Black Economic Empowerment (BBBEE)
14 December 2006
The Department of Trade and Industry submitted the Codes of Good Practice on
Broad Based BEE to Cabinet for approval and gazetting on 26 October and 8
November 2006. The meeting of the 8 November deferred the approval of the Codes
with the proviso that further work needed to be done on them specifically
regarding the simplification thereof. It was decided in this meeting to table
these codes in Cabinet again on 6 December 2006, with the view for final
approval.
Cabinet has approved these codes subject to further work being done on the
statement dealing with the process of verification, how to deal with fronting
practices as well as compliance reporting by complex structures.
In the same vein, the Cabinet also approved the gazetting of both phases one
and two of the Codes, which is intended to take place in January 2007.
The process of developing the codes began in April 2004, with the drafting
of the first phase of the Codes of Good Practice, which was approved by Cabinet
in 2005. The first phase included code 000 dealing with the conceptual
framework for Black Economic Empowerment (BEE). The code provides statement 001
dealing with BEE verification, Fronting and Complex structures; statement 002,
which provides for the gazetting of transformation charters; and statement 003,
which provides separate scorecards for specialised entities such as State-Owned
Enterprises (SOEs) and Non-governmental Organisations (NGOs). Phase I also
included Code 100, statement 100, which measures effective ownership of
enterprises by black people and statement 102, which measures ownership points
in the case of the sale of assets and businesses in lieu of equity
transactions. Finally, Code 200, statement 200, measures effective control of
enterprises by black people.
The drafting of phase two of the codes, dealing with the remaining five
elements of the generic scorecard as well as pertinent issues such as the
measurement of small enterprises and the matter of fronting began in April
2005. In this final round, Cabinet was approving the second phase of the codes.
Thus, bringing to finality the completion of the approval of the entire codes
of good practice, including its gazetting. These five elements of the second
phase include: Code 300, statement 300, which measures initiatives intended to
achieve equity in the workplace. Code 400, statement 400, which measures the
extent that employers carry out initiatives designed to develop the
competencies of black employees. Code 500, statement, measures the extent that
enterprises buy goods and services from BEE compliant suppliers as well as
black owned entities. Code 600, statement 500, measures the extent to which
enterprises carryout initiatives contributing to enterprise development.
Finally, Code 700, statement 700, measures the extent to which enterprises
carry out initiatives contributing to socio-economic development.
As per the BEE Act No 53 of 2003, the Department of Trade and Industry (the
dti) was mandated to draft the Codes of Good Practice for BEE. These Codes are
meant to provide generic standards and a framework for the implementation of
BEE throughout the whole economy.
The BEE Codes are viewed as standards structured along the lines of
standards issued by the accounting and auditing fraternity. Likewise, they
simply provide universal standards for the implementation of BEE initiatives
and the measurement of such initiatives with the view of providing consistency,
transparency and clear direction on BEE.
The codes of good practice were developed and finalised through an extensive
consultation process involving chambers of business, big business, black
business, labour and civil society. International road shows involving foreign
investors were conducted to solicit inputs into the drafting process. Extensive
workshops were held with government departments as well as content experts to
explain the codes and to solicit inputs into the drafting process. Feedback was
received from various interested parties and technical working groups were
established to provide further inputs as well. Parliament through the portfolio
committees was consulted to make inputs into the drafting process as well. The
codes are truly a South Africa product with extensive support from the
international community.
After the release of the codes for public comment in December 2005,
approximately 180 submissions were received from across the economy, including
big business, black business, government, and State-Owned entities during the
public commentary process, which were all analysed and most recommendations
used to finalise the codes.
General Concerns
These codes have taken on board a number of concerns raised by all the
stakeholders. The language style used in the codes has been simplified for ease
of reading and understanding. To further address the concern that was raised
pertaining to the complexity of the codes, an interpretive guide has been
produced to aid BEE practitioners to gain further clarity and understanding of
the Codes. A summary of the Codes has also been produced aimed at the ordinary
person to fully grasp the codes and BEE.
