Broad-based Black Economic Empowerment: Amended Codes & Scorecard

By Tony Balshaw and Jonathan Goldberg

In October 2013, the far-reaching Amended BBBEE Codes of Good Practice became effective. These have had a profound impact on businesses in South Africa. In this update of their popular book "Broad-Based Black Economic Empowerment", two of South Africa’s leading consultants explain the practical implications and answer the questions they most often encounter in their wide experience with local businesses. The expert authors clearly explain the codes and their implications as these apply to businesses of all sizes, universities and practitioners in South Africa. They will aid readers in understanding, implementing, calculating, measuring and promoting the objectives of transformation in South Africa.

• Language: English
• Publisher: Tafelberg
• Release date: Jul 14, 2014
• ISBN: 9780624069591

Tony Balshaw

Tony Balshaw is one of South Africa's leading experts and consultants on family business. Author of "Thrive! Making Family Business Work", Tony works extensively with families and the businesses they control, both in South Africa and internationally. Notably, he regularly acts as consultant for these and other businesses on the topic of broad-based BEE.

Book preview

Broad-based

BEE

BLACK ECONOMIC EMPOWERMENT

AMENDED CODES & SCORECARD

TONY BALSHAW & JONATHAN GOLDBERG

Tafelberg

Some images in this book might appear unclear, especially the formulae in Chapter 8 and onwards. In such cases, a clear image can be obtained by (depending on your device) adjusting the view settings to a larger size or double-tapping the image.

The Amended Codes of Good Practise effective 11 October 2013, are far reaching, and will have a profound impact on businesses in South Africa. The original Codes were operational from 9 February 2007 and there was unprecedented demand for our previous books Cracking Broad-Based Black Economic Empowerment: Codes and Scorecard Unpacked followed by Broad-Based Black Economic Empowerment: Final Codes and Scorecard. We have been overwhelmed and encouraged by the success of these books and the positive feedback received from readers, across the spectrum of businesses, universities and practitioners in South Africa.

Under the aegis of lead author Tony Balshaw we have now updated the book based on the Amended Codes of Good Practice. This book not only takes into account the far reaching changes in the Amended Codes of Good Practice but also addresses the practical application of the Amendments. Where possible the structure and content was retained to provide a user friendly one-stop practical reference source for broad-based BEE practitioners and participants, corporate executives, owners and managers of widely and closely held businesses, directors, government officials, regulators, foreign investors, professionals such as lawyers, accountants and human resource practitioners, students, trade unions, industry bodies and other persons. Transformation efforts and the application of the original Codes of Good Practice has largely driven by the largesse of businesses in South Africa. The Public Sector only started applying the Codes years after they became effective. Whilst the Codes were initially accompanied by unparalleled economic growth, there is concern that these amendments to the Codes will be retrogressive for business, civil society and our economy as a whole and the broad-based BEE momentum lost. The delays by organs of state and public entities in implementing the Codes after they became operational, the capacity and duality of accredited verification agencies, transformation charters and Sector Codes, charter committees promoting changes to key thresholds and targets in the Codes, retrogressive move to narrow-based ownership and onerous scorecard compliance targets and indicators are examples of are challenges that could stall the viability of government’s initiative to promote economic transformation in order to enable meaningful participation in the economy by black people.

There is a retrospective shift in direction toward ownership, which now comprises 57 per cent of the Scorecard points. There is greater emphasis in the Amended Codes on majority black ownership, particularly in relation to the sub-elements of Procurement as well as Enterprise and Supplier Development.

We believe this new book provides much value for the readers; it not only simplifies broad-based BEE - especially in the application of the Amended Codes of Good Practice, but also aids readers in understanding, implementing, calculating, measuring and promoting the objectives of transformation in South Africa.

The book has been broadly structured in three parts to provide a practical and handy reference source for a wide range of readers. We have, wherever possible retained lists of ideas for consideration, easy-to-follow diagrams, practical suggestions, real-life business examples of the concepts in action, useful templates to follow, a glossary of terms and other valuable information flesh out and annotate the text.

First, we introduce the rationale for broad-based BEE, its cascade effect on the economy and the constraints on its implementation. We address the need for changing beliefs and related soft issues, and discuss strategising for change.

Then we examine the legislative framework and introduce the Codes of Good Practice and related terminology. A significant constraint in writing this book has been the apparent oversights and poor drafting of the Amended Codes. Nevertheless, we have pre-empted certain pronouncements and provide the reader with comprehensive information and tools to understand the framework, and to apply and implement all five Elements.

Regular updates and pronouncements can be obtained from the Department of Trade and Industry website or by corresponding with the authors. In the text we generally refer to businesses, but use the term entity to describe business entities in the context of the BEE legislation and enabling framework.

