Cumulative targets?

I'll tell you what I know about the art of BEE (as opposed to it being a science, which it clearly isn't) and that is that every person in the industry interprets each element differently.  Goodness knows that I have, convincingly I stress, interpreted all the elements in the most business friendly light and will generally go out of my way to prove that my interpretation is right.

But I was stumped on Friday.  And this is why.

I was told by a client that he had been advised that enterprise development is cumulative.  "True", I said.  According to what they'd been told this meant that the contributions are cumulative from the inception date (either Feb 2007, or a date five years prior) which means that the targets are cumulative too.  In other words,  say you contribute 2% of NPAT in the first year, then in order to make that full fifteen points the next year then you need to spend 4% of NPAT and so it goes on.

I disagreed with them but Vuyo's book is very vocal on this matter.  It is so important to Vuyo and Kyle that they have provided it with a heading on page 322

"Cumulative measurement of enterprise development contributions"

The targets and contributions for each year are cumulative.  The reason (for this) is to encourage a long term investment strategy...... A measured entity that does not contribute to the targeted amount to enterprise development in year one will carry the shortfall over to year two.  It will have to contribute a larger amount in year two to compensate for the shortfall in year one.

Not being one to allow Vuyo's opinion to be the overriding one when it doesn't suit me I phoned Obed.  And Obed had the same opinion as me and that was that you measure the contribution against the last year's target.  My next port of call is the codes themselves and the Interpretative Guide.

Code 600, paragraph 3.1.2
Qualifying Enterprise Development Contributions of any Measured Entity are recognisable cumulatively

BEE interpretative guide (page 84)
All enterprise development contributions are measured cumulatively from the earlier of the commencement of the Codes or a maximum of five years prior to the commencement of the codes until the date of measurement. This cumulative period will be limited to five years at a time – in other words the sum of contributions is averaged over the number of years (limited to a maximum of five years).

If Jack and Harris are correct (and I strongly suspect they aren't) then this is the second time the codes have opted for a stick approach to a  target; the other time with that ridiculous 40% minimum under employment equity.

To qualify my argument that the Jack/Harris interpretation is wrong.  Both code 600 and the interpretative guide talk about contributions being measured cumulatively.  Nowhere is it mentioned that targets are cumulatively measured.  This  is further confirmed by the description of the formula for calculating enterprise development spend; viz.

B is the value of all Qualifying Contributions made by the Measured Entity measured from the commencement or the this statement or the Inception Date to the date of measurement

C is compliance target in respect of the Qualifying Contributions as specified in the scorecard for statement 600 (which is clearly 3% of NPAT)

Is there anyone out there who would like to provide me with an argument that suggests Vuyo and Kyle are correct?

Comments

[Rienzo]

I think critical point to extract from the Codes, is the final part of the description which reads "the sum of contributions is averaged over the number of years". The important word there is AVERAGED, where the cumulative contributions over the 5 year period are used to ascertain compliance against an averaged target. Because targets are set against future performance, and measurements are made retrospectively it is impossible to say with any accuracy up front, how much a company should be dedicating to their ED or SED spend - they can only know for certain once they have closed off their Financial year and measured NPAT (or loss) acheived. THEN they can determine whether or not you have actually acheived target. So the cumulative measurement actually assists companies to carry over non-compliance year-on-year, and then average it out to earn maximum points. It seems like a bitter pill / stick approach, but over the 5 year cumulative period the measured entity actually scores. I agree with Vuyo.

[Paul Janisch]

I think we agree on the same point. The cumulative measurements are measured against an average of 3% of NPAT over five years. This figure will always remain 3% of NPAT. What Vuyo and Kyle are arguing is that the measurement for year one is not closed off after that year (if the target is not met). Therefore that percentage that wasn't contributed in year one moves over to year two and gets added to the targets of year two. In other words the targets are cumulative as well.

I can't see that this is the case in the codes at all. And as Obed said to me recently - this will cause a situation where ED contributions dry up all together because companies would rather forgo the points than be punished for not achieving the target each year.