Smoke and mirrors of BEE targets
Loopholes in key amendments put transformation objectives at risk
ANOTHER week and yet another set of amended broad-based BEE codes for a vital sector in untransformed South Africa.
On Tuesday, amid much fanfare, Minister of Telecommunications and Postal Services Siyabonga Cwele launched the Amended BBBEE ICT Sector Code.
In terms of the charter, the ICT sector comprises broadcasting, electronics, information technology and telecommunications subsectors.
The ICT sector has selected ownership, skills development and enterprise supplier development as priority elements and attached a minimum target of 40% of the total target in each element.
The target for the ownership element has been increased to 30% (25% in the generic codes).
However, targets ought to be celebrated only when they are achieved, not when they are consistently missed.
In its Sector Monitoring Report, which outlines the status of the implementation of BBBEE in the ICT sector, the industry admits it has failed to meet its own targets.
“The report reflects the transformation efforts of ICT companies that were gleaned from 200 BEE verification reports,” said Cwele.
“This is a small sample but it provides a good measure of where the sector is in relation to transformation. The report shows that the ICT sector is performing poorly on transformation by all measures,” said Cwele. Yes, by all measures. A crucial amendment in the codes is that an ICT company with at least 75% black ownership and with revenue less than R50-million per annum will automatically get a Level 1 BBBEE contributor rating. This is good news, right? Or is it?
The obvious objective here is to give small black-owned businesses the advantage and opportunity to thrive — at least on the BBBEE score.
For two related reasons I am not sure if this qualifying small enterprise threshold benefit will actually achieve its objective.
Very often ICT companies have “billings” or “turnover” that is not actually their “revenue”.
Their actual income is often in the margin that is still to be extracted from the billings. So you could easily find that you are still a very small business “billing” your clients — numbers that are above the R50million threshold — but your own “revenue”, the margin you earn, is well below the threshold.
This may sound overly technical but bear with the accountant in me.
For example, it is common for customers to specify the required IT equipment and to seek Level 1 BBBEE suppliers that can fulfil that order.
An IT company would go to a distributor of that specific brand and product, get a quote, add a margin and quote their client.
Let’s imagine the small IT company got a R10-million order for laptops from a client, and approached one of the manufacturer’s distributors for a quote and managed to get the order fulfilled for a wholesale discounted total price of R9-million.
Does the qualifying small enterprise (QSE) threshold apply to the R10-million value of the invoice sent to the client or only to the R1-million that the small IT company will actually make from the order?
I suspect the small IT company records the R10-million as its revenue, and the R1-million trickles down to “gross profit”.
Another four orders of similar value take the company out of the QSE threshold even though it actually banks R4-million in revenue — before paying rent, salaries, and other expenses.
The second problem with the QSE threshold is that in an attempt to award work to black suppliers, clients could quite easily achieve the opposite.
Let us modify one variable in my example. Let’s make the laptop distributor a 100% white-owned South African company.
Suddenly, the truth is that of the R10-million order, only R1-million went to the small black-owned IT firm. The lion’s share of the order — along with its own margins and associated incentives from the original equipment manufacturer — has gone to the white-owned distributor.
To make matters worse, the client then goes out and tells the world it spent R10-million with a black supplier, which is clearly not true.
This is not unique to the ICT sector.
Perhaps it is unique to an economy in which the majority of people don’t control the means of production and, even with political power, continue to be tenants on their own land.
Khumalo is the chief investment officer of MSG Afrika Group and presents “Power Business” on Power 98.7 at 5pm, Monday to Thursday
Targets ought to be celebrated only when they are achieved, not when they are missed