Finally, we investigate practical considerations for the implementation of broad-based BEE, as well as family business, governance and ownership rewards, acquisitions and valuations, financing, and some specific accounting and taxation considerations.

The impact of broad-based BEE on business has been dramatic. We believe that this book encapsulates and provides a unique perspective on Amended Codes. We trust that our ideas prove to be fundamentally sound in turning change into value for South African businesses of all sizes. We also hope, through this publication, to inform the various stakeholders in our economy, including those charged with regulating the Codes, chief among whom are government entities and big business.

Tony Balshaw

Jonathan Goldberg

May 2014

It is not the strongest species that survive, nor the most intelligent, but the one most responsive to change. – Charles Darwin

Black economic empowerment (BEE) arguably continues to be the greatest strategic issue, challenge, threat and potential opportunity facing businesses of all sizes, structures and shapes in South Africa today. It is a government initiative to promote economic transformation in order to enable meaningful participation in the economy by black people.

The socioeconomic imbalances that existed for decades (even centuries) required reform, greater ethical conscience and ploughing back to ensure the long-term survival of companies.

BEE has been described as an investment that is a matter of survival for South Africa and the economy. It is aimed at effecting a more equitable distribution of economic wealth and has been branded as the essential second wave of transformation after democratisation and the political miracle. South Africa’s first democratic government was elected in 1994 with a clear mandate to redress the inequalities of the past in every sphere: political, social and economic.

Twenty years have now passed since South Africa’s democratisation yet unemployment levels remain stubbornly above the 7 million mark with negative consequences such as social unrest. On reflection many are saying that the pace of transformation has not been good enough.

South African businesses have had to face major strategic integration issues relating to the country’s reincorporation into the global economy as well as to government initiatives and related regulations aimed at transforming the socio-economic environment for the majority of the country’s citizens. The market-driven economic environment has been characterised by sustained economic growth and resilience.

It must be asked if, twenty years on, is BEE still necessary particularly in the form of the Amended Codes which have the potential to be a regressive step for the fragile South African economy?

There is no doubt that the challenge of economic transformation, propelled by black economic legislation, demands our urgent attention. BEE is a reality and a business imperative. Companies which have failed until now to respond need to do so quickly or face the cheerless prospect of not being in business in a comparatively short period of time.

There are two primary drivers of broad-based BEE:

•first, the altruistic driver – those people who believe it’s the right thing to do and have bought it onto the national agenda;

•secondly, those who recognise that broad-based BEE is a strategic imperative, understanding that it makes good business sense.

The latter will more than ever constitute the sustainable driver for embracing the Amended Codes.

BEE continues to have a huge impact on the way business is done in South Africa – for large corporates, family businesses, small and medium-sized businesses, professional practitioners. Quite simply, BEE impacts, in one form or another, on almost every participant in the South African economy. The impact, unlike other legislative interventions, is more indirect and not mandatory on businesses from a legislative-legal point of view but the public sector imperative that every organ of state and public entity must apply the Amended Code of good practice will drive compliance. This is notwithstanding the fact that the compliance standard and requirement is voluntary and self-regulatory for all entities other than state-owned entities. Entities are examining whether BEE compliance is still worth the cost.

The complexities of the how, who, when and what of broad-based BEE is the main cause of concern and perceived threat for many business owners and managers, particularly because BEE touches a raw nerve – ownership and control. The issuing of extremely onerous and complex Amended Codes of Good Practice is adding to the concerns.

THE GOVERNMENT’S AGENDA

If we change the ownership in the economy, but the economy is still the same size, we have achieved only one level of success, but have not succeeded in what we want to do with the economy. – Gill Marcus, Reserve Bank governor

In pursuing broad-based BEE in South Africa, the government’s stated objectives are to facilitate the empowerment of blacks by:

•promoting economic transformation in order to enable meaningful participation of black people in the economy;

•achieving a substantial change in the racial composition of ownership and management structures and in the skilled occupations of existing and new businesses;

•increasing the extent to which communities, workers, co-operatives and other collective businesses own and manage existing and new businesses and increasing their access to economic activities, infrastructure and skills training;

•increasing the extent to which black women own and manage existing and new businesses, and increasing their access to economic activities, infrastructure and skills training; promoting investment programmes that lead to broad-based and meaningful participation in the economy by black people in order to achieve sustainable development and general prosperity;

•empowering rural and local communities by enabling them to gain access to economic activities, land, infrastructure, ownership and skills, and promoting access to finance for black economic empowerment.