The number of indicators being measured on the codes has been reduced from
42 to approximately 23. It is believed that this action will result in a
significant reduction in the amount of time that enterprises will need to spend
in trying to achieve BEE compliance. Final targets were a product of extensive
research and consultations with all critical stakeholders, and were modified
accordingly where required.
General Principles of the Codes
The Parity Principle, a specific target has been set for ownership by black
women in order to ensure that benefit accrues to both black men and black
women. This principle emphasises that black women must accrue 40-50% of benefit
across all the elements of the scorecard. For the black designated groups 2-3%
of benefit must also accrue to them as well on all the elements of the
scorecard.
Small and Micro Enterprises
Government has singled out small enterprises as vital in the fight against
unemployment. Aiming therefore to ease the regulatory burden on small
enterprises, many of which are already struggling under financial and capacity
constraints, the Codes provide less onerous BEE compliance requirements for
small and micro enterprises. Thresholds for Qualifying Small Enterprises (QSE)
have been increased substantially to range between R5 million and R35 million,
based on annual turnover. Thresholds for Exempted Micro Enterprises (EME) have
been increased substantially from the original R300 000 to R5 million based on
the annual turnover.
Only one threshold based on turnover is being used for determining QSE as
opposed to the original sector specific definitions for QSE. Head count has
been removed due to its unintended consequences of curbing employment in
enterprises.
The effect of these thresholds is that a significant number of enterprises
are excluded from having to comply with BEE requirements. Such excluded
entities contribute the least to our GDP. Those medium to large entities that
are required to implement all the 7 elements of the scorecard make up less than
2% of the total number of economically active entities and contribute the most
to our GDP.
In contrast to the generic scorecard, the QSE scorecard allocates an equal
25% weighting to each of the seven elements or pillars of BEE. The overall
weighting of the elements on the scorecards adds up to 175%, but because QSE
only have to elect four of the elements, selected elements of compliance will
end up totalling 100%.
Start-up enterprises are measurable as EMES for the first year following
their formation or incorporation. This provision applies regardless of the
expected total revenue of the start-up enterprise.
Code 100: Ownership
Statement 100 provides specific incentives in the ownership scorecard to
ensure participation of black women, black designated groups and new entrants
and to ensure that only real economic interest in the hands of black people is
measured and recognised. Thus emphasising the principle of substance over form
when measuring BEE. The compliance target for ownership remains 25%+ 1 vote.
Weighting points for new entrants are two bonus points and broad based schemes
1-bonus points. Flow through and modified flow-through principles are included
to ensure that the objectives of BEE ownership will not be circumvented through
complex structures. This principle traces ownership measurement through the
chain of ownership to the natural black person. The modified flow through
principle allows for the participation of non-BEE funders at one tier of
ownership.
The Exclusion Principle allows for ownership by certain entities to be
excluded from calculation of ownership up to a maximum of 40% of the measured
entity. These include ownership by government entities, section 21 companies;
and mandated investments (i.e. pension funds, medical scheme, insurance funds,
medical scheme, banking investment friendly society, mutual schemes and unit
trusts, etc.).
The recognition of ownership after the sale or loss of shares by black
partners: Continuing Consequence Principle, enables a company to include up to
40% of the ownership points after a BEE partner exits or loses its shares to a
funder if the following conditions are met: the shares were held for more than
3 years prior to sale or loss, value was created in the hands of black people
and there is a level of transformation within the measured entity. This allows
for black shareholders in a company to be able to liquidate their investment in
order to realise value while allowing the measured entity to retain some of the
points it had attained towards the ownership element of its scorecard.
Code 100 on ownership also provides detailed requirements for the
recognition and measurement of trusts and broad-based schemes as black
ownership. Code 100, statement 103 provides recognition of equity equivalents
on ownership for subsidiaries of foreign multinationals in South Africa. Any
equity equivalent contributions towards the ownership element made by
multinationals are measurable against the value of their operations in South
Africa. Equity Equivalent programmes will have to be approved by the Minister
of Trade and Industry and the line Ministry and may involve social development
programmes as well as enterprise creation programmes. The valuation of such
programmes will be determined by the use of acceptable valuation standards.
