Games that Consultants Play with BBBEE Elements

By Dr Ivor Blumenthal


In pursuit of why Broad-Based Black Economic Empowerment (BBBEE) has received such a bad rap since its inception, it is necessary to unpack the vagaries inherent in the current legislative framework giving rise to BBBEE.

In a previous article, I discussed specifically the games played by Consultants in-relation to both New Enterprise and Supplier Development and what is necessary and required to tighten up the legislation with regard to Good Procurement practices, which are BBBEE-friendly.

What I want to discuss in this follow-up article, is whether the framework directing the other four elements in the Generic Scorecard can withstand the onslaught from wily Consultants, Lawyers and Accountants who really do not always have their client’s best interests at heart.

Ownership is the really thorny issue. However, a company shareholder should understand that the minimum levels established for “Ordinary” Share Ownership, namely 26% is an economic statement. It is our Government saying that if you cannot share 26% of your Net Profit After Tax, i.e. of your own economic entitlement, with the people who have helped you earn that Net profit in the first place, where you as a Founding Shareholder still benefit from 74% of that Net Profit, then you have no right running a business in this country, given the dispossession which your employees, and their extended families, have experienced to-date.

Of course, it is a matter of redistribution but essentially, from a brass-tacks perspective, it is the cost of doing business in South Africa. Given the fact that on-average other countries on our continent and many countries around the world have much higher levels of expectation in-terms of employee and local citizen entitlement and partnership, what we are being asked to sacrifice or invest, depending on how full or empty your glass is, is an acceptable percentage of equity.

You have to do the maths. Consider, that in-addition to every normal deduction permitted prior to determining Net profit After Tax, a company is entitled to deduct justified “Retained Earnings” and importantly “DEBT” incurred by Black Beneficiaries who derive economic entitlement under a BBBEE deal either directly or through either a Beneficiary or Ownership Trust. The real cost therefore of sharing Ownership, fades down from the gross 26% to between 7.8 and 10% of Future Earnings. Allocating 10% of NPAT as the required investment to remain in business and increase Turnover because you are on the right side of BBBEE, is surely a no-brainer?

The real villain in the formulation of an Ownership solution for local businesses, is “Foreign Ownership”. Why, where a business has a South African footprint and where that business is earning income in our economy, should that business not be required to compete on an equal footing with home-grown counterparts when it comes to sharing Ownership? You can be certain that there are IP charges, License Fees and foreign exchange expenses being set off against income from South African Gross Income, in any event. Why should a Foreign Shareholder be exempt from having to share 10% of its Net Profit After a watered-down Tax for Foreign Ownership, is applied?

This should obviously be applicable only to South African Turnover and to a South African operational footprint.

To allow Foreign Owners to set up shop in this country and incentivise them out of the pivotal BBBEE requirement as has been done with Wallmart and countless other Multi-Nationals who have set up shop here in this country, the latest being Amazon in Cape Town smacks of colonisation and indeed echoes of modern-day slavery. Cheap labour which is uninvolved as a participant in both Management and Ownership.

Why would our Government perpetuate this situation? Proponents, mostly Multi National Consulting Companies would argue that it is the cost we must pay as a country for attracting inward bound investment. Given the massive amount of Supply-Side Investment our DTI makes in incentivising such foreign investment where those new businesses are virtually wholly capitalised from DTI allocations which are funded by local companies, and where a large chunk of their operational budgets are similarly subsidised, complimented by a very lucrative set of tax dispensations for foreign-based inward bound investors, the question must be asked why on the labour front, BBBEE exemptions are also necessary?

There has to be a line drawn somewhere to create parity and opportunity for local business owners to be able to compete on a fair footing with their Global counterparts?

Go a little further specifically with regard to Amazon and now the newly strategized Wallmart emphasis on the Digital Economy, and the global lesson is that wherever Amazon has set up, it has resulted in an eventual 25% or more reduction in in-store retail, and importantly in a 35% reduction in traditional advertising and service business done with the retail sector. Essentially job-losses result.

Why would Amazon have to use traditional service business suppliers when it owns one of the largest consumer database in the world and similarly Wallmart does as well? These companies are integrating not collaborating.

Then there is the BBBEE element of Management Control. Why is it seemingly so difficult for Shareholders and Boards of Directors to understand that Team Leaders, Supervisors, First Line Managers, Senior Managers, Directors and Executive Directors, should eventually be reflective of our National and Provincial Demographic spread? Understandably the baseline which companies are coming from makes this reality an impossibility in the first years of BBBEE scrutiny. However, how can a 50% requirement that these Managers should be Black in-order for a company to be awarded with BBBEE status under this Element, be considered to be an undue burden? The challenge is the plan to get there, not the destination itself. There are ample rewards in BBBEE for trying without having to fudge the companies Organogram to lie your way to achieving those points.

