With February financial year ends fast approaching, knowing whether your business will require a B-BBEE certificate and furthermore one with a specific level is crucial. The road to becoming B-BBEE compliant requires adequate planning and implementation, and achieving the level you require might require you to have a list of measures in place to do so. The interesting and noteworthy fact about the B-BBEE Act is that compliance is actually not mandatory by law for businesses. Nevertheless, the economic imperative to be B-BBEE compliant in South Africa is rapidly increasing and it is becoming progressively more challenging to operate a business without complying. So, what are the requirement for your business to become B-BBEE compliant?
The Codes of good practice define the following thresholds for companies requiring annual B-BBEE verification:
· Exempted Micro-Enterprises (EME), where the total annual revenue is R10 million or less
· Qualifying Small Enterprises (QSE), where the total annual revenue is between R10million and R50million
· Generic Enterprises where the total annual revenue is R50 million or more.
· Initiatives which split, separate or divide a Measured Entity as a means of ensuring eligibility as an EME, a QSE or a Start-Up Enterprise may constitute an offence and could be dealt with severely.
"The road to becoming B-BBEE compliant requires adequate planning and implementation, and achieving the level you require might require you to have a list of measures in place to do so."
What are the requirements for an EME?
In support of small businesses by the Department of Trade and Industry, and making their access into the economy easier, an EME is only required to obtain a sworn affidavit or certificate issued by Companies and Intellectual Property Commission (CIPC) on an annual basis, confirming the following:
a) Annual Total Revenue of R10 million or less; and
b) The level of Black ownership.
· An EME with 51% black ownership qualifies for immediate enhancement to a level 2 B-BBEE status
· An EME with 100% black ownership qualifies for immediate enhancement to a level 1 B-BBEE status
· An EME with less than 50% black ownership qualifies for immediate enhancement to a level 4 B-BBEE status
A very important point to remember is that the black ownership for an EME is measured using the flow through principal when a sworn affidavit or Certificate issued by Companies and Intellectual Property Commission (CIPC) is used. If an EME wishes to be measured in terms of the QSE scorecard it may do so.
What are the requirements for a QSE?
A QSE is only required to obtain a sworn affidavit or Certificate issued by Companies and Intellectual Property Commission (CIPC) on an annual basis if they are between 100% and 51% black owned confirming the following:
a) Annual Total Revenue of between R10 million and R50 million; and
b) Level of Black ownership:
· A QSE with 51% black ownership qualifies for immediate enhancement to a level 2 B-BBEE status
· A QSE with 100% black ownership qualifies for immediate enhancement to a level 1 B-BBEE status
As is the case for EMEs, black ownership is measured using the flow through principal when a sworn affidavit or Certificate issued by Companies and Intellectual Property Commission (CIPC) is obtained. If a QSE’s effective black ownership is less than 51% they will need to be measured against all elements of the QSE scorecard, where a B-BBEE Certificate has to be issued by an SANAS Accredited BEE Rating Agency. If the Black Owned QSE company is only required to obtain a Sworn Affidavit it may be measured in terms of the QSE scorecard, should it choose to.
The differences when being rated as a QSE vs Generic
If your company has been rated as a QSE in the past and has now reached the Generic entity threshold with an annual turnover of R50m+, there are some key differences to be aware of when planning for your next B-BBEE verification. Below we have discussed some of the differences between the rating of a QSE entity and a Generic entity.
In order to avoid the discounting principle (being penalized or discounted by one B-BBEE Level), a QSE only has to comply with Ownership and one other priority element such as Skills Development or the Enterprise & Supplier Development element. The first major difference between a QSE and Generic entity rating, is the application of the discounting principle. A generic entity will now need to comply with all priority elements, referring to Ownership, Skills Development and Enterprise and Supplier Development (ESD).
The second major difference between a QSE and Generic rating, is the use of national and provincial demographic targets. When calculating the score for Management Control and Skills Development, measured entities need to be cognizant of the demographic calculation that is applicable to these two elements. The overall demographic representation of the applicable province is used, as defined in the Regulations of Employment Equity Act and Commission on Employment Equity Report.
On the Management Control element, the scorecard is further split into a detailed breakdown consisting of Board Participation, Other Executive Management, Senior Management, Middle Management and Junior Management, each criterion being accompanied by its own weighting points and compliance targets. This is a much more expanded approach than what is seen on the QSE scorecard. Further to this, an additional indicator is introduced giving generic entities an opportunity to score additional points for employing black people with disabilities.
Under the Skills Development element, an additional 5 bonus points are available to generic entities when creating long term employment for black people who participated in learnerships, apprenticeships and internships that the entity paid for.
The Preferential Procurement element is also more detailed on the generic scorecard. The QSE scorecard was limited to measuring the procurement spend with all Empowering Suppliers based on the applicable B-BBEE Procurement Recognition Levels, Empowering Suppliers that are at least 51% black owned and spend from Designated Group Suppliers that are at least 51% Black owned. On the generic scorecard, however, these indicators have been expanded to include Empowering Suppliers that are Qualifying Small Enterprises, procurement spend on all Exempted Micro Enterprises and Empowering Suppliers that are at least 30% black women owned.
Enterprise and Supplier Development further sees a difference in the benefit factor matrix that is applicable to the relevant scorecard. As an example, an Interest-Free loan enjoys a 100% benefit factor on the QSE scorecard, whereas on a generic scorecard, this benefit factor is reduced to 70%. Additional bonus points are available as well. On the generic scorecard, entities are given the chance to score one bonus point for graduation of one or more Enterprise Development beneficiaries to move to the Supplier Development level, and another bonus point for creating one or more jobs directly as a result of Supplier Development initiatives.
The above criteria are applicable to the Amended Codes of Good practice, as amended, while the specific sector codes may have different compliance targets and weighting points, each drafted according to the needs of each industry. Based on the above requirements for the various entities as well as scorecards we urge all companies to sufficiently plan for their B-BBEE verification, especially when moving from one scorecard to another.