B-BBEE Considerations after Lockdown

Data derived from research over the last 11 global

recessions indicate that, on average, it takes 18 months

for an economy to begin its recovery. However, the root

of this global recession, caused through a pandemic and

the subsequent economic cycle, is something not seen

before.

In previous recessions, the world has continued to trade

through the 18-month recovery period, thus struggled

through them, which gives theory to the timeline. However,

the economic cycle of this recession reduced the global

GDP. One has to bear in mind that this recession is due

to an event rather than underlying economic issues.

Therefore, the recovery timeline for this global pandemic

and the long-term impact thereof is difficult to predict.

Nevertheless, there is hope for a rapid recovery as per a

recent statement made by Jason Hamilton, a Director of

First River Capital: “What we can, however, focus on is

that it is an event-driven recession; hence the recovery

and comeback should be quick, the question is just

when”1

.

The roll-out of events that happened to trigger the National

Disaster Act came about in quick succession with little

notice. As organisations assess the collateral damage

of our national lockdown, they will have to contemplate

whether their B-BBEE Strategy and targets set before

the lockdown still apply or whether they need to reassess

them.

The risk of organisations not considering the impact of

the lockdown on their B-BBEE Strategy or targets may

well lead to a breach in contractual obligations, whereby

penalties may become applicable or, worse still, the

termination of contracts. Without any consideration,

unforeseen Fronting Practices may emerge which, left

undetected, could result in damage to an organisation’s

reputation. In a nutshell, the actual risk to an organisation

depends on the steps they chose or chose not to take in

reassessing their B-BBEE Strategy and targets2

.

This article will unpack areas to assess per element,

whereby organisations can measure their B-BBEE

Strategy and targets against the collateral damage

brought about by these recent unprecedented times.

Generic Considerations

Organisations must reassess on which threshold they

qualify to be measured. The reality is that a loss of annual

turnover could see a Large Enterprise qualifying as a

Qualifying Small Enterprise (QSE) or a QSE qualifying as

an Exempt Micro Enterprise (EME). If this is the case, there

would be a knock-on impact. The areas listed below are

non-exhaustive.

> The targets – for example, a Large Enterprise moving

to a QSE means that the number of Priority Elements

shifts from three to two before the Discounting

Principle triggers.

> Organisations may qualify for Enhanced Recognition.

> The method of providing their B-BBEE Credentials

might change from a SANAS accredited B-BBEE

Certificate to an Affidavit.

> Such a change in an organisation’s financial

threshold may qualify an organisation as a Supplier

Development or Enterprise Development Beneficiary,

with the accompanying benefits of assistance in the

appropriate financial year.

Ownership Considerations

Today, due to such unprecedented times, there is no

way an organisation can accurately forecast its value.

The Net Value calculation on the Ownership scorecard

links directly to an organisation’s share price. A slump in

an organisation’s share price will most likely have a dire

impact on the Ownership Scorecard, especially since it

may lead to an organisation not making the sub-minimum

40% requirement.

Net Value Calculation

The Net Value calculation takes into account the value of

B-BBEE Shareholders’ equity and the acquisition debt,

which is the amount incurred by the shareholders to

acquire the equity. Generally, the Net Value calculation

evaluates the decrease of the acquisition debt over ten

years in sufficient proportions. Hence year-on-year the

debt amount lowers, which translates into points on an

Ownership Scorecard. However, suppose the lockdown

has an impact on an organisation’s share price. In that

case, there will be a decrease in the portion of the

acquisition of debt, which will affect an organisation’s

Ownership Scorecard. What are the unforeseen

consequences of this happening?

The debt amount of ‘Black’ Shareholders, if payable

through dividends, will not decrease, so there will be

a shortfall in the repayment of such debt.

> Contractual terms and conditions more often than

not include a penalty or cancellation clause for such

an occurrence; hence ‘Black’ Shareholders are at risk

of being in breach of contract.