Any effective Trade Union worth its status and member support would be interrogating a company’s “Management Control” report which has been submitted for Verification, in-concert with the Employment Equity Plan and the Skills Development Plan and Reports. If a company lists a person as a Manager in one of these categories the questions asked should be: When was that person appointed and by which process? Are their salaries commensurate with other Managers in the organisation? Do they have staff reporting to them and are they afforded accountability for decision-making and strategic responsibilities required from other Managers at that level? Ultimately the first question to ask is whether they actually know that they are a Manager?

There is absolutely nothing wrong with having a well-structured Management Development Program in-place, extending over multiple years with multiple levels of development and reward built in. What is wrong is simply labelling ordinary staff members Management, for the sake of a BBBEE Verification, That’s simply stupid!

When it comes to the BBBEE Element of Skills Development, there are weird and wonderful games often played by Consultants who in this instance are nothing other than glorified Training providers, often themselves only partially accredited and sometimes not accredited by SAQA at all.

There are seven categories of Training that can be accounted for within this Element but there is simply not enough scrutiny and quality assurance paid by all of the responsible actors including HR, Trade Unions, Quality Councils, SANAS and even Charter Councils to the litany of manipulation and misrepresentation inherent when it comes to Skills Development compliance.

What is wholly unjustified is why a company should be permitted to count Skills Investment in external parties completely unrelated to the workplace? Surely whether it is Bursaries, Scholarships, Learnerships, Internships, CPD or Professional recognition, all of such expenditure should only be accountable in the case where it is on current employee’s and future employee’s already in the companies supply-chain? Meeting a “Real Need” (staff shortages in critical scarce skill categories as indicated in the Employment Equity and Skills Development Reports), and “Probable Needs” relating similarly to meeting medium and long-term challenges of changing operational requirements and generally the impact of the Fourth Industrial Revolution?  

It is mind-numbing to witness the silence of Organised Labour and principally the Trade Union movements in this regard. Companies are spending 6% of payroll on Skills Development but who…..who are the recipients? Generally only Training Providers themselves know and certainly, the sponsoring companies never see these people. This is especially true where the training of Disabled people is concerned. 

Two things need to happen here. Firstly, disallowing Skills Expenditure on anyone other than a registered permanent employee, or by exception on Learnerships and Internships sanctioned and quality controlled, somehow, in-relation to the established needs of the company reflected in the Employment Equity Plan and Report and the Skills Development Plan and Report.

Secondly, evidence that Professional Recognition, integrating Training, Experience and the recipients’ personal Integrity reflected in behavioural record, has somehow been linked to the Performance Management System of the company. In that way, a company will be in a position to account for initial bursary-directed expenditure, workplace orientation via internships and learnerships, and contract-based exposure linked to YES (Youth Employment Service) opportunities prior to Permanent Employment.

Thereafter it is straight-forward to manage on-the-job exposure, training and best practice development via CPD, linked to Professional Body recognition via Designations.

The final BBBEE Element which requires discussion is that of Socio-Economic Expenditure. The reality is that BBBEE was never intended to supplement or to replace either the Lottery or the fiscally allocated budgets managed by a multitude of Government departments either on a National or Provincial level. What has happened however is that in scrambling to earn the 5 points on offer for SED, parties have lost track of why SED was included in BBBEE as an Element in the first place.

BBBEE is a workplace-based solution for the call for redress. In that respect, all expenditure (1% of NPAT) for SED must surely be spent in-pursuit of benefitting Employee’s and their extended families. Not unrelated communities which are the province of Government. This doesn’t mean that a company cannot donate and have those donations recognised as SED to CHOC, to other Cancer Organisations, to Hospice and other qualifying NGO’s. What it does mean though is that the company should be required to show how those benefits are accruing in-favour of employees of the company directly and their extended families. So, if a company is investing these funds in a group scheme which qualifies as a BBBEE actor, there should still be an agreement produced showing how that Group Scheme will benefit this company’s employees and their own extended families.

Why this is not the Modus Operandi is anyone’s guess?

Ultimately the lesson to learn is that irrespective of how a CEO has tried to outsource responsibility for BBBEE Implementation what can never be abdicated is ultimate accountability.

A CEO retains responsibility for the moral justification, the operational succinctness and workability, and the scrutiny placed on that project. This is not only by company actors such as Management, Employee’s and Trade Unions, but also the scrutiny the company will be subjected to from customers in-terms of their procurement-vetting responsibilities, from Charter Councils and ultimately, especially if they are large companies, from SANAS and the DTI Registrar responsible for BBBEE Oversight.

No Consultant will be allowed to assume the responsibility away from any CEO and needless to say no Consultant with any integrity, would or should ever want to!