The reason for the broad-based approach has been the perceived failure of economic transformation due to the problem that many role-players, including the government, have viewed broad-based BEE from the narrow ownership perspective. That is why the Broad-based Codes of Good Practice of 2007 were introduced. These 2007 Codes ensured that it would not be sufficient just to have black ownership as a BEE strategy. Seven years later there has been a significant change in direction. The Amended Codes are skewed - weighted towards black ownership once again.

BEE-driven transformation should be broad-based and entailing the genuine involvement of all stakeholders; led in particular by the incumbent business owners and managers.

THE BROAD-BASED BEE CARROT

Government, in the process of correcting historical imbalances in South Africa, is redirecting capital to black people through the manifestation of government’s significant (monopolistic) procurement budget and regulations.

The fact is that BEE has rapidly become a strategic imperative for most businesses. BEE has a variety of ingredients, dimensions and facets – better known in broad-based BEE parlance as Elements; it is not only limited to ownership and management considerations.

Clearly if businesses wish to supply goods or services to the public sector, organs of state (national, provincial and local government) and public entities, acquire licences and concessions or bid for public procurement, then they will be required to demonstrate their broad-based BEE credentials particularly in relation to:

•ownership;

•management control;

•skills development (employment equity and skills development);

•supplier and enterprise development, and

•socio-economic development

In accordance with Amended Code Scorecard and related legislation. The private sector, non-profit companies (NPCs) and other stakeholders are also encouraged to apply the Codes of Good Practice when transacting with businesses, thereby aligning business imperatives with the government’s broad-based BEE objectives. In fact the Codes require that all entities that undertake any business with any organs of state or public entities need to be measured using the Codes to establish their own broad-based BEE compliance.

Black consumers comprise the largest market and growth sector in South Africa. There is a huge opportunity for businesses to grow as the disposable income of previously marginalised blacks increases. Black people will control and demand preferential procurement (not in the least voting with their wallets), and will be in senior positions controlling both public and private sector procurement in most supply chains. Consumers place greater emphasis on companies fulfilling socio-economic development and those that communicate formal messages about their operational-level and socially orientated citizenship responsibilities.

BEE IN A NUTSHELL

Essentially, the practical working of broad-based BEE requires a business to ensure that it measures its broad-based BEE empowerment status based on the Amended Codes of Good Practice.

The broad-based BEE status of an entity will be based on the broad-based BEE points scored using the Generic Scorecard. The Status, based on the overall score achieved, will be evaluated using the following table which comprises of eight Contribution levels and related Recognition levels:

An entity that scores less than 40 points is deemed not to have a BEE Status.

The broad-based BEE Status of an entity is measured across the five Elements of ownership, management control, skills development, supplier and enterprise development, and socio-economic development.

The BEE Status is used by an entity’s customers (including government) to whom the businesses supply goods and services to seek good BEE points. Government and quasi-government agencies are compelled to apply the Generic Broad-Based BEE Scorecard and to obtain the broad-based BEE Status of businesses with whom they transact in procuring goods and services or, for example, issuing concessions and licences. These certificates will be valid for a period of one year.

The purpose of broad-based BEE is to play a meaningful role in South Africa’s economic transformation and ensure sustainable future growth and profitability. With this in mind, broad-based BEE is aimed across the board, at shareholders, customers, employees, suppliers and the community at large.

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It is likely that the competitive advantage of empowerment will have only a limited lifespan.

The starting point will be to determine whether a business, for a range of reasons, will be affected negatively as a result of not complying with BEE legislation.

This question is ever more relevant under the new Codes. Is it still worth the time, effort and cost to produce an acceptable scorecard for an entity. We believe the first rationale for the implementation of broad-based BEE, the altruistic driver, by entities is largely gone.

It is important to remember that the Act applies to the public sector and public entities directly and therefore has only an indirect effect on businesses insofar as they have dealings with government bodies. There will be a cascade effect on private sector entities.

There are three qualifying thresholds for businesses to determine the basis of measurement to be used in determining their broad-based BEE Scorecard status and recognition level.

It is important to establish upfront which of the following categories will be used for measuring an entity’s broad-based BEE compliance:

Exempted Micro-Enterprise (EME)

Entities with an annual revenue of R10 million or less automatically qualify as Exempted Micro-Enterprise (EME). These entities are deemed to have a broad-based BEE Status of Level Four Contributor, with a Procurement Recognition level of 100 per cent. If the entity is more than 51 per cent owned by black people then the EME qualifies for promotion to a status of Level Two Contributor having a Procurement Recognition level of 125 per cent.

An EME is only required to obtain a sworn affidavit on an annual basis confirming the following:

•Annual total revenue of R10 million or less; and

•Level of Black ownership.

