It’s been 24 years since the end of Apartheid, yet South Africa is still reeling from its negative effects – widespread poverty, huge unemployment and a lack of skills and quality education. There has been little opportunity for the majority of South Africans to join the mainstream economy and find jobs.
The Amended Broad-Based Black Economic Empowerment (BBBEE) Act 46 of 2013, which came into effect on 24 October 2015, and its associated Amended Codes of Good Practice, aims to address this inequality, giving small black-owned businesses and marginalised members of the population – black women, unemployed black youth, black people with disabilities and those from rural areas – an opportunity to participate in the formal economy, to access opportunities, gain skills, grow businesses and create employment.
Large corporates and Qualifying Small Enterprises (QSEs), with turnovers of between R10 million and R50-million must comply with the Amended Codes if they want to do business in South Africa. This includes developing small businesses through mentorship, and providing grants and loans.
The Act and Amended Codes are significant pieces of legislation that have the potential to see real transformation of our economy and to bring relief to millions of South Africans whose daily reality is social and economic hardship. But for it to have the desired impact, South African companies need to come to the party. If we are to transform South Africa, B-BBEE cannot just be a tick in a box on a scorecard. Big business must be willing to hold the hand of small black-owned enterprises and show them how to succeed by teaching them the business skills they need, giving them access to funding and to markets by making them part of their supply chains.
The Amended Codes place significant focus on Enterprise and Supplier Development (ESD) and aims to facilitate that by offering businesses points on their B-BBEE scorecards for preferential procurement and ESD. By taking ESD seriously, businesses can improve their B-BBBE recognition levels while giving previously disadvantaged South Africans a real chance at success. Without this kind of commitment from the business community, South Africa will never be able to transform into the country we all want it to be – the one we all dreamed about in 1994.
Amended B-BBEE Codes are driving transformation
The amended B-BBEE Generic Codes of Good Practice provides a real opportunity to changes the empowerment landscape in South Africa, says Petra Rees, Managing Director at the Lean Enterprise Acceleration Programmes (LEAP).
“We’re already seeing an acceleration in the changes companies are making since the Amended Codes came into effect in May 2015.”
The Amended Codes have emphasised supply chain as a critical key component, introduced a new Supplier Development (SD) requirement and put Preferential Procurement, SD and Enterprise Development (ED) under the Enterprise and Supplier Development (ESD) umbrella, making it the biggest of the five elements on the B-BBEE Generic scorecard with 40 points.”
This says Rees has moved companies from trying to do the right thing – like growing small businesses and offering them financial support – to actually having to do business with them. “Now companies actually need to find quality black entrepreneurs and small businesses, grow them, buy from them, help them to become sustainable and make sure their services are of a standard that will ensure the sustainability of the large corporate’s business and the quality of its own offering.”
The Amended Codes prioritise the ownership, skills development, and ESD elements. “The ownership element seems to be the greatest challenge for businesses as it impacts the procurement scorecard,” says Nomzamo Xaba, Group Executive, Empowedex Research and Advisory. “Not only does a company have to worry about its own ownership position, but also about whether its suppliers are black and black-women owned.” When it comes to ESD, a company is regarded as black-owned when black people have a 51% shareholding in that company.
Xaba sees the Amended Codes as a positive development for the transformation agenda. “It pushes for more black-owned and black women-owned businesses to come into the core economy and means big business has to make a concerted effort to buy from small and medium-sized black businesses.”
A big change in the Amended Codes, says Diana Cumberledge, Enterpriseroom’s BEE Specialist, is that Qualifying Small Enterprises (QSEs), with turnovers of between R10 million and R50 million, now have to do a black ownership deal or get a very low or non-compliant rating. On the old Codes they could quite easily achieve a Level 1, 2 and 3 B-BBEE rating without one by spending a percentage of their Net Profit After Tax (NPAT) on things like socio-economic development and achieving good preferential procurement scores. “Now there is more emphasis on black people having ownership of the economy and holding top positions in companies, even small ones,” she says. This means that QSEs that want to do business with large businesses and government are going to have to transform at an ownership level.
