Much criticism has been levelled at dti over it New BEE Codes. Perceived by many as a legislator that has set an insurmountable bar, dti says its drive for economic-development has been lost in legislated translation. Liso Steto, Director at the dti, spoke to Smart Procurement Review about supporting small businesses and the perception of ‘legislation daydreams’.
Why did the dti institute revised B-BBEE Codes of Good Practice?
The short answer is: to simplify an existing complex solution to a complex problem.
BEE is complex in nature. The marginalisation of the majority of the country was a complex initiative, done through the education system and property ownership, among others. The challenge to reverse this is equally complex and required a complex solution: the BEE Codes. With the New Codes we have sought to simplify compliance, for example, instead of seven elements we now have five.
Under the five elements we have set thresholds of priority on skills; skills are necessary to industrialise the economy and they are needed where they a short, which is amongst the black majority.
What were the urgent motivations for revising the Codes?
1) Did they fail to achieve economic growth?
We needed to ensure that BEE is not a side policy and links to other key government interventions, strategies and policies. Government seeks to create industries and value within our own economy so that we can create opportunities for jobs and growing industries. BEE cannot depart from that.
BEE cannot be used to neglect certain key issues around creating value within the country. Our economy must be inclusive, but cannot do so at the cost of creating value and industrialising our economy. We had to strike that balance. With the current provision we have initiated something to that effect.
2) Were companies finding loop holes?
Under the previous Codes there was a provision allowing an organisation to exclude certain input costs from procurement spend. This was abused in that it allowed them to avoid spending that money with black BEE companies, at the loss of opportunities to create industries locally.
Under the New Codes these same input costs cannot be excluded; rather organisations must indicate how they will create value locally for specific commodities that they procure – all linked to the Industrial Policy Action Plan (IPAP) and building local content in the country.
Policy developers worked with the private sector to identify opportunities for local value addition.
What is different under the New Codes?
Enterprise Development has been a part of South Africa’s environment for a while and we can find many beneficiaries who grew under such initiatives, but we need to enhance the level of recognition and promotion of entrepreneurship and black-owned businesses. This is clearly articulated in the New Codes.
Small to medium enterprises (SMEs) face challenges such as accessing capital, accessing markets and meeting quality and standards. They need to focus on this as opposed to BEE.
Furthermore, there was strong feedback from business, as a key stakeholder, to the effect of “I’m already black, but I have to prove I’m black to get business from government” – while we do not want them to front or misrepresent themselves, the risk is that you increase the burden on them.
So rather relax the requirement. We have granted black-owned businesses with a turnover of less than R10-million exemption to allow them space to focus on developing products or services and expanding their businesses.
We increased the small-business threshold from R5-million to R10-million. But from then on please comply. It is a corporate responsibility for everyone from that turnover point.
Meanwhile, if a business is 50% black-owned it is automatically Level 2 – a policy intended to benefit black people and increase their participation in the economy as more people/organisations will be inclined to do business with Level 2 businesses.
If you are 100% black-owned you get Level 1.
The New Codes require that 80% (previously 70%) of a company’s spend should be with BEE-rated suppliers, but this earns only 5 points (previously 12 points). Also, 40% (previously 9%) of this is to be spent with black-owned businesses to earn a further 9 points (previously 3). Does this not shift responsibility for creating and developing black-owned businesses away from government and on to business?
Big business has a responsibility to help us achieve industrial development; more importantly, to achieve supplier development and diversification of supply chains. The Enterprise Supplier Development (ESD) element accounts for 40 points of the 109 total, clearly indicating our intension to create a symbiotic relationship between big and small businesses.
But this is aimed not only at the private sector; we expect the same of the public sector, whose ‘specialised score card’ has the same requirements. In the past, organs of state had the option of applying BEE where reasonably possible. Now the requirement is that they must apply BEE.
Dti is working with the Department of Small Business (DSB) to help big business find SMEs through a database of suppliers registered by the DSB.
However, businesses that really want to source a supplier can easily make it happen on their own. In fact, many businesses engaging with the dti are very creative in identifying suppliers.
The mixed reaction to the requirement to source from small businesses is owed to people’s need to ensure that they are not compromising quality and supply. However, we expect the same diligence from them in capacitating small businesses through ESD and by granting them procurement opportunities.
Currently there is talk of “legislation fantasies vs operational realities”. Practitioners feel there is a gap between the two.
Operations function within realities and the clear reality is that 21 years of the new dispensation have only scratched the surface of ensuring inclusive economic participation. The xenophobic attacks in early 2015 are evidence that South Africa is a ticking time bomb.
We hope to grow the economy and create value, but that growth cannot be on the back of the minority. The black population needs to be part of the economy, part of growing the pie.
There is a clash of legislation and policy – is the dti solving industry challenges by issuing more and more legal frameworks?
The Codes and Preferential Procurement Policy Framework Act (PPPFA) regulations differ in terms of allowing for affidavits and CIPC certificates. The PPPFA does not recognise these as yet as the legislation is not yet updated.
Furthermore, the Codes and the Department of Mineral Resources are seeking alignment of the definition of ‘black’.
However, it is clear that changes in the BEE Codes are linked to the National Development Plan, and to IPAP: where IPAP has identified a specific commodity to be designated, like set-top boxes, BEE does not play in that space, we allow for the designation to happen.
What is the dti currently doing to engage more with stakeholders and build investor confidence “presumably shaken” by the release of the New Codes?
The provisions in the New Codes stem from industry at large. Our stakeholders include practicing verification consultants, all sectors of the private sector and local and provincial government.
We pride ourselves on the level to which we engage with our stakeholders. In 2013 we had 40 formal engagements with stakeholders, in 2014 we had 58. By May 2015 we had held 20.
Furthermore, we’ve got a good cadre of people that support and assist the private sector to understand the facts. We work closely with a joint technical committee of consultants and verification agencies and we discuss the challenges around interpretation issues. Our statements are created in conjunction with them.
Negative feedback is based on a lack of information. BEE is complex and can be misconstrued,
so we want to do as much as we can. The source of investors’ information is critical, which is what we focus on. We directly address media responses that are not factual. We present to embassies and conduct compliance talks overseas, successfully – we recently received R700-million in BEE investment, focusing on skills development, ED and research.
As of 1 November 2015 the BEE Act trumped any piece of legislation that conflicts with it.