Paul Janisch

Let's say you offer high quality BEE consulting but have little idea of what you are talking about

There is a ridiculously famous and competent consultant out there. We mere mortals aspire to be as good as he and his high quality company are.  Here is a man (not a tall man - but gargantuan in competence) who understands fronting very well.  He is the one who told the world that FRONTING IS FRAUD.  And then most knowledgeably told a certain verification agency that fraud can be committed unknowingly (pity that he knew not, or possibly knows not, that fraud is an intention crime).  His bugbear is using the wrong BEE code. This, dear reader, is the worst type of fronting.  He's even gone to court after alleging that someone fronted somewhere - pity it didn't make it beyond the court steps.  

Let us return to the high quality consultation.  A company that is in recruitment has been informed by the high quality consultants that because they only recruit into the IT industry they are subject to the ICT code.  My response to this was (my specific comments are underlined)

The code says the following right at the beginning (paragraph 3 STATEMENT AICT000)

3. Application of the Amended B-BBEE ICT Sector Code
3.1 The following entities are measurable under the Amended B-BBEE ICT Sector Code:
3.1.1 All persons, organisations and entities operating in the ICT Sector in South Africa;

That statement would APPEAR to include a recruitment agency operating in the ICT sector. However this must be read in conjunction with Schedule 1 (last page in the code) . This is what it says

The “Information & Communication Technology Sector” shall without in any way limiting the ordinary meaning of the terms, mean the sector in which employers and employees are associated with carrying on any one or more of the following activities:

Marketing, manufacturing, assembling, servicing, installing, maintaining and/or repairing systems, software, equipment, machines, devices and apparatus, whether utilising manual, photographic, optical, mechanical, electrical, electrostatic or electronic principles or any combination of such principles, that are primarily intended for the recording and/or processing and/or monitoring and/or transmission of voice and/or data and/or image and/or text or any combination thereof for use in any one or more of the following activities:

Accounting, calculating, data processing, data transmission, duplicating, test processing, document reproduction, document transmission, record keeping and record retrieval, broadcast or transmission for entertainment or information purposes of voice and/or image text or any combination thereof and/or: the provision of services relating to the above.

There is nothing in your business that performs any function listed in the middle paragraph. A law firm that only specialises in banking law is a law firm, not a bank. An accounting firm that only deals with civil engineers is an accounting firm, not a civil engineering firm. It’s very clear to me that you are not subject to the ICT code.

The high quality consulting firm responds with the following, somewhat edited with the occasional italic jibe

After a long deliberation with some of my colleagues regarding whether you should follow the amended ICT Sector Codes or the amended Codes of Good Practice. A unanimous (my emphasis) decision was reached based on the line of business your company solely focuses on - specializing in IT recruitment - that it should comply with the amended ICT sector codes and not the amended codes of good practice.

On your website the following is promulgated:

Starting off as a small  recruiting agency last century the company has grown to a formidable force in the IT Recruitment Industry. The company continues to grow their unique model of IT recruitment.

Now reading the above statement in conjunction with statement AICT000, general principle and the scorecard, paragraph 3, application of the amended B-BBEE ICT sector codes:

3.1 The following entities are measurable under the Amended B-BBEE ICT Sector Code:
3.1.1 All persons, organizations and entities operating in the ICT Sector in South Africa.

And further breaking down statement 3.1.1, basically the statement refers to persons, organizations and entities generating the majority of their revenues from ICT related activities. Analyzing your core business which is servicing clients and potential clients with highly ICT skilled individuals, the majority of it's (sic) revenue is definitely generated from ICT related activities. (Are they in fact ICT related, does a cleaning company cleaning a building that their ICT client works from perform ICT related activities? Similarly is Wesbank a finance house or in the motor industry?) Therefore under this statement this qualifies your company to be complaint (dig - complaint) with the amended ICT sector charter and not the amended codes of good practice.