Tracey Webster, CEO of Enterpriseroom, says the greater emphasis on SD and preferential procurement should see tangible growth in the small business sector. “We believe that it’s in the small business sector that jobs will be created and where the economy will be boosted if funds, access to supply chain opportunities and mentorship are made available to small businesses to help them grow.”
Xaba adds that most small businesses struggle to get access to markets and funding with most stuck with debt funding they don’t qualify for, as they can’t secure the required collateral. “The ESD element of the Amended Codes requires the support of black businesses that includes debt funding at relaxed terms and investment in small businesses.”
And that is where companies like Edge Growth come in. Besides being a small business incubator and helping corporates with their ESD strategies – like Enterpriseroom and LEAP, Edge Growth also provides finance for SMEs who can’t access funding from banks. It also channels funds of corporate clients who wish to fund their ESD programme beneficiaries.
Stuart Townshend, Edge Growth Director, says South Africa’s financial lending system is not geared to funding high-risk SMEs. “So we seek to fund those who can’t access formal funding but are still able to grow on the back of it. Our model tries to solve the three big challenges SMEs face – access to markets, finance, and the right kind of skills development to close any capability gaps and help prepare SMEs for the growth journey.”
Providing SMEs and EMEs with access to markets is critical and should be the main focus of companies’ ESD programmes, says Webster. The ESD Scorecard encourages the graduation of ED beneficiaries into SD beneficiaries by offering companies a bonus point on their ESD scorecard for doing this, with the end goal being for them to become part of the supply chain. The 3% of net profit after tax combined spend on ESD, is there to assist these beneficiaries to develop their businesses sufficiently for them to become suppliers.
Dr Ivor Blumenthal, CEO of ArkKonsult, says companies who understand what is meant to be achieved by B-BBBE, who have a consolidated strategic plan and are investing in supplier development should also be investing some of those available funds in assisting newly created suppliers to effectively brand their business and themselves, market their products and services and consistently communicate the strategic advantages they offer in the marketplace.
“New enterprises and ultimately new suppliers have to be absorbed into the marketplace to remain sustainable and operational. They have to become part of the marketing and communication, the branding and the selling platforms that are part of the culture of communication. They have to be adopted and nurtured so as not to fail.”
Things to consider when setting up an ESD programme
Setting up an Enterprise and Supplier Development ( ESD) programme is not something companies should take lightly as the costs to companies, both big and small, can be significant. The behind-the-scenes costs of setting up and running an ESD programme are not insignificant and require the participation of various departments within a company.
“The more companies can align their ESD programme with business objectives, the better, as it then supports business sustainability. ESD then gets properly profiled and is allocated the necessary resources it requires,” says Stuart Townshend, Edge Growth Director.
“Companies also need to establish what they can accomplish on their own and where they need to bring in a good partner to assist – for example, in the development and implementation of a sustainable ESD strategy and programme.” Townshend adds that a programme should be structured so that beneficiaries are provided with a combination of finance and incubation.
“Most SMEs don’t know how to access finance. If it’s done through an ESD programme, they have more speedy access to it.” He says finance should be a balance between grants and loans. “Often grants go to enterprise development (ED) beneficiaries who are just starting out, as they would not be able to service a loan. Once an ED beneficiary starts making sales and needs a delivery vehicle to sustain growth, for example, that’s when a company can consider granting them a loan.”
Petra Rees, Managing Director of the Lean Acceleration Enterprise Programmes (LEAP), says executives need to think about the overall company’s objectives, analyse their preferential procurement spend, consider the Amended B-BBEE Codes’ requirements and then plan their ESD strategy. “Their ESD programme should meet their organisational objectives, leading to improvement in the company’s revenue and operational expenses. This requires commitment and change management processes, the magnitude of which is often underestimated,” says Rees.
Nomzamo Xaba, Group Executive, Empowerdex Research and Advisory, says there must also be clarity about what the beneficiary receives from the relationship with the company. “Currently the trend is for business to earn as many points with as little effort as possible. Beneficiaries become the losers as they receive little benefit from the support they receive. Where businesses are providing support, they must contract correctly with the beneficiaries. A lot of support goes…
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