Why are organisations losing Socio-Economic Development (SED) at the time of verification?

It is simple, organisation’s are unable to differentiate between Corporate Social Investment (CSI) and SED. SED is identified as Series 500, being the 5th and last element in the Amended Codes. Although it is not an identified Priority Element, this component of the codes is a fundamental empowerment vehicle. Points allocated to SED are in return for ‘spending’ 1% NPAT on a credible initiatives in line with the requirements of this element. Although the SED points are the easiest to achieve on the scorecard, the spend in return for the points makes a fundamental difference to Beneficiaries.

Primarily the difference between CSI and SED can be surmised from the proverb; “Give a man fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime”. In other words, it is more worthwhile to teach someone to be self-sufficient than to do things on their behalf continually.

‘Give a man fish; you feed him for a day’ -CSI

By definition; CSI translates into projects or initiatives, which do not form part of normal business activity. They are not undertaken to increase profitability. Generally, they are projects or initiatives aimed at community upliftment, whereby they directly improve the quality of a Beneficiary’s life.

‘Teach a man to fish; you feed him for a lifetime’ – SED

By definition, SED refers to projects or initiatives that facilitate sustainable access to the economy. In terms of B-BBEE, this refers to ‘Black’ People.

Importantly, in my experience, the majority of organisations put their hearts into it when choosing CSI or SED initiatives. A significant number of our clients have supported impressive initiatives that meaningfully benefit communities and the public at large. However, when embarking on such projects or initiatives, many are doing so based on the concept of CSI, but expect a return on the SED element of their scorecard.

It is important to remember that the difference between CSI and SED in the B-BBEE arena is the burden of proof. The core of any verification process applicable to all elements is evidence of who benefitted. Please note the word ‘who’ and not ‘what’. In terms of SED, evidence in the form of documentation is necessary to substantiate claims, more specifically what percentage of ‘Black’ People benefitted. Although it is important to bear in mind that various Sector Codes like ICT and Construction have designed their SED criteria to target their specific sector, the definition of Beneficiaries remains the same. ‘Black’ People in terms of the B-BBEE Act, are defined as African, Coloured and Indian People who are either citizens of South Africa by birth or descent, otherwise became citizens by naturalisation:

  • On or before 27th April 1994; or
  • Born on or after 27th April 1994 and would have been entitled to acquire citizenship by naturalisation prior to that date, but were precluded from doing so by Apartheid policies.
  • Proof of the initiative. Remember you are claiming for a specific spend, so evidence must confirm that the claimed project or initiative is in fact just that.
  • An Independent Competent Persons Report, which is signed off by a person not representing the ultimate Beneficiary. This must confirm the percentage of ‘Black’ Beneficiaries that benefited.

In an attempt to shift the CSI mindset towards SED, I always remind my clients that both make a difference, but one counts as an SED contribution on a B-BBEE Scorecard and the other does not. The following example illustrates the extent to which CSI and SED are confused. This event played out at an Exco meeting I attended on behalf of my client. The conversation opened with, “We do many initiatives for the SPCA in Soweto, can that be claimed as an SED contribution?” Voices in my head immediately scream “Please, let’s not go there, please no!” Vocally I calmly responded, “No, you cannot.” My mind was literally reeling, as I never thought I would be asked a question like that. However, I managed to remain calm and clung to my sanity. I then explained the reasons why the SPCA in Soweto could not be claimed, mainly because I was hoping that she would not ask why not? I went ahead to explain that the Amended Codes specifically identify ‘Black’ People, and dogs and cats do not fall into that definition. Needless to say, she was not yet done with me, as her next question was “What if the Beneficiary is a ‘Black’ dog or cat?” Today I laugh, but at the time nothing about her statement was amusing to me. In fact, I had to excuse myself from the meeting to pray long and hard for some calmness to return to my body.

Another example are soup kitchens, which are great CSI initiatives. The difficulty, however, in substantiating this as an SED contribution on a scorecard is providing the evidence of who benefitted. The reality is, a soup kitchen is, more often than not, an informal setup or open to all those in need. Therefore, short of having a system in place that ascertains whether or not each Beneficiary is indeed a ‘Black’ Person by asking them to sign a register before they take the soup, providing such evidence of each Beneficiary would be difficult.

