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COVID-19: Impact of the pandemic on B-BBEE in South Africa

22 September 2020 Ashleigh Hale, Co-Head of Corporate at Bowmans

The main focus for many companies in the current economic environment is to preserve cash and liquidity.

Shrinking profit lines and a reduction in procurement spending will no doubt have an impact in the next broad-based black economic empowerment (B-BBEE) rating cycle, on scores under the Skills Development, Enterprise and Supplier Development and the Socio-Economic Development elements in the B-BBEE Codes in particular.

While it may be argued the impact will be minimal because some of the targets are measured against net profit, and as profits decrease, the targets equally decrease, the reality is that many companies have had to cut spending in a number of areas, and this is likely to affect their B-BBEE Level.

It is not only the scores under these elements that may be affected. There could also be an impact on B-BBEE ownership scoring. Companies planning not to pay dividends will have to consider how this decision may affect the ability of their B-BBEE shareholders to repay any debt associated with the purchase of shares.

Ownership is a ‘priority’ element of B-BBEE. This means that companies have to score a minimum number of ‘Net Value’ points on the ownership scorecard to avoid being penalised and discounted by one B-BBEE Level. Net Value measures the extent to which any debt associated with B-BBEE equity is paid off. Many B-BBEE funding structures rely on companies paying regular dividends to service the B-BBEE shareholders’ debt, and as a result, to meet the requisite number of Net Value points on the ownership scorecard.

It may be possible to address any shortfalls in this regard by amending the terms of the funding structure. Many B-BBEE ownership structures have implemented ‘notional funding’, which aims to achieve the same economic effect as a traditional loan structure but without any actual flow of funds – hence the term ‘notional funding’. Notional funding structures generally allow for the flexibility to defer or amend the terms of the ‘notional funding’, without adverse consequences for the parties.

Companies concerned about the impact of the pandemic on their B-BBEE Level would do well to consider participation in the Youth Employment Service (Y.E.S) Initiative.

The Y.E.S initiative aims to place one million young black South Africans in employment for at least a year with the objective of upskilling them and making it easier for them to find further work opportunities. Assuming certain qualification criteria and targets are met, a company may be able to claim enhanced B-BBEE recognition and improve its B-BBEE Level by one to two B-BBEE Levels.

It is important for companies to consider these issues in good time, before their next annual B-BBEE rating processes. They should be focused on:

- continuous assessment to understand where their B-BBEE programs may be on track or falling short;
- determining where their B-BBEE spend may be best allocated;
- assessing their B-BBEE ownership funding structures and addressing any Net Value deficiencies; and
- focusing on other areas of B-BBEE where additional points may be scored, such as the Y.E.S. initiative, or introducing a B-BBEE shareholder at a time when the company valuation is low.

The B-BBEE Commission has said there will be no exemptions granted from compliance with the B-BBEE regulations or the B-BBEE Act. Unfortunately, this also means there will be no recognition for B-BBEE purposes of contributions made by companies to the Solidarity Fund, despite the fact that many of the beneficiaries will be black persons. It remains to be seen if this will be revisited in 2021, once the impact of the pandemic on companies from a B-BBEE perspective becomes clearer.

Quick Polls

QUESTION

Is the commission procurement rule introduced via clause 5.14 of the Amended Financial Services Sector Code (AFSSC) an important piece of the transformation puzzle?

ANSWER

The clause’s implementation coincides with an increase in the minimum spend targets, which further complicates matters
Many FSPs still view the AFSSC as a matter of choice and consequence rather than compliance
Transformation represents a great opportunity for growth and penetration by brokers
Brokers are unlikely to find their commission business yanked away from them by insurers looking to influence procurement scorecards
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