Now the question becomes, "your company does not produce any ICT related equipment/software nor does it offer technical services to its clients, why must it still comply with the amended ICT sector charter?". Reading further deeper into Schedule AICT1 under the amended ICT sector charter:

Analysing the wording highlighted in yellow (not included in this post) under Schedule AICT1, the first statement emphasizes that the ICT sector does not limit the persons, organizations and entities falling within the ICT sector codes to persons, organizations and entities producing ICT equipment and/or offering technical services to its customers. But it broadens the scope to persons, organizations and entities also offering IT recruitment services to customer or potential customers, employee like property, plant and equipment from part of any organization's asset base. Offering IT recruitment services to an organization qualifies as servicing that particular organizations IT function, as those recruited individuals will be at the end of the day responsible of making sure an organization's IT function operates effectively, efficiently and sustainable. (And finance houses providing finance for IT related goods and services are also IT companies. Makes perfect sense)

They approached my logic with the following

"A law firm that only specialises in banking law is a law firm, not a bank. An accounting firm that only deals with civil engineers is an accounting firm, not a civil engineering firm" .
The law firm specialising in banking law might not be a bank, but will have to comply with the banking charter. The reason being that the bank was established on the sole purpose of servicing the banking industry, the majority of it's (sic) income is generated through banking related activities and without the existence of the baking industry the law firm wouldn't be generating income or wouldn't have been established to begin with.

The underlined paragraph is all over the place.  There is a genuine mistake there, the bank that was established really refers to the law firm, now that I've cleared that up it still doesn't follow any logic.  Without the banking industry the law firm would be providing other legal advice and deriving an income from that. 

Let's put this to bed.  This logic is flawed for a few reasons.  

1. We need to understand the purpose of each sector code.  They are (supposed to be) designed to address the transformative requirements of a particular sector.  It is assumed that the code deals with the peculiarities of that industry because it understands that industry.  A company providing recruitment services to another company is not equipped to deal with the skills development, enterprise and supplier development requirements of a sector code.  How could a law firm that provides services exclusively to a bank be able to deal with access to financial services? Similarly, how could recruitment firm provide ICT-type ED services.  They can't - what they do is get professionals into companies.  They aren't professionals themselves.
2. Why would a services belong to the Services SETA when it is subject to the ICT code?  Companies operating in the ICT sector belong to the MICT SETA.  Services companies belong to the Services SETA because they are services companies.  

In spite of the above this does however pose an interesting conundrum, one that a cement company raised years ago.  A cement company is a manufacturer of cement, they are not construction companies.  Sephaku Cement's last old codes assessment was conducted under the dti's old generic codes.  I would agree with this.  

At least now I know what high quality consultation is, it's something to aspire to.

Corporates need to drop their BEE standards if this process is to survive

Let’s say that the acceptable time to run 100 metres is 15 seconds.  This is the entry level if you want to compete.  The world has now become obsessed with 15 seconds and not paying attention to the distance associated with 15 seconds.  Our larger corporates, state-owned entities and municipalities are obsessed with these 15 seconds. Not quite 15 seconds but BEE levels.  They are used to levels.  So many companies have been told to retain their level under the new codes or not slip below a certain level at the first verification.  This is rather like saying that we expect 15 seconds but the distance is now 150m.  We’ve come to expect this from large corporates who are unsympathetic to the issues that smaller companies face in their day-to-day survival.  A lot of this has to do with procurement departments in these large corporates who are staffed up with militant empowerists who have no idea about business and standards.  I’m hearing many stories about how a service provider develops a good relationship with a buyer and hits a brick wall with procurement who refuse to use the company.

It’s an age-old problem.  I would imagine that the big corporate would say – we are able to retain our levels, hence you should too.  As an aside I have heard that our esteemed chief empowerist, the BEE Commissioner, is getting rather pissed off that certain companies have actually improved or retained their rating under the revised codes.  However when you have a company with very established departments to handle each element then you’re going to see results.  Smaller companies don’t have these and are taken by surprise when it comes to the ridiculousness of rating.