Net Value is calculated at the date of an organisation’s

B-BBEE Verification. Therefore, if there is a shortfall in the

Net Value amount, remedial action can rectify the matter.

‘Black’ Shareholder Engagement

Shareholder engagement as to the value and distribution

of dividends is essential, especially if the ‘Black’

Shareholders are employees. However, before doing this,

an organisation must engage with its B-BBEE Rating

Agency and provide evidence, in the form of its financial

statements. Engagement with ‘Black’ Shareholders should

include:

> Managing the expectations of distribution values;

> Providing evidence as well as the rationale behind

it, in the case of a lower dividend or no distribution of

the dividends; and

> Taking cognisance of any concerns and, in the

shortest timeframe possible, addressing them

adequately.

To ensure good faith, it is vital to identify, then mitigate, any

risk stemming from engagement with the shareholders.

There must be no room for conspiracy theories or any

opportunity for shareholders to allege Fronting Practice or

misconduct2

.

As a result of the lockdown, the Master’s Office and

the Companies and Intellectual Property Commission

(CIPC), amongst others, were temporarily closed. The

result is that, upon reopening, there will be a backlog

in applications. Therefore, a delay in the processing of

such applications by the regulators can be expected. The

potential impact could be

> In respect of trusts, an expected delay in registering

new trusts or changes to the trustees, due to letters of

authority being necessary, and any amendments to

trust deeds; and > delays in relation to registering a new entity or a

‘start-up’ and amendments to the Memoranda of

Incorporation for new share classes.

The administrative delays caused by the lockdown

may interrupt the registration of B-BBEE Ownership

transactions or prevent existing B-BBEE Shareholders

from adhering to contractual obligations

2

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Management Control Considerations

Now more than ever, as organisations navigate the

challenges of the lockdown, they stand to benefit from

a solid Management Control Strategy. By the nature of

the challenges facing organisations, each will have to

evolve and adapt to find a ‘new normal’ through grit,

determination and innovation. During lockdown level 5,

approximately 36% of businesses laid off employees in the

short-term. At lockdown level 4 this reduced to 26%.

Results published by Statistics South Africa on

29th September indicate that the number of employed

people decreased by 2,2 million to 14,1 million in the

second quarter of 2020 compared to the first. This

unprecedented change is the largest quarter one to

quarter two decline since the survey began in 2008.

In the context of the lockdown and the amendments

to the Employment Equity Act (EEA), one cannot

address Management Control without incorporating the

Employment Equity (EE) requirements, as they inherently

go hand-in-hand. Bear in mind that an organisation may

not claim Management Control points without submitting

a EE Report.

The detrimental impact of the nationwide lockdown has

forced many organisations to consider retrenchment

to stay afloat. However, cutting employees may be

detrimental to their Management Control and EE

outcomes which are measured as follows

Considerations for Employers

contemplating retrenchment

The Notice to Designated Employers issued on 4th May

2020 (CEE Notice) by the Commission for Employment

Equity (CEE) acknowledges the catastrophic impact

of the lockdown on the economy, namely a decline in

economic growth, job creation and retention. The CEE

Notice reminds employers that, during the organisational

restructuring or configuration processes, they remain

bound by the relevant employment laws and are required

to ensure that there is no unfair treatment or unfair

discrimination in policies and practices.

The CEE Notice further states that “all Designated

Employers are requested to strive not to reverse the

previously attained transformation gains, including to,

where reasonably practical, achieve their initially planned

annual EE targets.” Thus, in the face of the lockdown,

employers remain cognisant of their obligations,

particularly concerning workplace transformation. Two

considerations arise from these obligations: > Can employers, when selecting employees for

retrenchment, take into account the need to meet

the targets set in their EE Plan? > What happens if the retrenchment impacts an

employer’s workforce to such an extent that an

EE Plan is no longer viable?

Can EE goals be used as retrenchment

selection criteria?

