Accommodation made for small businesses which are unable to attract black partners  

LAST month the trade and industry department released phase two of the codes of good practice which contain detailed codes dedicated to the implementation of empowerment by small and medium enterprises.

These codes, known as the qualifying small enterprise codes, are in effect the first set of guidelines on how small businesses should tackle empowerment. Prior to these codes, most small businesses believed they would need to follow the early examples of big businesses by selling a minimum stake of 25,1%.

With the new codes, however, all businesses will secure contracts based on their overall, broad-based empowerment score and empowerment procurement recognition will be proportional. In other words, suppliers with an empowerment score of 75%-85% will enjoy enhanced recognition, with procurers recognising R1,10 for every R1 spent with these suppliers, while suppliers with an empowerment score of 65%-75% will enjoy full recognition. Suppliers with a score of 64% and below, however, will not enjoy full recognition and the percentage of recognition will decrease proportionally with their scores.

In short, empowerment equity will allow companies to score no more than 20 to 29 points (including bonus points and enhanced recognition) on the trade and industry department’s broad-based scorecards.

This alone is insufficient for empowerment procurement recognition as only those companies with a minimum score of 30 points will enjoy any empowerment procurement recognition.

Nonetheless, the broad-based scorecard for small and medium enterprises, known as the qualifying small enterprise (QSE) scorecard, is considerably more lenient than the generic scorecard. The first step for small businesses is to determine which businesses qualify for measurement under the QSE scorecard.

The trade and industry department has relied on the categories of business sizes as defined in the Small Business Act’s accompanying schedule which classifies businesses as micro, very small, small and medium according to their turnover and number of employees in the sector in which they operate.

In the same vein, businesses that have been categorised as QSEs are classified as such according to their annual turnover and number of employees in the sector in which they operate. For the most part, medium businesses are required to be measured under the generic scorecard, with the exception of those in catering, accommodation and other trades and those in community, social and personal services.

For those small and medium businesses that qualify for measurement under the QSE scorecard, the department has allowed a fair amount of flexibility, to ensure the implementation of empowerment does not become onerous. Instead of being measured according to the seven elements of broad-based empowerment, QSEs may elect to be measured against their empowerment contributions to five of the seven elements, with each element being weighted 20%.

In this way, those that are too small to attract black equity and black management (and/or where potential black partners are unable to obtain funding) may prove their empowerment status through contributions to employment equity, skills development, preferential procurement, enterprise development and corporate social investment.

This will ensure that all QSEs have a similar opportunity to become or remain competitive when competing for procurement contracts.

There is still, however, an incentive for QSEs to sell equity to black partners since any score for ownership will be multiplied by 1,25. For those QSEs that do not have sufficient leverage for the effective implementation of preferential procurement or that are not in a position to participate in enterprise development or corporate social investment, points may still be obtained by contributions to other elements.

As with the generic scorecard, however, skills development, enterprise development and corporate social spending are all measured as a percentage of payroll, a percentage of earnings before interest, tax, depreciation and amortisation, and of net profit after tax respectively, making compliance in these areas feasible, even for small businesses.

The fact that the QSE scorecard has been tailored for small businesses is also evident in the measurement criteria for all seven elements. For example, QSEs need not ensure there is equity in the hands of black women and designated groups to score full points, though doing so will earn bonus points.

Similarly, management control measures only black representation at owner-manager level, with a 2% bonus for black women representation of 10%.

With respect to skills development, company participation in learnerships is not taken into account. Instead, this is replaced by assessing whether the QSE has submitted its application to the National Skills Fund.

Preferential procurement, enterprise development and the residual element are measured along much the same lines as the generic scorecard, but here, targets have been adjusted.

Although QSEs have the flexibility of being measured against five elements instead of seven, and although criteria are less stringent than those of the generic scorecard, the trade and industry department’s message to small businesses is clear: broad-based compliance is expected.

In addition, the modeling of the QSE scorecard on the generic scorecard makes graduation from QSE to the generic scorecard fairly seamless.

Although the codes for QSEs are subject to change following the collation of public comments from after March 31 this year, QSEs should be guided be the contents of these codes and make use of the next 18 months leading up to the gazetting of the codes to get their broad-based empowerment contributions in order.