Industry Norms, the NPAT calculation, SED and how to deal with the numbers

Within Socio-Economic Development is a critical requirement that SED initiatives should result in sustainable economic participation by its intended beneficiaries and discourage dependence on hand-outs.

The full value of the Socio Economic Development contributions is recognisable if at least 75% of the value of the contribution directly benefit black people. If less than 75% of the value of the Socio Economic contributions directly benefit black people, the value of the contribution made is multiplied by the percentage that benefit black people.

A typical target for contributions of a Generic entity is as follows: the annual value of all Socio-Economic Development Contributions made by the Measured Entity as a percentage of the target equates to a 1% contribution of Net Profit after Tax (NPAT). Whilst this seems simple to understand, the criteria varies within certain industry sectors.

To assist with these NPAT criteria, businesses may also utilise the statistics published by STATSSA on quarterly basis in the report “P0044-Quarterly Financial Statistics”. This report summarises the South African industry’s overall performance and then per sector (mining and quarrying, manufacturing, electricity-gas-and water, construction, trade, transport, storage, communication, real estate and lastly community, social and personal services).

In the case where a measured entity did not generate profit for that particular year, the Codes have provided for the use of industry norms by applying a Indicative Profit Margin formula to determine the actual contribution.

Indicative profit margin is the profit margin in the last year where the company’s profit margin is at least one quarter of the industry norm; i.e. if the industry norm was 4%, then NPAT over Turnover must be greater than or equal to 1% (calculated as 0.25 x 4% = 1%).

In September 2019 (the most recent full statistics published by STATSSA as at February 2020), the average profit margin for the entire South African Industry over a 12-month period is 4.54%.
Naturally each sector has it’s own profit margin ratio and is to be used in the relevant sector’s SED contribution calculation.

Profit Margin ratios per industry over a rolling 12-month period are given below.

Mining and Quarrying 5,69%
Manufacturing Industry 3,70%
Electricity Gas and Water supply -6,39%
Construction 2,18%
Trade 3,73%
Transport Storage and Communication 2,55%
Real estate and other business services 12,39%
Community, Social and personal services 6,97%

Note that Indsutry Sectors may have different NPAT targets as shown below for the annual value of all Socio-Economic Development Contributions made by the Measured Entity as a percentage of the target equates:

Tourism, ICT QSE, Forestry, Media-Advertising-Communications, Transport 1% of NPAT
ICT Generic 1% of NPAT
Agricultural 1.50% of NPAT
Financial 1.25% of NPAT
Property 1% of NPAT

The indicators and weightings are as follows in this example specific to a generic sector:

Average annual value of all SED contributions by the Measured Entity as a percentage of NPAT or turnover to obtain the maximum point for SED is 1% of NPAT or 0,125% of turnover or by use of STATS SA quarterly statistics indicators for the particular industry when calculating the industry norm net profit margin.

Companies unsure of how the calculation is done should source the opinion of a professional B-BBEE consulting firm as Socio-Economic Development will remain a vital aspect to the growth of business in South Africa and it goes without saying that the economic benefit is highly beneficial to all stakeholders.

Author Craig Tonkin

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