Novus’ new level 1 BBBEE rating raises eyebrows
Novus insists its sparkling new level 1 BBBEE rating is above board, in spite of a court challenge from publishing rival Caxton
A long-term, multi-tiered and progressive approach to transformation was behind manufacturing and printing group Novus’s dramatic improvement in its broad-based BEE (BBBEE) score from a modest four to an envy-inducing one in just 12 months, according to its CEO, Neil Birch.
Not everybody is thrilled with the apparent progress. Indeed, so vexed is printing and publishing group Caxton that it took the unprecedented step of asking the high court to interdict Novus from using its sparkling new level 1 BBBEE certificate. Caxton chair Paul Jenkins, who has trawled through Novus’s shareholder register and found no sign of the sort of significant BEE transaction that would support the enhanced rating, says that without such a transaction, "it’s not clear how Novus could possibly have achieved the percentage black ownership reflected on the certificate".
The rating gives Novus a significant advantage over Caxton, with its lowly level 4, when it comes to competing in a tough marketplace.
But Birch is adamant there is "nothing untoward about it". Speaking to the FM after the group’s recent AGM he outlines the process involved. Essentially it required aggressively interrogating every aspect of the group’s business for points that could be used.
The move, from what Birch describes as a high level 4 rating to level 3 in December 2018 was the result of a closer inspection of the group’s shareholder profile. This involved the employment of a consultant to identify the beneficial holders of the shares managed by institutional funds.
"It’s quite a common process," explains Novus’s recently appointed chair, Phumla Mnganga.
The move from level 3 to level 1 in May 2019 was thanks to a lot of disposals to BEE parties between 2015 and 2017, which the board previously hadn’t realised could be used for rating purposes. In addition, Birch says, there was a lot of transformation within the group’s management and a concerted effort to boost procurement from black companies. A large chunk, over 40%, of Novus’s supplies are imported. This is excluded from the denominator in the BEE score calculation, leaving activities such as maintenance, security services, consultants, logistics and transportation for potential to beef up the BEE rating.
"When it comes to BEE verification, the burden of proof is on the company to provide the necessary evidence to the rating agency," says Birch. "We’ve improved our analysis and our ability to provide proof to our agency. We only realised recently that you can get recognition for a broad variety of factors. Previously the person in charge didn’t know."
Likely to come under the spotlight during court proceedings, which are expected to kick off in January, is the role played by Express Verification Services (EVS) in sprucing up Novus’s BBBEE credentials. In May 2018 Novus abandoned its long-term verification agency AQRate in favour of Empowerdex subsidiary EVS.
Novus CFO Harry Todd says: "One of the reasons we moved away from AQRate is they didn’t give us all the information we could have used, we should have been at a higher rating long ago."
AQRate’s CEO Chris van Wyk seems puzzled by Todd’s criticism as they had not received complaints about their service before their agreement was cancelled in April 2018. "We valued Novus’s business and hold them in high regard. The management we engaged with were professional at all times and had an earnest drive to comply with the BEE legislation."
In December 2018 EVS signed off on the new level 3 rating. This was quickly followed up, according to a certificate first published on June 11, with a level 1 rating that had been issued on May 16 2019. As it happens, the level 1 rating was issued at around the same time as the SA National Accreditation System slapped a three-month suspension on EVS. That suspension, which was briefly lifted and promptly reimposed, was triggered by Angelo Agrizzi’s testimony at the Zondo Commission suggesting that EVS took payment to "sort out the BEE ratings" needed by Bosasa. Birch says it’s "unfortunate" that EVS has been suspended but they are still using the level 1 rating.
Jenkins is questioning the timing of the May 16 rating and alleges it was in fact issued on June 11, when EVS was already suspended. For one thing, the necessary audited figures were not available in May, says Jenkins.
BEE veteran Ajay Lalu of Black Lite Consulting is following Caxton’s legal action "with great interest" and believes it will be precedent setting.
"I’m continually surprised at the number of companies — from MMI to Novus — that manage to get a level 1 score," says Lalu.
He says that when the revised codes were put in place most policymakers thought it would be almost impossible, given the onerous criteria, to reach level 1.
"The Employment Equity Commission’s statistics show we haven’t made a dent on this front; across the board we haven’t seen substantial changes that would support the large numbers of companies getting level 1 status," adds Lalu. "There must be a complete fudging of outcomes."
Lalu believes the codes allow for far too much interpretation and lack an objective measurement of outcomes. The scope for fudging could be reduced, he says, if the regulators had more practical corporate experience, which would enable them to interrogate more effectively.
Meanwhile, given how slowly government works, it might be down to Caxton’s court case to provide some clarity on what is, and is not, allowed.