Is B-BBEE about to become narrow based again?   

Is Broad-Based Black Economic Empowerment (B-BBEE) about to become too narrow based for sustainability in the long run?

Since the Department of Trade and Industry (DTI) published the proposed amendments to the B-BBEE Codes of Good Practice in March 2018, there seems to be uncertainty among business owners regarding the impact of these amendments on Broad-Based Black Economic Empowerment (B-BBEE) in general and specifically with reference to the enhanced recognition status for black-owned businesses. Let’s look at this in more detail.

Enhanced recognition for black-owned entities

One of the interesting features of the proposed amendments is the extension of the enhanced recognition to include generic black-owned enterprises (*Generic Enterprises are businesses with an annual turnover exceeding R50 million). Generic enterprises will be deemed to be B-BBEE Level 1 with 100% black ownership or B-BBEE Level 2 with at least 51% black ownership without having to complete a B-BBEE scorecard.

The above proposed amendment has opened the door for a rather interesting debate: Will B-BBEE start fading away once these proposed amendments become effective?

Enhanced recognition and fronting practices

By implementing the proposed amendment of ‘enhanced recognition for all Black-owned businesses’ irrespective of size, we will soon find ourselves on a slippery slope, with greater opportunities for fronting practices, as an influx of white-owned generic enterprises might start considering different and more creative ways of restructuring their shareholding to reflect 51% black shareholding for a favourable B-BBEE Level 2.

The impact on Skills Development and Enterprise & Supplier Development

Fewer generic enterprises will invest in Skills Development and Enterprise & Supplier Development, which forms the core of the entire broad-based approach. When doing the necessary calculations, generic enterprises will soon realise that it will become far more cost-effective to pay dividends to shareholders than to lay out capital as per the B-BBEE scorecard, even more so during the current economic down-turn cycle where fewer enterprises resort to dividend payments to distribute profits to shareholders. The higher dividend tax recently imposed contributes towards this impasse.

Conclusion

For B-BBEE to remain progressive and to continue having a positive impact on economic growth, employment and business development in South Africa, the DTI should strongly consider using a system similar to that of the Construction Charter Council.

Creating an extra layer for the enhanced B-BBEE Level 1 and 2 enterprises will diminish the above-mentioned risks. In summary: 

  • 51% Black shareholding = B-BBEE Level 2, provided that the generic enterprise meets the sub-minimum of 40% for both Skills Development and Enterprise & Supplier Development (if full points are scored = Upgrade to a B-BBEE Level 1)
  • 100% Black shareholding = B-BBEE Level 1, provided that the generic enterprise meets the sub-minimum of 40% for both Skills Development and Enterprise & Supplier Development
  • If neither sub-minimum is met, the generic enterprise forfeits the right to be deemed an enhanced B-BBEE Level 1 or 2 and must comply with the provisions of the full scorecard.

By implementing this, the B-BBEE policy framework will curb disinvestment in B-BBEE development initiatives by generic enterprises. Significant emphasis will still be placed on Skills Development and continuous development of Small, Medium and Micro Enterprises (SMMEs) by Generic Enterprises.

SERR Synergy’s comprehensive B-BBEE service include tailor-made solutions that meet existing B-BBBE challenges by implementing effective and value adding strategies.

About the Author: Rylan Wissing joined SERR Synergy in 2014 and currently holds the title of Gauteng B-BBEE Assistant Manager.  He is a BCom (Law) [2008, LLB [2010] graduate from the University of Pretoria and was admitted as an attorney of the High Court in 2014. He has been involved with B-BBEE for the last 7 years assisting in excess of 200 Companies across South Africa with various strategies, consulting and legal compliance within the B-BBEE industry.