Contribution Level	2007 Codes	2013 Codes	ICT Code	Recognition level
Level One	≥ 100 points	≥ 100 points	≥ 120 points	135%
Level Two	≥ 85 points but < 100 points	≥ 95 points but < 100 points	≥ 115 points but < 120 points	125%
Level Three	≥ 75 points but < 85 points	≥ 90 points but < 95 points	≥ 110 points but < 115 points	110%
Level Four	≥ 65 points but < 75 points	≥ 80 points but < 90 points	≥ 100 points but < 110 points	100%
Level Five	≥ 55 points but < 65 points	≥ 75 points but < 80 points	≥ 95 points but < 100 points	80%
Level Six	≥ 45 points but < 55 points	≥ 70 points but < 75 points	≥ 90 points but < 95 points	60%
Level Seven	≥ 40 points but < 45 points	≥ 55 points but < 70 points	≥ 75 points but < 90 points	50%
Level Eight	≥ 30 points but < 40 points	≥ 40 points but < 55 points	≥ 55 points but < 75 points	10%
Non-Compliant Contributor	< 30 points	< 40 points	< 55 points	0%

What those large corporates don’t understand is that levels are dropping,  in some cases dramatically.  They may score well under procurement now because you still have old codes scorecards floating around.  These scorecards will soon expire and will be replaced with revised codes scorecards and procurement scores will suffer as a result.  Possibly even resulting in dropped levels.  Can you see the commissioner dabbing when this happens.

This is all counterproductive.  We don’t need to debate the importance of economic empowerment.  Using a sjambok to drive it will result in its death.  When a donkey doesn’t want to move you can whip it as much as you like.  Both business and civil society have little or no faith or trust in this government.  If this empowerment process dies, that’s it. It won’t be resuscitated, there’ll be no desire to get it back. It hangs now by a thread and a government that wishes it to fail to blame white monopoly capital for its failures. 

This is what I think we need to do.

1. Drop the priority elements. Getting to 40 points (in the case of the dti scorecard) is hard enough.  Dropping a level to non-compliant is just plain stupid.  Allocate points on the basis of performance.
2. Corporates must drop their level demands. It took seven years for companies to improve under a lenient scorecard.  They can’t be expected to suddenly comply at the highest level at the first verification.  As I mentioned earlier scores will start higher and then drop as supplier scores drop.  This is a process and it takes a lot of getting used to.  It doesn’t help that the codes,  SANAS and the commissioner have frighteningly different perspectives and interpretations.
3. We need skills development leniency. I’ll post something at some stage about how I think we can sort out skills development.  6% of payroll and what appears to be accredited, SAQA this and unit standards that training is not reasonable, neither is it feasible.  Most emphasis needs to be placed on quality on-the-job training.  This is how most of us learn our jobs.  An educated workforce (which is not feasible – that horse has long bolted) with no practical application of what they do is not helpful.  What company would agree to this, wait Eskom and SAA would, so would the ANC –the educated bit is not really a requirement in those circumstances.
4. Supplier development should be extend to supply chain development. 
5. SANAS must stop behaving like nazis. Stick to the intention of the act and reward initiatives that empower. 

Great wishlist – perhaps it’ll end up on Cyril’s desk after he’s booted zuma out of office.  I doubt that anything will happen until zuma has been fired.  If they don’t do something about these codes then we can expect fronting to become an even greater art than it currently is. Perhaps it won’t quite be fronting, it will probably be empowerment of sorts with few results and fantastic scores.

As it stands right now broad-based black economic empowerment is out of reach of most companies operating in this country.

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The BEE commissioner – zords drawn and ready for battle

The BEE commissioner – zords drawn and ready for battle

You have to give it to the gung-ho BEE commissioner, she really is gung-ho.  And before you take exception to the title it’s a pun on Zodwa Ntuli’s name.  To a certain extent, she is a breath of fresh air – her writing is consistent, well thought out and comprehensible.  This is a not a standard feature of many (or any) dti employees.  Her first practice note of this year deals with the complicated issue of the modified flow through principle and promotion to a level 2 supplier as a result.  I would like to think that my last post on this subject inspired her to get her pen and spellchecker into action.  In effect the commissioner is saying that if you use the modified flow through principle to get to 51% black ownership then you may not benefit from the enhanced level recognition.  I think there is merit to this theory.  And the thought behind the note is worthy of consideration but it remains an opinion.  In fact, the commissioner prefaces this note (as she does with all of them) with the following disclaimer.

2. This Practice Guide is issued as a non-binding guide purely to assist with the interpretation to ensure consistency in the application of the Act. Should this Practice Guide not be clearly applicable to your specific set of facts at any given time, you are advised to approach the B-BBEE Commission for a nonbinding advisory opinion, which will be more specific to your set of facts.

