptions. To that end, our response should take into consideration the following:
- For these changes to be enacted, this would require review of the B-BBEE codes of good practice as well as review of sector codes – consultation of which is not in the public domain at this point
- It is not explicit in the article – but we are assuming – that the “30 points” referred to would be additive to the Enterprise and Supplier Development elements but would exclude the existing Preferential Procurement recognition
- It is not explicit – but implied – that the Transformation Fund will be the only entity able to recognise these points
- Neither 30 points nor a cheque for 3% of your NPAT will give you a Level 3 under the current codes
- We assume that the principles of sub-minimums would continue to apply
Question 1: On what basis is government a better qualifying entity?
If an organisation makes a R100 000 unencumbered Enterprise Development (ED) grant to a black-owned small business … Is it the position of the DTIC, that this contribution will be worth less recognition than if it gives the funds to the Transformation Fund?
It feels implausible that this principle could pass Constitutionality or the spirit of the Codes of Good Practice.
Question 2: How will verification be measured?
A core principle of ESD has been around being able to show a flow of funds to a qualifying beneficiary. You would have your Enterprise Development and then your Supplier Development activities and your verification agency needed to show that your funds reached the qualifying enterprises.
As verification agencies and SANAS – how will they meet their mandates if the beneficiaries cannot be identified?
Are we satisfied that we are simply going to adopt an approach that funds given to the Transformation Fund will be deemed to have reached the intended beneficiaries? Can a Measured Entity then adopt the approach on other activities where it does not have to show a clear line of sight to the beneficiary?
If not – why not?
Question 3: If the funds cannot be deployed by the Transformation Fund – do they roll over into the next Measurement Period?
An instinctive response would be that the funds spent in a specific period are to be accounted for / verified in that period.
In theory, neither the Measured Entity nor the Verification Agency now have sight of whether its funds were actually deployed or not – partially or in full.
However, there is some precedent which says that if you deploy ESD funds in certain cases, you can continue to roll that contribution over provided you don’t withdraw the funds.
Would this apply in this case?
Question 4: What is the principle behind these contributions?
The high-level principle of the Transformation Fund is to provide a pool of capital for black-owned SMEs.
By turbo-charging the ESD priority element, will the scorecards need to be adjusted to incorporate ownership, skills and management control elements?
Question 5: How do you integrate into your supply chain if you cannot see the beneficiary?
Over the last 12 or so years, organisations have spent a lot of time thinking about their supply chains and how ESD funding can be deployed most effectively. The automotive sector for instance has focused heavily on downstream suppliers. If you are one of the big mining groups, you have tried to align this with both operational requirements, but also your social and labour plan commitments in the communities in which you operate.
Organisations have become very sophisticated around understanding their value chains and they also understand that many of these downstream beneficiaries have dependencies that extend beyond grant or soft loan support.
Left field example but if you are an automotive business and you have historically funded your supply chain … does it make sense for your funds to now be deployed to fund a tourism business?
Question 6: Skills, SED and unintended consequences?
While we had largely focused on the priority elements of the scorecard, a number of consultants in our network pointed to the Socio-Economic Development (SED) pillar as the obvious place where Measured Entities would look to cut spend.
If the incentive is structured as reported by Business Day then it will be very attractive.
What is the social impact of these cuts?
Our position is that the Skills Development element is due for a thorough review, but there are deeply entrenched interests who will want to argue for their own incentives should they find spend being re-directed to ESD.
Question 7: Will the same recognition be applied to other industry or sector “Transformation Funds”?
The Automotive and Legal sectors have their own transformation fund initiatives in place. These have been built on the back of extensive industry experience and developing a keen understanding of the respective value chains. On what basis would Measured Entities in these sectors receive less recognition than if they went directly into the Transformation Fund?
Question 8: Are these interest-bearing contributions?
More of a technical question, but well worth considering. If you have made R1m contribution to the Transformation Fund, your contribution could be generating probably R80 000 per year in interest if it is not deployed. Who is entitled to that interest – the DTIC or the Measured Entity making the contribution and can the Measured Entity claim that interest back / roll it over?
Question 9: What is disbursed and is there universal recognition?
In ESD contributions can be grant, soft loans or technical skills (EG accounting, marketing or acceleration support). These contributions have different recognition value on the scorecard.
Our understanding of the Transformation Fund is that it will allow for technical skills to be incorporated … but again if you do not have direct line of sight of your contributions – do they get treated the same?
Question 10: Where is the private sector?
The Business Day article primarily reference AfreximBank with a R10bn contribution (feels improbable) while the UIF, IDC and DBSA are mentioned as being the primary seed funders for this.
There is a passing mention of Vodacom.
The DTIC still seems to be struggling to win over the private sector with this proposal.
Question 11: NPAT and the multi-national loophole?
Lastly, it is worth unpacking the contentious issue of an NPAT calculation and multinationals operating in South Africa. As we have seen with the YES incentive, multinational businesses with low NPAT’s in South Africa are able to get an outsized advantage – the average multinational can probably gain 2 full levels on their scorecard with an investment of R2.3m with YES … simply because they don’t retain their profits in SA.
Does this incentive create the same issue?
Applaud the innovation but the detail will matter
In summary, we welcome innovation around the B-BBEE scorecard and the Business Day article has given us lots of food for thought.
We acknowledge that we shouldn’t jump to any conclusions before the final operational plan is in place, but some interesting questions were raised.
The challenge will now be around operationalising this incentive and creating trust between the public and private sector stakeholders.
We welcome your comments below.
