By Dylan Jessup, Manager: Incentives, COVA Advisory
Covid-19 and B-BBEE have had unintended consequences for the auto manufacturing sector.
It is more than a year since the initial Covid-19 hard lockdowns and the South African economy has the battle scars to keep the sheriff from the door.
One of these scars to emerge from the hard lockdown is the impact on component manufacturers’ B-BBEE scorecards. This is an interesting conundrum when the impact is rolled up to the B-BBEE scorecards of the OEMs (vehicle assemblers).
Many component manufacturers would have scaled back expenditure on items their individual B-BBEE scorecards that are not core to survival as a response to preserve cash resources.
The lower revenue recorded resulting from the lockdowns will have resulted in adjustments to B-BBEE expenditure targets. However, the B-BBEE Codes have sub-minimum expenditures that must be achieved in the Priority Sectors of Ownership, Skills Development and Enterprise and Supplier Development otherwise the Discounting Principle kicks in.
Most component manufacturers expect minimum compliance achievement, Level 8, which shall satisfy their requirements for accessing the AIS benefits for B-BBEE certificates valid until 31 December 2022, after which Level 6 is needed until 31 December 2023. For component manufacturers participating in the APDP2 Production Incentive, a Level 6 is required from 1 January 2022 and then Level 4 from 1 January 2023.
These two support mechanisms have different B-BBEE timelines which need to be considered against the timing of the annual B-BBEE verification and B-BBEE certificate validity dates. The dtic is not expected to adopt any indulgences for B-BBEE compliance failures which could result in their AIS approved benefits being permanently terminated whereas the Production Incentive allows for temporary terminations until B-BBEE compliance is achieved.
The roll-up into the OEM B-BBEE scorecards will have impact through Procurement and Preferential Procurement through the erosion of the suppliers B-BBEE scorecards. This will place pressure on the OEMs to achieve their stipulated targets to access the AIS and Production Incentive. The B-BBEE timelines for the OEMs are more stringent than their suppliers by having to achieve Level 4 from 1 January 2022 for the Production Incentive and 1 January 2023 for the AIS.
This could result in OEMs having: –
- AIS projects terminated;
- Lower import duty offset originating from Local Value Add being deemed Imported Content because supplier’s B-BBEE is lacking; and
- To pay higher import duty through the roll-up of OEMs Quarterly Customs Account.
The loss of AIS benefits does place pressure on the business case feasibility because the AIS benefit is essential support to mitigate investment and location risk.
The lower import duty offset could result in higher dealership prices on imported vehicles and a knock-on inflationary effect into the wider domestic economy.
These are unintended consequences which are not receiving warranted attention as the focus remains on survival despite signs of overall economic recovery.
Company: COVA Advisory
Contact: Dylan Jessup
Email: [email protected]