The method of selecting employees for retrenchment

is an issue on which consulting parties must reach a

consensus. The selection criteria must be on a basis that

is fair and objective. EE considerations may fall within the

ambit of ‘fair and objective criteria’. The retrenchment

code of “last in, first out” – the LIFO Principle, which is

generally a fair and objective selection criterion, may

undermine a B-BBEE Strategy or EE Plan. Therefore, a

retrenchment process, now more than at any other time,

must be a considered one.

In short, it appears that there is no absolute bar in

using EE considerations for retrenchment and that

the application of such a selection criterion could be

defensible. A strict application of the generally accepted

LIFO Principle as a selection criterion could either directly

or indirectly be detrimental on the grounds of race or

gender demographics in an organisation. Taking into

account the controversial targets and requirements set

out in section 15 of the EEA an organisation may well be

justified in applying EE criteria over the commonly used

LIFO Principle

However, in applying EE targets as criteria for

retrenchment, further justification may be necessary.

For example, compliance with EE targets may be a

requirement for an organisation to gain or retain business,

otherwise it may be the criteria that allows them to operate

in a specific sector. Therefore, it is necessary that an

organisation’s EE policy highlights the rationale by which

the policy meets the requirements of the EEA itself.

Furthermore, the application of such a criterion would

need to be fair and flexible. Organisations must mitigate

the risk against claims by using EE targets in conjunction

with the LIFO Principle and not as the only basis for

retrenchment.

What happens if an organisation has

already undertaken the retrenchment

process and its EE targets are no longer

realistic?

In this regard, the CEE Notice recognises that “amid all the

organisational configuration processes … it is inevitable

that achieving the initially planned annual EE targets would

not be unscathed.” If EE targets are no longer achievable

due to retrenchments, organisations may amend their EE

Plans to ensure that they are more realistic or relevant to

their changing workforce. The CEE Notice endorses this

and provides that “employers may consider reviewing

and amending their EE Plans in consultation with the EE

Consultative Forums, but must document all the reasons

for the changes as prescribed in the Employment Equity

Regulations, 2004.” Such consultation must align with

section 16 read with section 17 of the EEA.

Despite the economic hardship provoked by the

lockdown, employers must remain cognisant of its EE

obligations, even if it means amending initially planned

EE targets due to a reduction in its workforce. If an

organisation uses their EE targets as selection criteria

for retrenchment, a context-responsive approach that

delicately balances the objects of compliance with EE

targets and the interests of adversely affected employees

is essential

3

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Skills Development Considerations

As Skills Development by its nature brings people

together, it has been the hardest hit by the lockdown, as

training providers and SETAs closed their doors.

Globally, due to various lockdowns imposed, there has

been a paralysis in education. Most affected is

work-based learning.

Delays in Learners completing their courses and

enrolling new Learners will have an impact on the Skills

Development Scorecard. A knock-on consequence is

that the lockdown will have a bearing on the Absorption

targets, which removes the possibility of the Bonus Points

on offer.

The Services SETA has put processes in place to address

the issue of stipends for active Learners during the

lockdown. Evidence of an active Learner must be in the

form of the March 2020 attendance register.

Organisations that qualified as essential services during

level 5 lockdown must provide attendance registers for

Learners that worked throughout this period, as this will

have an impact on their completion period. Payment for

such Learners will be as per the normal process.

Learners who completed their Learnership in March

2020, or who are due to complete the programme during

the lockdown period, will not be eligible for payment of

stipends after the completion of their programme.

Stipend payments for the month of May will be according

to the March attendance register. Therefore, there is no

need to submit an additional attendance register. The

payment of all stipends will be on the last day of the

month.

To ensure the compensation of a workforce during the

lockdown, many organisations have applied to the UIF for

relief. However, what is the impact of Learners, Interns or

Apprentices receiving payment via the UIF Relief Fund?

