ICT companies will be hard hit when the new generic empowerment codes come into effect in May, with commentators expecting a surge in fronting as entities seek to stave off onerous empowerment requirements.
Under the new broad-based black economic empowerment (or generic) codes, skills development, equity ownership and enterprise development have been made priority sectors. As a result, companies that turnover more than R50 million a year need to achieve at least 40% of the points available under each of these categories, or they will fall an empowerment level.
Transcend Corporate Advisors director Trevor Tshabangu says IT companies will suffer most under the priority element of ownership which, under the new codes, must be at 25% - but this is based on net benefits to black shareholders. He says this requirement is likely to see companies drop about three levels on average when the new codes come into effect, because the charter has not been revised.
Inforcomm CEO and industry commentator Andile Tlhoaele notes the charter, almost a decade in the making, was finally gazetted with immediate effect by trade and industry minister Rob Davies, in June 2012, and cannot be amended until an ICT charter council is elected. Last November, telecoms and postal services minister Siyabonga Cwele issued another notice for nominations to the council, but this process has yet to be wrapped up.
Fronting risk
ICT companies will be "hard hit" when the new codes come into effect in May because their current scorecards will be translated into points under the codes, and will be found wanting, says Tshabangu. "The impact is huge."
Tshabangu explains if IT companies do not meet the new subminimum requirements in terms of ownership, enterprise development and skills development, they will drop at least one level. Tlhoaele expects IT companies to drop at least one level on the skills development requirement unless they make drastic changes before May, a move he anticipates as unlikely.
In addition, says Tshabangu, all companies in the sector will be affected because the new codes will have a ripple effect through the value chain because suppliers will be downgraded, which will affect organisations that buy from them. Tlhoaele says: "The entire sector might just average at level four or five status. This means you might not easily find a level three, two or one large company in the sector for the next three to four years."
Tshabangu says the unintended consequences of the new codes include that there will be an increase in fronting, and some companies will simply be out of the running for key government tenders. Companies will split into multiple entities in a bid to become qualifying small enterprises and avoid the onerous requirements of the codes, which brings with it the cost of dealing with more red tape, he says.
Tlhoaele adds companies will endeavour to stay under the R50 million turnover level, and may sandbag deals into the next financial year to achieve this aim.
In addition, says Tshabangu, IT companies are likely to front through arbitrarily hiring people of a specific demographic just to meet the economic active population targets of the province in which they operate.
However, says Tlhoaele, the new codes make fronting a criminal offense, and government entities - such as the Independent Communications Authority of SA - now need to ensure the codes are adhered to.
There has already been an upsurge in companies wanting to be rated under the old codes, and firms that go through this process before 1 May will have the edge, Tshabangu says. The challenges of the new codes will be a bit too much for some companies to stomach, he adds.
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