Code 200 & 300: Management Control and Employment Equity
The Management scorecard places emphasis on black representation at senior
executive levels. Management also encourages a proper representation of black
people on company boards in executive and non-executive capacity. This counters
the market trend of appointing black non-executives rather than executives.
Compliance targets for management have been split as follows: 40% top
management, 50% Board Representation. Weighting points for management remain 10
points.
The Employment Equity scorecard provides for measurement based on
occupational levels in schedule EEA9 in terms of the Employment Equity (EE)
Act. It specifically measures the representation of black people in senior,
middle and junior management occupational levels, but excludes semi-skilled and
unskilled occupational levels. This aims to deal with the lack of
transformation on all these occupational levels within an organisation. It is
also aligned with the EE Act in order to prevent contradiction in terminology
and efforts in the implementation of Employment Equity initiatives in both EE
Act and BEE Act. Compliance targets have been split into 5-year targets and
10-year targets. Senior management 5 year targets 43% and 10 year targets 60%.
Middle management 5-year target 63% and 10 year target 75%. Junior management
5-year target 68% and 10 year target 80%. Weighting points for the employment
equity element of the scorecard has been increased from 10 to 15 points.
Code 400: Skills Development
The Skills Development scorecard provides a target 3% of payroll to be spent
towards the skilling of black employees. This code has been aligned with the
Skills Development Act and the Skills Development Strategy. It specifically
encourages that skills development should take place in the priority skills
areas as identified from time to time and including those currently identified
by the Accelerated and Shared Growth Initiative for South Africa (AsgiSA). The
scorecard measures skills spend and also allows for the measurement of output
through the use of the learning programme matrix as issued by the Department of
Labour. The weighting points have been decreased from 20 to 15 points.
Code 500: Preferential Procurement
The Preferential Procurement element promotes BEE compliance by all entities
regardless of their ownership status. Compliance targets for preferential
procurement have been split as follows: A 50% target has been set for
preferential procurement over a five year period and a 70% target has been set
for preferential procurement over a 10 year period. Out of these targets
specific allocations have been made for procurement from BEE compliant
suppliers in general based on their performance on the scorecard, small and
micro enterprises as well as black owned and black women owned entities. In
trying to encourage procurement of locally produced goods and services, the
scorecard also provides enhanced recognition for procurement from value adding
suppliers. In also trying to encourage the promotion and sustainability of
small enterprises, we have also provided enhanced recognition for procurement
from beneficiaries of Enterprise Development initiatives.
Code 600: Enterprise Development (ED)
This element provides for the measurement of enterprise development and
industry specific initiatives. ED encourages entities to implement/support
initiatives that facilitate access to finance such as loans, equity, seed
capital and non-financial assistance such as training and mentoring,
preferential credit facilities, capacity building programmes for QSE and access
to low or no cost infrastructure, etc. Enterprises are encouraged to make
either monetary or non-monetary contributions. A target of 3% of Net Profit
After Tax (NPAT) has been set or alternatively a target of 0,375% of Total
Revenue. The weighting points have been increased from 10 to 15 points.
Code 700: Socio-Economic Development
This element provides for the measurement of Socio-Economic Development
Contributions. The key principle is for these initiatives to result in the
beneficiaries having sustainable access to the economy. A target of 1% of Net
Profit After Tax has been set and alternatively 0,125% of Total Turnover. The
maximum number of points in this element is 5.
Conclusion
The dti is confident that the Cabinet adopted Codes of Good Practice on BEE
have gone a log way towards providing certainty and predictability in the
economy and that these codes have addressed all the concerns raised by all the
key stakeholders. We are now certain that the implementation of BEE will gain
momentum. This also opens the door for the speedy gazetting of transformation
sector charters under section 12 and 9 of the BEE Act.
For further information, please contact:
Donavan Jacobs
Media Relations
the dti
Tel: (012) 394 1641
Fax: (012) 394 2641
E-mail: DJacobs@thedti.gov.za
Issued by: Department of Trade and Industry
14 December 2006
