Downstream BEE Non-Compliance

Procurement Managers, The Pressure is On!

Gareth Ochse

Co-founder and director Gareth Ochse has more than 25 years’ experience building disruptive businesses and helping finance them. Gareth has advised on deals with values ranging from $50,000 to $1 billion. He worked as a strategy consultant with Bain & Co (Johannesburg and London) and was a founding team member of Bainlabs (early stage venture capital).

Des Mahony

Fellow co-founder Des Mahony is both a Chartered Accountant and Advocate. He was a founder of African Alliance – a pan-African investment bank and has more than 20 years of deal-making experience across the investment spectrum, most of it outside of South Africa. More recently, Des was COO/CFO of 4 Africa Exchange – a newly licensed South African exchange, where Des was responsible for the exchange being awarded its license and its first listing.

Listen to Gareth Ochse' 12 min interview with ScottCundill.com on "Downstream BEE Non-Compliance - Procurement Managers, The Pressure is On!"

Frustrated Freddy is a procurement officer at a major manufacturing company. He is under daily pressure to ensure his downstream suppliers are BEE compliant. He understands all too well that his own company’s BEE scorecard points depend on who he signs up as a supplier, and that many of his current suppliers are non-compliant.

His own performance is based on the extent to which he engages with BEE suppliers. A vast amount of his time each day is spent trying to mentor, goad and coach his existing suppliers to improve their own BEE scores, when he should be spending time on procurement. He becomes, in effect, a development agent for government.

The problem he faces each day is that only a tiny fraction of the roughly 3.1 million companies in SA have any form of black ownership. Sure, there are other ways suppliers can accumulate BEE points other than through black ownership – such as through the appointment of black management, training and enterprise development – but the reality is that the overwhelming majority of SA companies fall short of basic BEE compliance.

For proof of this, we analysed our database of over 20,000 valid BEE certificates in the Generic and QSE space:

BEE ownership of corporate SA

 
Large Entities
QSEs
Majority Black Owned 7% 27%
Minority Black Owned 19% 16%
No Black Ownership 74% 57%
Sample size 9576 12150
Market size (SARS VAT returns) 25075 55873

Source : https://www.tusker.co.za/blog/the-official-stats-on-bee-ownership-vs-whats-really-going-on/


Given that our sample is based on valid certificates only, and that companies who choose to ignore BEE wouldn't report, it's highly likely that the % compliance in either Generic or QSE category is far lower than the numbers above and BEE ownership is still something most of your suppliers have to do.

Consequences of BEE non-compliance

Non-compliance can be severe: not only are you excluded entirely from government contracts, you are also excluded from participating in large corporate contracts for the simple reason that all large corporations are themselves scored according to the extent they engage with BEE compliant companies of all sizes. For big companies with many suppliers, non-compliant suppliers present a real risk of loss to the business as a whole.

Consider what this means in financial terms: the national government has an annual procurement budget of R850 billion, according to the chief financial officer at the Department of Trade and Industry. That does not include the combined procurement budgets of the larger companies, which likely exceeds this by a substantial margin. Virtually all of this procurement budget therefore circulates among the relatively few supplier companies that are BEE compliant.

Why black ownership is hard to do

Most South African companies are privately owned, and often family-owned. They choose to remain privately owned because of the perceived risks of inviting in unknown shareholders whose contribution is uncertain and vague – other than allowing the company to tick a box on the BEE scorecard - and in so doing are confined to playing on the periphery of the economy.

Another reason why black ownership is rare is that black shareholders generally do not have the funds to acquire equity in companies. One popular solution to this is vendor financing, where black shareholders acquire equity through dividend payments in the newly empowered company. This, too, is not without risk. Business cycles rise and fall, and earnings (and therefore dividends) can go through periods of slump. That makes it more difficult for black shareholders to acquire beneficial interest in the company equity, as dividend payments slow down, and this can put black shareholders under pressure to exit BEE deals. That leaves the company back where it started – without a BEE partner or with a poor net-value score. Misunderstanding how these deals works also increases the risks associated with allegations of fronting – including potential criminal sanction.

BEE compliance – the legal complexity

The BEE codes are complex to understand, and the regulatory regime is both time-consuming and expensive to administer – another reason why most private companies prefer to avoid the thorny subject of black ownership. Structuring a BEE deal is typically fraught with tortuous legal language that introduces further uncertainty and puts additional drag on the business while each deal is being considered or negotiated, including sourcing expensive external advice on each deal. Transformation is hard, and many companies put it off until it becomes existential.

There are also tax issues associated with BEE ownership and compliance. For example, the sale of shares in a company triggers a capital gains tax event. Even elaborately structured deals intended to avoid an immediate transfer of shares (and hence a tax liability) will eventually result in a tax obligation further down the road. Few BEE advisors seem to truly take the care to understand the full consequences of deal in terms of different legal acts, and especially tax consequences.

