Business / Business News

Sungula Nkabinde
3 minute read
13 Apr 2016
12:42 pm

New BEE codes a double-edged sword

Sungula Nkabinde

Verification easier for micro-BEE companies – but will have unintended consequences.

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Newly implemented broad-based BEE codes stipulate that an affidavit is the only documentation necessary for small, black-owned companies to prove their status. While this has been a welcome development for black-owned companies, who previously had to spend thousands to get their status verified, things will now also be easier for companies looking to cheat the system.

Amended codes allow the use of sworn affidavits for all companies with annual turnover of less than R10 million. For companies with at least 51% black ownership, the limit is R50 million in annual turnover.

Deon Oberholzer, the CEO and co-founder of BEE verification company Veri-Com, says this could have catastrophic consequences for transformation as verification certificates that companies like his were once mandated to supply, provided an element of oversight.

“A lot of order and structure in our industry, where people got into the habit of doing things properly, will fade away,” says Oberholzer. “Because now, nobody has to go through the process of finding out whether a particular company’s BEE credentials are indeed legitimate, and whether it meets the necessary requirements.”

In addition to incentivising companies to keep their reported revenues below the given thresholds, Oberholzer adds that business owners will take advantage of the lack of specificity on the definition of black-owned by simply signing the affidavit and claiming ignorance if they are ever taken to task.

Some will cut corners

He says, for example, that a manufacturing company would look at the amount they need to pay in order to achieve a certain BEE scorecard – including skills development, black procurement, black ownership – and think it more convenient to create a network of distributors, whom they can represent as 51% owners. The real owners would then give them money to buy trucks and to sell on the company’s behalf to their already existing clients, and the black person(s) simply becomes an intermediary. In such a case, Oberholzer says nobody will care to check whether the black-owned status of that company is legitimate because there will be a signed affidavit to that effect.

“People are coming up with all sorts of scams to make their companies look like they’re black enough to receive BEE credits… The worst thing is that there are professional service providers, offering solutions (that allow companies to misrepresent their BEE credentials),” says Oberholzer.

He says that, although there is a new BEE commissioner, whose job it is to investigate cases of fronting, there are likely to be many more companies that get away with misrepresentation simply because the legislation is not clear enough. Instead, he argues that it is important for the spirit of transformation to be consistent with the law of transformation, because it is human nature for people to find ways around the rule if it benefits them.

Says Oberholzer: “The spirit of transformation is that people must try to help in developing and uplifting previously disadvantaged entrepreneurs so that there can be more of them. If the law of transformation does not tell you how to do that explicitly and specifically, in terms of what not to do, then people are going to do whatever they want… It might not get the required result, but it will tick the box”.

At the end of the day, it’s about reducing red tape

BEE policy expert Andile Tlhoaele, does share the sentiment that the new regulation is wide open to abuse, but feels that more should be done in terms of introducing punitive penalties for those who do try to cheat the system, rather than reverting to a system that was mired in red tape.

He says that, before procurement regulations were amended, many small businesses, particularly black-owned businesses, were not able to claim BEE points when doing business with government, and that led to many of them not being competitive on price when they tender.

“Anything that cuts red tape and removes the burden of regulation goes a long way towards improving efficiency and thus driving the economy forward,” says Tlhoaele.