The past couple of months have been tough for businesses especially with the state of the economic environment in mind. Covid-19 has been affecting many businesses globally, however the impact on B-BBEE is something which is totally unique to South Africa. The impact of Covid-19 has had an effect on businesses across all the distinct types of enterprises. The impact on a particular business is of course dependent on the type of business and the turnover of the business. This impact has eventually led to the primary focus of many businesses shifting to preserving cash and liquidity. Small and medium enterprises (SMEs), are the hardest hit by Covid-19. It is with no exaggeration that many of the SMEs will not survive after this pandemic. Many are facing closure and some have already closed their doors. The shrinkage in profit lines indeed has an impact on the B-BBEE rating . The scorecard in its generic form caters for five elements, namely: Ownership, Employment Equity, Skills Development, Enterprise and Supplier Development and the Socio-Economic Development. Most of these elements are directly linked to the financial indicators of the business, those elements that may not be directly linked are however still affected by the pandemic in some or another way.
The following is an indication of how some of the elements of the scorecard are affected by the Covid-19 pandemic:
- Ownership- The impact on this element results in lower share value and lower dividend payment. This is also a priority level on the BEE scorecard which means that companies must score a minimum of “Net Value” points on the scorecard to avoid penalties and getting discounted by 1 BEE level. In terms of Net Value Score (Net Value which measures the degree to which any debt linked to B-BBEE equity is paid off), the share value and acquisition debt of the Black owner may suffer a negative impact. In an article released by the Department of Trade, Industry and Competition it was also noted that some of the companies may face closure and be forced to sell the larger percentages to non-Black companies and thereby lose their B-BBEE 100% ownership.
- Employment equity- Many companies have had to retrench staff because of loss of trade, this in turn could lead to the unequal demographic representation in some workplaces. This unequal demographic representation reduces the score of this level.
- Skills development- Retrenchment of staff means less to no staff to possibly train which means there will be no training to take place as per the requirements of the skills development element. However, the skills development and training element is not only dedicated to staff but to the unemployed in the country as well in aid to combat the unemployment rate especially among the youth. Companies assist the unemployed through availing efficient training programmes such as learnerships, internships, short courses. In turn, points are earned for the total amount of money and resources spent yearly. This however to an extent could no longer be made possible, as many companies could no longer afford to avail such programmes resulting in a loss of points. The lockdown restrictions have also played a role here, as some training could not take place due to the restrictions (travel and physical meetings specifically). This lowers the score of this level as skills development is also one of the priority elements on the scorecard.
- Enterprise and supplier development- Lower profits equals no cash flow for enterprise and supplier development support. The loss of profits or the decrease in profits could also mean lower targets or indicative profit margin which in turn results in scoring of lower points. Covid-19 also has also had a negative impact on procurement spend, meaning there has been a reduction in procurement spending due to low profits as mentioned earlier. Which in turn lowers the points under this element. In a worst-case scenario, this could lead to the liquidation of beneficiary companies.
It is crucial to note that there are risks involved in not taking into consideration how the Covid-19 pandemic could affect your BEE status. These risks include but may not be exclusive to: The business could be breaching contractual obligations, incur penalties, termination of contracts, face misconduct concerns or fronting allegations. In the end all of this could lead to reputational damage on both short term and long-term scale. The business risks that could be faced are solely based on which steps the business has or has not taken in ensuring the best possible way forward in terms of their BEE status amidst the Covid-19 impact. Therefore, it is recommended seeking help and have a comprehensive analysis done in connection with the impact of Covid-19 on your business.
It is imperative for especially Black-owned businesses who may already have suffered under the negative impact of the Covid-19 to proactively get back on their feet and find the way forward. B-BBEE consulting agencies such as Cenfed are always willing to help companies especially in these times proven to be dire for many businesses and especial their BEE status.
For assistance or more information please contact us.