Company Announcement - The amended codes of good practice for broad-based black economic empowerment (B-BBEE), coming into effect on 1 May, can stimulate much-needed competition and innovation in the economy due to their focus on supplier and enterprise development, says Deloitte. Many companies have been scrambling to ensure they have updated empowerment certificates in place prior to the deadline of 1 May as this will ensure that they do not have their B-BBEE Ratings reduced under the more stringent amended codes. However, Deloitte cautions that companies which don’t have an effective long-term empowerment strategy in place could fall behind their competitors that have proactively embraced the codes, by at least one to three years.
Lerato Sithole, Director – Supply Chain Management, says businesses need to see the changes as an opportunity to broaden their economic base rather than a hindrance to growth and an unnecessary layer of red tape.

“While there is an assumption that the codes will have a negative impact, there are competitive advantages to having a more empowered workforce. Long-term benefits are about growing your slice of the pie and increasing the company’s competitive edge, therefore companies should not only focus on the short term drivers. ” says Sithole. It is generally accepted that true transformation in South Africa is far from the finish line despite nearly two decades of trying. The amended codes will allow South Africa to fast track this process.

The previous codes were less stringent and as such, some businesses saw loopholes for fronting, and that hindered the transformation process. The amended codes now look into ensuring that companies develop their own people and local supplier base. “Once you have an empowered workforce that is equipped and capable then you become a stronger and a more competitive company.” says Khutso Sekgota, Senior Manager-Supply Chain Management, Deloitte.

If the codes are implemented correctly they will result in more business which are  B-BBEE Compliant EMEs (i.e. enterprises with annual revenue of less than R10m) and QSEs (enterprises with Revenue between R10m and R50m). This  will in turn increase the number of players in the market and result in companies becoming more innovative. “There will also be benefits from a price point of view in the long term, as an increase in the number of alternative suppliers will result in increased competition and value for money. Due to limited options in some strategic sectors (such as energy, manufacturing, professional services and business process outsourcing) it is difficult to bring prices down and facilitate competitiveness for local industries,” says Sekgota. “The amended codes strongly incentivises doing business with EME and QSEs, and this is expected to be a vehicle that grows and stimulates the economy,” says Sekgota.

The enterprise development component provides enough flexibility for businesses to use an incubation approach with potential suppliers, before signing them up for longer periods. “Substantial points will be earned for investing, creating and transferring skills in the pipeline of capable B-BBEE complaint suppliers under the “enterprise development” component of the codes. Likewise more points can be earned through the supplier and preferential procurement component of the codes, when the potential suppliers are qualified and graduated into fully fledged suppliers of the company. The framework is therefore streamlined to develop local and transformed suppliers that are integrated into the company’s own supply chain,” says Sekgota.
Deloitte further advises that B-BBEE needs to become a key component of the company’s long term business strategy to ensure sustained results.  “You need to build in the B-BBEE components into the operational fibre of the company, rather than just looking to measure them in retrospect, for compliance purposes. The company’s empowerment strategy should look both internally and externally at its supplier base. Companies will need to do more market analysis to identify opportunities for high impact transformation without putting their business at operational risk; and this is very possible.

They could for example just consider incubating a developing supplier in the first year before partnering from year two onwards,” says Sithole. The punitive measures will be hard-hitting for those companies that don’t comply with the codes. Non-compliant companies that bid for public procurement, private-public partnerships, sale of state-owned assets will in most instances need to drastically reduce their prices under the PPPFA framework in order to ensure they can compete with competitors of higher B-BBEE ratings.

Companies that require compliance to the B-BBEE Codes as part of their licencing conditions will also be hard pressed to ensure that they are not deemed non-complaint, as this may hamper their prospects of licences renewal or obtaining such new licences. Companies that are license-based and which fail to meet their sector code or the generic code could jeopardise the renewal of their licenses Those companies doing business with private sector will also find that their customers are increasingly demanding favourable B-BBEE ratings from their suppliers in order to boost their own contribution to the “enterprise and supplier development” points and ultimately their overall B-BBEE rating.

“If companies embrace the amended codes as well as the incentive structures built into it them, they will realise favourable results. But if they step back and just say it is not working, then it will definitely not work for them” says Sithole.