The B-BBEE Commission has stated that claims for

Learnerships, Internships and Apprenticeships must align

with the requirements of Statement 300. Bear in mind

that there is no way one can partially comply with the

expectations of B-BBEE.

There is no doubt that the restrictions stemming from the

national lockdown will have consequences for the annual

plans and overall performance of many organisations.

Therefore, organisations are encouraged to adjust their

Skills Development Plans and, where possible, ensure the

implementation of their initiatives to achieve their annual

targets as set before lockdown.

The B-BBEE Commission is not authorised under the

Act to grant any exceptions in implementing Skills

Development initiatives due to the impact of the national

lockdown. Subsequently, organisations can only claim

the amount of the stipend paid directly to a Learner,

Apprentice or Intern, as any payment made by the UIF

is not a direct expense to an organisation. As such,

organisations must secure the successful completion of

Category B, C and D Programmes

Further, Skills Development targets may be affected by

the lockdown, as many organisations were forced to go

through the retrenchment process to survive lockdown,

as well as reduce salaries to those employees who remain

employed. The reduced payroll could thus mean a

reduced target for Skills Development Spend.

Recent advances in technology make distance learning,

be it online or offline, an option, but not a long-term

substitute for face-to-face teaching and practical skills

training. In low- and middle-income countries many

issues are impeding the wider and permanent diffusion

of distance learning. These involve socio-economic and

cultural aspects besides the limited ICT infrastructure

that contributes to the digital divide. While new solutions

for teaching and learning could bring much-needed

innovation to education and training systems, the shifts

we are seeing have the potential to exacerbate existing

inequalities for those who already face disadvantages in

trying to access and engage in learning.

The periods of restricted movement and lockdown present

both challenges and a unique opportunity for education2

.

Enterprise & Supplier Development

Considerations

Preferential Procurement

The consequence of organisations trading at low capacity

or coming to a complete halt during lockdown is that there

has been no or little procurement. Subsequently, there is

a risk that organisations will have to relook the Preferential

Procurement Recognition of their active suppliers to meet

their Preferential Procurement target. Hence, emphasis

should be on quality instead of quantity. Organisations will

have to ascertain which suppliers will have the most value

to offer on their Preferential Procurement Scorecard to

counteract the effect of the lockdown.

Now more than ever, organisations must ensure that the

suppliers they use have valid B-BBEE credentials. Another

aspect to bear in mind is that many small businesses have

adjusted their operating models to deliver on demand.

Therefore, it may be advantageous for an organisation to

analyse their suppliers, which could potentially allocate

two or more points on their Preferential Procurement

Scorecard. Thus, purchasing from QSEs or EMEs may be

an avenue to counteract the impact of the lockdown.

Enterprise Development and Supplier

Development

The lockdown has had a significant impact on small

businesses, especially start-ups. Since the lockdown

began, more than 70% of start-ups have had to terminate

employment contracts, and in the worst cases close the

business5

.

Both Enterprise Development and Supplier Development

targets are based on an organisation’s Net Profit After Tax

(NPAT). The initiatives used to achieve the spend targets

are based on NPAT forecasts, with the actual initiatives

implemented during the course of the Measurement

Period. In the case of the lockdown decreasing NPAT, an

organisation must review their initial forecasts and, where

necessary, amend their planned initiatives. A review will

ensure that an organisation’s spend aligns with their actual

turnover2

.

Another challenge through these trying times is that

beneficiaries may default on loans. When giving a loan,

an organisation has the full rights of recovery; however,

this has to be clear in the terms and conditions. First and

foremost, a loan must take the form of a debt instrument

and not be a grant disguised as a loan.

Any loan made with the intention of not receiving

repayment of the capital amount is not a loan but a grant,

thus the claim must reflect this. Consequently, claiming a

loan under Enterprise Development instead of a grant is

Fronting Practice.

However, a solution is that, if a Beneficiary fails to repay a bona fide loan, an organisation may offer a Beneficiary a grant which will

allow them to repay the loan, or an amendment of the contract to provide the beneficiary with a payment gap or reduced instalments.