BEE compliance – front companies

Given the litany of problems already outlined in achieving BEE compliance, it should not surprise us that “BEE fronting” has become such a prevalent problem. Fronting includes a “transaction, arrangement or other act or conduct that directly or indirectly undermines or frustrates the achievement of the objectives of the B-BBEE Act…”. Fronting is rife in the harder-to-do parts of the scorecard, such as ownership. The result has been that some of the bigger companies interrogate the structures used to achieve BEE (across all scorecard elements) of their suppliers. As a procurement manager, relying on affidavits from your suppliers can be risky.

The Tusker Solution

There is a better way to achieve BEE compliance; through a trusted ownership structure that meets spirit and letter of the law and demonstrates proof of both substance and form.

The solution to 51% ownership requirements amongst your suppliers:

We’ve spent years looking at the problems associated with BEE and ownership in particular. We can show that 51% ownership is the cheapest form of BEE, and have developed a unique solution to the problem.

Tusker.co.za is a BEE private equity fund, SAVCA member and licensed FSP (49558).

Tusker offers:

  • 100% legitimate BEE ownership that will pass any test, meets the letter and spirit of the B-BBEE Act and lets you sleep at night without legal or tax risk.
  • A high return on investment.
  • A unique deal focused on helping you reduce risk by diversifying your asset base (and that makes sense whether BEE exists or not).
  • Indefinite ownership: unlike other private-equity funds, Tusker has no need to sell its shares in your business until it makes sense for you.
  • Fair valuation and deal terms that set the tone for a long relationship going forward.
  • A quick, standardised deal process that can be concluded in under 3 months.
  • Skilled, experienced and professional directors who work to grow the value of your business through appropriate governance and high-performance boards.
  • Financial benchmarking analysis that shows you how to free up cash, accelerate growth and increase valuation ahead of your industry peers.
  • A world leading growth programme that will help you develop a winning strategy, focus on what’s needed to implement it and build succession in your business.

Tusker looks for a minimum 20% stake in its portfolio companies. It can replace existing black shareholders/structures or become your entire BEE ownership partner.

We can offer EMEs (Exempted Micro-Enterprises) and QSEs 51% or 100% ownership, meaning compliance with the rest of the scorecard isn’t required and substantial cost savings are possible.

The people behind Tusker

Tusker was set up by a team with unparalleled experience in private equity, company management, law, tax and accounting, both in SA and abroad.

Gareth Ochse
Des Mahony
Sanjay Soni
Sonwabo Zide
Dr Ngao Motsei
Mzolisi Nkumanda

Co-founder and director Gareth Ochse has more than 25 years’ experience building disruptive businesses and helping finance them. Gareth has advised on deals with values ranging from $50,000 to $1 billion. He worked as a strategy consultant with Bain & Co (Johannesburg and London) and was a founding team member of Bainlabs (early stage venture capital).

Fellow co-founder Des Mahony is both a Chartered Accountant and Advocate. He was a founder of African Alliance – a pan-African investment bank and has more than 20 years of deal-making experience across the investment spectrum, most of it outside of South Africa. More recently, Des was COO/CFO of 4 Africa Exchange – a newly licensed South African exchange, where Des was responsible for the exchange being awarded its license and its first listing.

Tusker director Sanjay Soni is an experienced and dynamic chartered accountant, having serviced a range of multi-nationals, private sector and public-sector clients as a trusted business and strategy advisor over the past 20 years. He is an executive director with the Black Lite Group, a niche advisory boutique focused on B-BBEE strategy, sustainability advisory and management consulting services.

Director Sonwabo Zide has over 10 years of Retail and Corporate and Investment Banking (CIB) experience which includes: Regional Head for East Africa CIB Operations at Standard Bank, Head of Sales Support at ABSA Capital.

Director Dr Ngao Motsei (PhD- Organisational Design) heads up MyPortfolioLife, where her work spans four portfolios. She is (i) Director of Companies; (ii) Educator (Lecturer at Gordon Institute of Business Science); (iii) Entrepreneur (Co-Founder of DigiBiz (Pty) Ltd); and (iv) Executive Coach.

Mzolisi Nkumanda, chairman of the Tusker Trust, is a seasoned professional with over 24 years’ experience in the corporate world, 14 of which were spent in Finance/Accounting and Tax (both in commerce as well as in the professional firms) – and about 11 years in General Management/Corporate Governance. He has served on boards both in the private and public sectors, is a certified Ethics officer, and is busy completing his PhD in Ethics.

What’s in it for you?

Tusker is ideal for high-volume deal-making, such as in the supply-chain environment.

If you are looking to your suppliers to transform, then you need to understand Tusker and get comfortable enough with our approach. This will put you in a position to help your suppliers transform, which will put you ahead.

We are standing by to help.