Critical issues from final Construction Sector Code
THE TERM “BEP” refers to Built Environment Professionals such as consulting engineers, architects and other professional service providers in the construction industry, and the news is dire for multinational BEPs.
They apparently should please just leave the country, as it appears internationally-owned consulting firms will no longer be considered for government contracts in South Africa.
If you do not want to exit completely, please sell the business to your black executives. If they cannot afford it, just close the door on your way out, please.
Sanral published its draft procurement policies late last year, noting that they will only do business with companies that have 51 percent BEE ownership.
The Amended Construction Sector Codes (CSC) sets out a new and highly controversial disqualifier for BEPs that only half of your BEE shareholding would count if the business is not more than 50 percent owned by its own South African executives.
So, by combining these two, an internationally owned BEP is automatically disqualified.
I believe there will be some pushback on this, but it might not be particularly vocal or legal.
The industry works predominantly on tenders for big projects and we all know that if you make too much noise, your tender submission may just fall off the back of the truck on the way to the tender committee.
Procurement from black-owned designated group suppliers
First the definition: A “black designated group supplier” is defined as “a company that is at least 51 percent owned by black people that are unemployed, youth, persons with disabilities, living in rural areas and/or military veterans”.
Because many BEP’s subcontract work to other BEP specialists, I somehow doubt that the incidence of designated BEPs are ten times as high as the incidence of designated suppliers of anything else, but there it is: BEP’s have to source 20 percent of all their procurement from this tiny sector of the economy, please. The equivalent for everyone else in terms of the BEE codes and the sector codes is only 2 percent.
Foreign national employees no longer seen as employees
The last bone of contention is the treatment of employees that are foreign nationals. Counter to all the definitions and determinations that are the foundation of the rights and obligations of legally employed foreign nationals, according to the last minute changes. Oh, and foreign employees are no longer recognised as employees, even if they are in a formal employment relationship. Their salaries are now part of “procurement”. This is a really weird last minute addition that happens to be entirely counter productive.
We can assume the idea might have been to incentivise construction companies to employ more South African Citizens, but to create a set of rules that are so obviously capable of being circumvented is a clear indication that this was not thought through or put out for comment. If you do have any foreigners working for you, get them to become freelance consultants.
They merely need an invoice and a sworn affidavit from you and – voilà – you are now dealing with level 4 EMEs with 100 percent procurement recognition, a nice reduced skills development target and less pressure on management transformation.
For the love of me, I cannot figure out how this promotes any real transformation.
Prior to this, we had a compounding BEE benefit, especially on the Skills Development element. The skills targets were recognised for spending on black staff only, but the target was based on total salaries. The exclusion of international salaries simply serves to reduce this target.
The Construction Sector Council
Now with teeth. One of the few highlights in the final draft of the CSC is that the role of the Construction Sector Council (CSCC) has been strengthened to an executive authority with the mandate to monitor transformation in the sector. With the president-elect Cyril Ramaphosa having built his election platform on a commitment to root out government corruption and state capture, we can expect an equally hard push to get rid of in corruption and fraud in business.
And for that the CSC confirms that, the B-BBEE commissioner and the CSCC will most certainly form a close working relationship work together to take aim at BEE fronting in the construction sector.
What is really disappointing, though, is that the CSC was the result of a most thorough and comprehensive process of industry participation.
The code is generally well drafted and most of its unique requirements are specific to the industry and included for the right reasons, such as the inclusion of construction material suppliers in the scope of the code and the intense focus on construction industry professionals.
The last-minute changes discussed in this commentary were not properly communicated, not tested and many instances will most likely lead to unintended consequences that will not improve transformation in this critical sector of our economy.
We all know what happens if you add extra floors on top of a building as an afterthought. Apart from a few sensible tweaks, most of these changes fall into the afterthought category.
February is upon us
Construction companies in the sector with a February year end have but a few weeks to get their house in order or risk being out in the wilderness for a year.
Companies should remember that the measurement periods may now only be the actual financial year of the entity. So if you miss this year, the next window to do something is a year away.
Steer clear of any form of fronting, though. As mentioned, the push against corruption will surely – after the widespread and ongoing reporting of the erring of companies such as KPMG, McKinsey, SAP, Steinhoff and others – include businesses of all sizes.
The new government, whoever it may include, will be obliged to carry out a visible “witch-hunt” among those who feel they can flout the rules because others do.
For those with a February year-end, if you think you can relax until a later date, I think you’re in for a rude awakening.
And there is likely to be an even ruder awakening for those who think they can blame government corruption for dodgy practices or non-compliance with Sector Codes. Trust me on this one.
Deon Oberholzer is the chief executive of Gestalt Growth Strategies.
The last-minute changes were not properly communicated, not tested and many instances will most likely lead to unintended consequences.