She informs us that this opinion is not a legal opinion, but we could expect her to use this line of argument should it get to the point where it needs to get legal

3. This Practice Guide does not constitute a legal document or a ruling of the B-BBEE Commission on the issue concerned. Further, although this Practice Guide is not binding on the B- BEE Commission, it does set out the approach that the B-BBEE Commission is likely to take on any matter relating to the recognition of third party procurement spend for consistency.

If you noticed the veiled threat in paragraph three (underlined) then steel yourself for the ultimate threat in paragraph 14

14. Therefore, the B-BBEE Commission in accordance with the requirements to advice on the interpretation of any provision of the Act as per section 13F(1)(a) and (3)(b) (ii) of the B-BBEE Act, hereby concludes that the modified flow through principle cannot be used to benefit from the enhanced recognition status reserved for 51% and 100% black owned EMEs and QSEs. Any contrary advice would be regarded as a misrepresentation of Entity B’s B-BBEE status which is an offence in terms of section 13O (1) (a) of the Act.

What she is now saying is that she really DOES HAVE the legal weight to exercise this opinion, contrary to her earlier disclaimers, and if you offer contrary advice then it’s an offence in terms of section 13O (1) (a) of the Act.  In other words

(1)          A person commits an offence if that person knowingly—

(a)          misrepresents or attempts to misrepresent the broad-based black economic empowerment status of an enterprise

And if this isn’t threatening enough she seems to suggest in the remaining paragraphs that verification agencies MUST follow this opinion and could be fined if they don’t.

This is a problem.  In the first two paragraphs she tells you that this is an opinion and has no legal backing.  She then tells you that any opinion contrary to her opinion, which might also not be backed by legal opinion, is in fact contrary to her opinion and an offence in terms of the act.  She’s way out of line here, she’s not a legislator and cannot arbitrarily decide what an offence in terms of the act is.  This is a threat and a violation of the rule of law – something the misruling party is rather adept at.  The only way we’ll ever know whether this is an offence is if she attempts to prosecute a company for this in terms of that section.

A contrary opinion based on the codes themselves as they are written

So here is a contrary opinion and it carries exactly the same amount of weight as Zodwa’s. She can attempt to prosecute me in terms at section 13)O, but this would be a gross violation of my constitutional rights.

The modified flow through principle is discussed in paragraph 3.4 of statement 100.  It only applies to black voting rights and black economic interest; women, designated group etc voting rights and economic interest cannot benefit from the modified flow through principle. 3.4.3.1 one explains the levels of ownership here

Where in the chain of ownership, black people have a flow through level of participation of at least 51%, and then only once in the entire ownership structure of the measured entity, such black participation may be treated as if it were 100% black

Statement 000-5 provides for enhanced recognition for levels of black ownership.  4.3 and 5.3 deal with EMEs and QSEs respectively.  It’s the same sentence repeated and says

A(n) EME/QSE which is at least 51% black owned qualifies for level two B-BBEE recognition level

This is absolutely clear – if a company is 51% black owned (take a look at my last post to get your head around this definition) and it turns over less than R50m it is a level 2 contributor.  There are no qualifications in the codes, we can the safely assume that the modified flow through is an acceptable method to measure black ownership.  The commissioner argues in paragraph 13, not incorrectly, that the modified flow through principle is not in keeping with the intent of the act

While we do recognise that the Codes have not explicitly provided limitations of the applications of the modified flow through principle in claiming the enhanced recognition status for black owned and controlled EMEs and QSEs, it must not be applied to circumvent the policy objectives. Therefore, it is the effect of the application of the principle that in our view limits its application to the extent that it would undermine the objectives of the Act.

She cannot, however, attempt to change the code by means of an opinion.  This can only be done in terms of section 9(7) of the Act

(7)          A code of good practice remains in effect until amended, replaced or repealed.

If you choose to go the modified flow through rule and follow the rules and procedures and you turnover less than R50m then you may enjoy the enhanced level recognition.  There is nothing in the codes of good practice that says you can’t. We wait with bated breath for Zodwa’s first prosecution in terms of this.  

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