Any misrepresentation in terms of the above paragraph constitutes a criminal offense as set out in the Broad Based Black Economic Empowerment Act as amended.

Exempted Micro-Enterprises are allowed to be measured using the QSE Scorecard should they wish to maximise their points and move to a higher procurement recognition level. In a competitive broad-based BEE sensitive environment Exempted Micro-Enterprise operating companies will probably be better off electing to be measured using the QSE Scorecard.

Start-up Enterprises

Start-up Enterprises may be measured as Exempted Micro-Enterprises for the first year following their formation or incorporation. This provision applies regardless of the expected total revenue of the start-up enterprise.

A start-up enterprise is defined as a recently formed or incorporated entity that has been in operation for less than one year, and excludes entities that are merely a continuation of a pre-existing entity.

This means that Start-up Enterprises are deemed to have a broad-based BEE Status of Level Four Contributor having a broad-based BEE procurement recognition of 100 per cent under this paragraph.

Start-up Enterprises must submit a QSE Scorecard when tendering for any contract with a value higher than R10 million but less than R50 million. For contracts above R50 million they should submit the Generic Scorecard.

Qualifying Small Enterprise (QSE)

Entities with an annual Total Revenue of between R10 million and R50 million qualify as a Qualifying Small Enterprise (QSE).

Enhanced broad-based BEE recognition level for QSE.

•Qualifying Small Enterprise which is 100% black owned qualifies for a level one broad-based BEE recognition level.

•QSE which is at least 51% black owned qualifies for level two broad-based BEE recognition level.

•Such QSEs are only required to obtain a sworn affidavit on an annual basis, confirming the following:

–Annual total revenue of R50 million or less; and

–Level of black ownership

Generic Scorecard

The so-called Generic Scorecard is applicable to all entities to be measured under the Amended Codes having an annual turnover exceeding R50 million.

All entities with a turnover exceeding the R50 million must apply the Generic Scorecard as set out in the Code series 100 to 500. Each of these Generic Scorecard Elements are addressed in detail in this book.

It is however inconceivable that an entity whose turnover exceeds R10 million should have the same onerous measuring criteria as a large multi-billion listed company.

BROAD-BASED BEE ELEMENTS AND SCORECARD POINTS

The Amended Codes and Scorecard centre around five Elements that are used to measure quantitatively and qualitatively broad-based BEE compliance. The five elements set out in the Generic (Code series 100-500) Scorecard are:

Ownership Element (Code 100)

The Ownership Element measures the effective ownership of entities by black people.

Management Control Element (Code 200)

The Management Control Element, as set out in Code series 200, measures the effective governance and management control of entities by black people.

Skills Development Element (Code 300)

The Skills Development Element, as set out in Code series 300, measures the extent to which employers carry out initiatives designed to develop the competencies of black employees.

Enterprise and Supplier Development Element (Code 400)

The Enterprise and Supplier Development Element, as set out in Code series 400, measures the content to which entities buy goods and services from Empowering Suppliers with strong broad-based BEE recognition levels. This element also measures extent to which entities carry out supplier development and enterprise development initiatives intended to assist and accelerate the growth and sustainability of black entities.

Socio-Economic Development Element (Code 500)

The Socio-Economic Development and Sector Specific Contributions Element as set out in Code series 500, measures the extent to which entities carry out initiatives that contribute towards Socio-Economic Development or Sector Specific initiatives that promote access to the economy for black people.

Generic Scorecard Points

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Some people would argue that broad-based BEE is seeking to extract uncompensated value from others through economic discrimination and evolving crony capitalism in an environment of economic discrimination. This argument will be even stronger, by some, under the new Codes of Good Practice with the emphasis back on ownership.

Value destruction occurs where redistribution takes place other than through economic growth. This issue remains the subject of on-going debate within the ruling political party, and will continue to be analysed throughout the implementation of broad-based BEE. In future, a good measure of economic growth will be attributable to the advancement in black individuals’ net asset value (including equity), notwithstanding that such capital may be encumbered to borrow funds to grow further.

The new Codes of Good Practice attempt to encourage this approach through phased implementation of certain Scorecard targets over a period. The ten year period, envisaged in the 2007 Codes, was not reached. In October 2013 a complete new set of Codes of Good Practice were released with a 12 month transitional period which has been further extended to 30 April 2015. Many say Government should have waited for the ten year period to lapse (2017) before changing the course of the broad-based BEE landscape. Government is under pressure from voters to ensure that the country transforms. They have taken the view that the way to do so is to place greater emphasis on black ownership, supplier and enterprise development.

Rather than working towards economic growth, people have been prone to bask in the glory of the