The first indication that the NPO sector might suffer under the new Black Economic Empowerment (BEE) codes was when the Department of Trade and Industry (DTI) first proposed that measured entities will only receive the full advantage of the Socio-Economic Development (SED) element if they donated to NPOs whose beneficiaries were 100% black instead of the 75% under the old codes. This caused a tremendous outcry, not only from the NPO sector but from the general public at large. Thankfully the DTI listened and this proposed amendment was dropped; the minimum threshold remains at 75%.
Three critical changes
The three changes to the BEE codes that might adversely affect NPOs are:
- Priority Elements
The new codes contain three priority elements:
- Skills Development (SD)
- Enterprise and Supplier Development (ESD)
Any entity failing to achieve the minimum threshold of 40% for each of these priority elements will have their BEE status discounted by one level. The priority elements will mainly affect Qualifying Small Enterprises (QSEs) and Large Enterprises. In the case of QSEs they can choose to be measured on either SD or ESD. The possibility of an entity having its status discounted by one level, should it not meet the minimum threshold for any of the priority elements, hangs like the sword of Damocles above all QSEs and Large Enterprises. This threat might result in these entities placing all their BEE efforts into the priority elements at the expense of the Socio-economic Development (SED) element. If this is the case then the NPO sector will be negatively affected.
- Qualifying Small Enterprises (QSEs)
Under the new codes any entity whose annual turnover is between R10M and R50M is categorised as a QSE. Under the old codes a QSE could choose to be measured on any four of the seven elements. The four elements were weighted at 25 points each. Most QSEs chose SED as one of the four elements to be measured on. This was because the SED element was considered “a low hanging fruit” and the 25 available points was considered a fairly easy target. The charity sector benefited greatly under the old BEE codes. A large portion of the charity sector’s income was derived from QSE businesses.
- The negative fundraising side
Under the new codes QSEs have to comply with the new generic scorecard. The new SED element is now worth only 5 points out of a total of 105 points. This means that under the new codes the SED element’s importance has been downgraded from 25% to under 5% of all available points. To make matters worse the threshold for the Skills Development element has been raised from 3% to 6% of an entities payroll. Considering that the SD element forms part of the priority elements you might find that many QSEs will choose to recoup the extra 3% payroll expense from the SED element thus discounting the SED element all together. An entity will do this to avoid being penalised on any of the priority elements. There is no penalty or discounting of a QSEs BEE status should it not comply with the SED element. SED is not a priority element and as such it could be neglected in favour of the priority elements. Under this scenario the charity sector might find that entities in the QSE category are no longer as forthcoming as they once were.
- The positive fundraising side
The flip side of the coin is that out of the five elements on the new BEE scorecard the SED element is the only “low hanging fruit” element. By this we mean that it is by far the easiest element to comply with. Even though the weighting of the SED element is only 5 points you might find many companies complying fully with this element because there is a quick 5 points they can add to their scorecard. As an NPO we hope that this is the scenario. Should it be then you might find that the charity sector actually benefits under the new BEE codes.
- Exempted Micro Enterprises (EMEs)
At the stroke of a pen the DTI has vastly increased the number of EMEs. The threshold for EMEs has been raised from an annual turnover of R5M to R10M. Under the new codes all EMEs are exempt from applying BEE and automatically qualify as level 4 contributors. Under the old codes QSEs who were turning over between R5M and R10M are now EMEs. The charity sector was benefiting from a large number of these entities because many of them probably chose to be measured on the SED element. Now these entities are exempt from BEE and one is left wondering whether they will continue to invest in SED.
- The negative fundraising side
As stated before EMEs are exempted from applying BEE. This obviously means that they do not have to comply with any element of the codes let alone SED. Now that there are more businesses classified as EMEs the pool of companies from which charities can raise funds (using BEE as a motivation) has shrunk and this could have a negative impact on the charity sector.
- The positive fundraising side
When looking at raising funds from within the EME category of businesses we look to our own experiences. Generally speaking we have never found it difficult to raise funds within this sector. Even though EMEs are exempted from BEE these companies still donate generously to various causes, proving that the act of giving does not have to be legislated. Granted, the size of the donations is not as large as those companies within the QSE and Large Enterprise categories but the donations are easier to come by and more frequent. We sometimes refer to these donations as our “Bread and Butter” as it is from these donations we are able to cover our daily operational expenses. In speaking with the few charity organisations with which we have a relationship their view is pretty much the same. With businesses in the QSE and Large Enterprise sectors, although they do give generously, the donation is larger but less frequent because their giving is strictly tied into their SED strategies (red tape, if you will). The funds we receive from QSEs and Large Enterprises are usually used to fulfil our mission statement.
After the new BEE codes were promulgated on 11 October 2013, the immediate response from many experts and business leaders was negative. Our view is not how the new generic scorecard will affect the entire structure of a business so in many cases the negative views might be justified. Our view is on the single element of the new codes: Socio-economic Development. Quite a few articles have already been written on how the new codes will hurt the charity sector. Our initial response was the same. But on closer examination we are taking a positive view: the status quo will remain unchanged, or even improve, for the charity sector. It will be better for us to obtain a solid grounding of the new BEE codes, formulate an implementation strategy and “sell” this to all businesses – small, medium and large. As South Africans we can no longer be certain of two things, but three: Death, Taxes and BEE.
EconoBEE – Welcome to the new codes
BusinessReport – Charities to be hard-hit by new codes
BDLive – Codes kick off new phase of empowerment
Polity.org.za – Revised B-BBEE codes have serious implications for business