With the revised codes of good practice scheduled to be gazetted in August or September 2013, businesses continue to be in limbo regarding some of the revisions in this important transformation legislation. The Department of Trade and Industry (DTI) has held a number of sessions after the close of the public commentary process to further understand and at the same time convince businesses and industries to comment and or accept DTI’s rationale on a number of points that are in dispute.
DTI, in their own admission have confessed that the bulk of concerns and questions that have been asked at the various sessions around the country are of the same nature and require thorough consideration and review. Be that as it may, the codes are scheduled to be gazetted before the end of the 2013 calendar year, in what shape or format, that waits to be seen.
The revised codes in their current format propose that Ownership, Skills Development and Enterprise and Supplier Development (ESD) be treated as priority elements, which carries a 40% minimum threshold. In other words, if a business does not score the minimum points in any of these three areas, they drop a level if they are a Qualifying Small Enterprise (QSE) and two levels if they are a business whose turnover is above R50 million.
The impact of this revision brings challenges in the motor industry as follows:
The Ownership element, which now carries 25 points is key to some of the businesses in the motor industry. A simple example is that if a business has 7% black ownership and is currently a level four, it will drop to a level six because they do not have at least 10% black ownership. In this example, depending on the shareholders’ appetite on ownership issues, this revision may discourage black participation in the business in the form of shareholding and thus stifle transformation. It may be the opposite though, in some instances.
The current gazetted Codes of Good Practice allows businesses to claim learnership/apprenticeship salaries as part of the skills spend in the Skills Development area and therefore encourages businesses to equip young people with skills. This not only assists apprentices but also grows the motor industry in terms of the desperately required skills base. Considering that the revised skills development code disallows these claims as BEE spend, this may to some extent encourage businesses to limit the intake of these apprentices and thereby affect the skills growth in the industry, which the country desperately needs.
The current procurement rules have a section that relates to imports and why they should be excluded from the Total Procurement Measured Spend (TPMS) when calculating the procurement scorecard. Any products or services that cannot be sourced locally, for whatever reason, cannot be part of BEE spend. The rationale behind this is that a business cannot be penalised for purchasing from a foreign business, which does have any BEE credentials. In the revised codes, this advantage is being removed and therefore imported goods and services will now form part of TPMS. The effect of this move, if it passes the test, is that total BEE spend will increase due to imported spend being treated as local spend and it will therefore affect the procurement score negatively. A negative score in this area, depending on whether it is above or below the 40% threshold, could carry a reduction in the BEE level. Furthermore, it could affect the customer’s score on their scorecard. Possibilities are that there are a number of businesses in the motor industry who will not be able to meet this criteria as they are known to be importing most of their parts from their manufacturers abroad.
The second concern in the ESD area is the issue of value-adding suppliers (VAS), a term used by DTI to “promote” certain businesses in terms of their procurement scorecard. Reading into the term in simple language, VAS rewards those businesses with high labour costs. The current formula for calculating a VAS, unless changed in the revised codes, states that if “total labour costs added to net profit before tax is 25% or more of turnover” this company is regarded as a VAS. In research done, almost 70% of large companies do not meet this criteria. The motor industry, highly mechanised industries and oil companies in general, cannot in any way come close to meeting this requirement.
In conclusion, the revised codes could, if gazetted in their current format, have certain unintended consequences in the motor industry, such as fronting, especially considering the issues around imports and the fact that these purchases now need to be included as part of TPMS. The VAS factor could discourage businesses to not even try to transform as their BEE certificates may not be considered by their customers because of the business not being able to meet the 40% threshold.
Director: Transcend Corporate Advisors