Otherwise, an organisation can write off the loan or follow the legal route based on the terms and conditions of the loan.

Furthermore, organisations may face cashflow constraints of their own during this time. Another option for consideration is to amend

their Enterprise Development and Supplier Development Strategies to incorporate mentoring, coaching or training, rather than making

large monetary contributions. To many Beneficiaries, having tangible support may be more valuable than a financial contribution.

Socio-Economic Development Considerations

The target for Socio-Economic Development is 1% of an organisation’s NPAT. An organisation which has been hard hit by the lockdown,

therefore running at a loss, may contribute a lesser amount based on the NPAT calculation. However, this might not always be the case,

as the calculation based on the organisation’s previous five-year calculations might result in a higher deemed profit rather than a lesser

target amount. However, this depends on the industry norm percentage.

The calculation of NPAT targets under Enterprise Development, Supplier Development and Socio-Economic Development is as follows

as per the Generic Codes. The NPAT or average target applies unless an organisation:.

> Did not make a profit over the past 12 months; or

> Has shown, on average over the last five years, a net profit margin which is less than a quarter of the norm in the industry.

Under the Generic Codes for Large Enterprises using the NPAT calculation, targets are:

> 1% of NPAT for Enterprise Development;

> 2% of NPAT for Supplier Development;

> 1% of NPAT for Socio-Economic Development.

When failing to utilise an organisation’s NPAT, then each of the above must use the Indicative Profit Margin. This margin is the profit used

in a previous year, where an organisation’s profit margin is at least one-quarter of the industry norm. Unless otherwise indicated by a

specific Sector Code, and in line with the B-BBEE verification principles and methodologies, the following is applicable:

Step 1 | Determine whether the contribution recognition claimed is for the Measurement Period only or whether it spans across multiple

Measurement Periods.

Step 2a | If based on the Measurement Period only, compare the NPAT margin to the Industry Norm, which appears in the current

StatsSA Quarterly Report6

.

Step 2b | If based on multiple Measurement Periods, compare the average NPAT margin over the Measurement Periods used to the

Industry Norm found in the latest StatsSA Quarterly Report6

.

Step 3 | If the NPAT margin is 25% or more of the industry norm, said NPAT figure applies.

Step 4 | If the NPAT margin is less than 25% of the industry norm, the target becomes turnover based. Calculate Indicative Profit

Margin - NPAT/Turnover. The NPAT figure used must be the most recent NPAT - not older than five years - which is at

least 25% of the industry norm.

Step 5a | Slot Indicative Profit Margin into the formula element target (1% or 2%) x IPM (actual figure and not 25% of IPM)

x Turnover = New Target.

Step 5b | If NPAT margin is less than 25% of the industry norm and is older than five years, the target becomes 25% of the latest

industry norm.

In light of the lockdown, organisations have investigated whether a Socio-Economic Development

contribution to the Solidarity Fund is a credible claim. The B-BBEE Commission clarified that

the Solidarity Fund was established in response to the lockdown and not for the purposes of

B-BBEE; therefore, such contributions do not qualify as a claim.

Organisations should reassess their available spend for this element, bearing in mind that

these points on the scorecard are the easiest to achieve. However, taking into account that

organisations will possibly have less to invest in this element, one must bear in mind that the

Beneficiaries of this element, now more than ever, need such an investment.

To conclude, the B-BBEE Commission has clarified that there will be no reprieve in B-BBEE

requirements in spite of the impact of the lockdown. In 2021, organisations will be measured

on the basis of initiatives implemented during this year’s Measurement Period. The instability of

business operations, due to any changes caused by lockdown regulations, will force organisations

to relook their B-BBEE Strategy roll-out to ensure they meet their overall annual target. Therefore,

organisations are encouraged to re-evaluate their B-BBEE Strategy and the implementation

thereof, based on the risk areas identified in each element.