The Construction Sector Code encourages community upliftment as part of their SED criteria, and this is an avenue many organisations outside that sector choose. However, like the soup kitchen, it is difficult to prove who the Beneficiaries are. For example, in the case of a community upliftment project or initiative in Soweto or Katlehong, there is a presumption that the beneficiaries would be ‘Black’ People, but the burden of proof would be to substantiate how many Beneficiaries were actually ‘Black’ People as defined, as opposed to those falling outside the definition. Therefore, it is critical to find a balance between CSI and SED, which must be fully understood. If an organisation is embarking on a project or initiative, which is meant to contribute to the SED element of the scorecard, it must provide evidence that the Beneficiaries meet the criteria.

What do the Amended Codes say?

SED contributions are measured on an annual basis and only allow contributions made in the measurement period under review. Contributions to this element are quantifiable in monetary value, using a Standard Valuation Method. The target SED spend to receive the maximum allocated points, is 1% of an organisation’s Net Profit After Tax (NPAT).

This target applies, unless an organisation did not make a profit in the last financial year or on average over the past five years. Otherwise, evidence must confirm that the net profit margin – NPAT/Turnover – is less than a quarter of the industry norm, which is based on information released by Stats SA every quarter.

  • This being the case, the target measurement for SED spend is set at 1% x Indicative Profit Margin (NPAT/ Turnover) x Turnover. An indicative profit margin is the profit margin from the previous year, where the organisation’s profit margin equals at least one-quarter of the industry norm.
  • In the event of an organisation not having a quarter of the Net Profit Margin benchmark, a quarter of the industry norm profit margin will be used as the Indicative Profit Margin.

The full allocation of SED contributions will only be recognised if more than 75% of the direct Beneficiaries are ‘Black’ People. Should the representation of ‘Black’ People fall under this threshold, contributions will be prorated by the percentage of the ‘Black’ direct Beneficiaries. Contributions to this element can be monetary or non-monetary. These must be formulated and executed with the core aim of developing activities that ultimately generate an income for the Beneficiaries.

Here-under is a non-exhaustive list of initiatives that qualify as SED Contributions:

  • Grant contributions to qualifying Beneficiaries;
  • Guarantees or securities provided for Beneficiaries;
  • Third-party payments for development on behalf of Beneficiaries;
  • Preferential payment terms for the supply of goods or services to Beneficiary communities;
  • Overheads and/or direct costs attributable to beneficiaries and /or their communities;
  • Development capital for Beneficiaries;
  • Payments on behalf of beneficiaries to suitably qualified and experienced third parties to provide SED services;
  • Training and/or mentorship to beneficiary communities, in line with a organisation’s core services, by its employees or management. These contributions are calculated by consulting cost per hour. Supporting documentation must substantiate time costs incurred, as well as the appropriate expertise of the trainer or mentor. These costs must be calculated at a rate in line with the industry norm;
  • Travel costs may be included as a direct cost. However, time spent commuting may not be included; and
  • Only a portion of salaries can be attributed to the maintenance of an SED initiative, as well as costs incurred in relation to promotion and implementation.

“Yonela Ntsaluba is a technical signatory, advisory and implementation specialist at Sage BEE123. She has a Bachelors in Economics from Fort Hare University and has completed the B-BBEE MDP course. As a proud product of an internship programme, she believes that Skills Development is key to creating a society that provides equal opportunity for all.”

In our country’s current economic climate, we do have to take cognisance of the challenges facing many South Africans. The core of SED is investing in the tools which empower people to become self-sufficient. This will in effect, welcome more people into the economy, provide more tax payers, lessen the socio-economic burden on Government, who will then have the financial capacity to drive the economy.

One comment

  • Great article, thanks very much for the clarity of these details, which contribute to precise decision making on socio-economic development spend / how you set up a service based company to offer SED points. I have some specific questions – would be great to get a contact to further the discussion. Thanks!

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