South Africa: Black Economic Empowerment - Revised BEE Codes

The Department of Trade and Industry (“the Department”) has embarked on a review of the black economic empowerment legislation.  On 9 December 2011, the Minister of Trade and Industry (“the Minister”) published, for public comment, the Broad-Based Black Economic Empowerment Amendment Bill 2011 (“the BEE Bill”).  The BEE Bill introduces changes to the Broad-Based Black Economic Empowerment Act No. 53 of 2003 (“the BEE Act”), which includes inter alia criminalising fronting, the establishment of a BEE Commission and the establishment of a regulatory authority for the BEE verification industry.  The 60 day period for commenting on the BEE Bill has closed and we await the promulgation of the BEE Bill into law.

On 5 October 2012, the Minister further published proposed amendments to the Black Economic Empowerment Codes of Good Practice (“the BEE Codes”).  Interested parties have 60 days to comment on the draft amendments.  A high level summary of selected proposed amendments are set out below (with their impact in italics):

• The seven elements of the BEE scorecard have been reduced to five elements.  The Ownership, Management Control (which now includes the previous employment equity elements), Skills Development and Socio-Economic Development Elements remain but the point weightings of the first three mentioned scorecards increase by five points each while the Socio-Economic Development element remains at five points.  The Employment Equity and Preferential Procurement elements are deleted from the scorecard.  The Enterprise Development Element remains, but now includes supplier procurement (previously preferential procurement) and supplier development.  The name of this new element is Enterprise and Supplier Development and score for this new element is 40 points.  Even though these amendments seem radical, all elements of the previous generic scorecards remain, however, the Employment Equity Elements have now been consolidated into the Management Control element and the previous Preferential Procurement element has been consolidated into the new Enterprise and Supplier Development element.  Certain of the weightings have changed, these changes are set out in more detail below.  The new generic scorecard is set out below:

• It should be noted that the new scorecard is out of 105 points plus there are 8 bonus points to be achieved on the Skills Development and Enterprise and Supplier Development scorecards.

• The points per BEE Contributor Level Status has also been amended as set out below.  More points are now required to be recognised as a level three, four or five Contributor, for example, a Level Three Contributor required between 75 and 85 points previously on the scorecard, now the points required is between 90 and 95.

• The turnover threshold for an entity to be recognised a Qualifying Small Enterprise (“QSE”) has been raised from between R5 million and R35 million to between R10 million and R50 million.  This means more entities will qualify as QSE’s.  The Revised Codes have seemed to introduce a new compliance threshold/scorecard for QSE’s, however, these were not published with the Revised Codes.

•  Exempted Micro Enterprises (entities with a turnover of less than R10 million) that are more than 50% black-owned will automatically have a Level Two BEE Status and those that are 100% black owned will automatically have a Level One BEE Status.  There is now an added elevation of the status of black Exempted Micro Enterprises, this means that these entities need not comply with the other elements of the scorecard as long as their turnover remains under R10 million.

• Non-compliance with the threshold requirements for the Ownership element, Skills Development element and Enterprise and Supplier Development element will result in an entity’s BEE status level being discounted by two levels.  The details of these thresholds are set out in the respective Code Series for these elements and are summarised below.  In the past, the BEE Codes allowed for a balanced scorecard, it was possible to attain an acceptable BEE status without complying with all seven elements, provided that a high enough score was obtained on elements that were complied with.  Now this is no longer the case, non-compliance with certain aspects of the three abovementioned elements will result in a decreased score which is fairly significant.  For instance, if an entity reaches a Level 5 BEE status without complying with the threshold Ownership requirements (see below for more detail), its BEE status will be reduced to a Level 7.  The same rule applies to QSE’s that do not comply with the minimum threshold requirements for Ownership or either of the Skills Development Element or the Enterprise and Supplier Development Element, the only difference is that the discount is limited to one BEE status level and not two as with the generic scorecard.

• The framework for BEE verification agencies are no longer regulated by the BEE Codes, these will be regulated by the BEE Act, once the BEE Bill is brought into law.  BEE verification agencies will now be regulated by the Independent Regulatory Board of Auditors under the Auditing Professions Act No. 26 of 2005.

The individual scorecards for the five elements have also been amended, the more striking amendments can be summarised as follows:

• ownership

  • The three bonus points have been removed for black new entrants, employee ownership schemes, broad-based ownership schemes and co-operatives.  However these types of broad-based black participants can still contribute five points (previously only one point) if certain compliance targets are met which are set at between 2% and 3%.  In essence, the new scorecard provides more points to be obtained if one of these types of broad-based participants are owners, and the threshold to obtain these points have decreased from 10% (to previously obtain the bonus points) to between 2% and 3%.

  • The points for exercisable voting rights have been increased from three points to four points if the compliance target of 25% plus one vote is met.

  • Points under net value has increased from seven points to eight points and the one point for ownership fulfilment has been dropped.

  • The minimum threshold requirement for ownership to be met, so as to ensure that the discounting of BEE level status does not apply, is that the measured entity must achieve a minimum of 40% of the annual net value prescribed in the BEE Codes.  BEE deals that are heavily burdened with debt may find the discounting of two BEE levels applying to them.

  • A measured entity that applies the Modified Flow-Through Principle cannot also benefit from the Exclusion Principle, and vice versa.

  • There are revised rules which apply to the recognition of Private Equity Funds.  These amendments are substantial and are not covered herein in any detail.  

• management control

  • As previously stated above, the employment equity scorecard has now been incorporated into the management control scorecard i.e. the measurement of black senior management, middle management and disabled employees.  The measurement of junior management has been excluded.

  • The concept of the adjusted recognition for gender has been deleted from the management control scorecard.  There is no longer a weighting placed on black females being on the board, in top, senior or middle management.  Compliance targets are measured based on the percentage that the black directors/employees bear to all other directors/employees in that category.

  • Measurement is now based on the overall demographic representation of black people, i.e. Africans, Coloureds and Indians.

  • The measurement of voting rights of board members have now been broken down into black board members (2 points), black female board members (1 point), executive black board members (2 points) and executive black female board members (1 point).  The compliance targets for all of these are now based on a percentage of the aforegoing categories in relation to all board members.  The compliance target for black board members remains 50%, while the new compliance target for black female board members (executive and non-executive) is 25%.

  • The compliance targets for top management and senior management is now 60% black and 30% black female and for middle management it is 75% black.  The compliance target for black disabled employees remains 2%.  

• skills development

  • The compliance target has been increased from 3% to 6%.

  • The adjusted recognition for gender is no longer used.

  • Measurement is also now based on demographics as with the management control scorecard.

  • The minimum threshold requirement for skills development to be met, so as to ensure that the discounting of BEE level status does not apply, is that the measured entity must achieve a minimum of 40% of the target set out in the skills development scorecard.

  • There are 5 bonus points if 100% of black people on learnerships are absorbed as employees by the measured entity or an entity in the same industry.

  • A number of other elements on the skills development scorecard have been amended, as well as a number of the key measurement principles.  These are not dealt with herein.  

• enterprise and supplier development

  • This new scorecard merges the previous preferential procurement scorecard and the enterprise development scorecard.

  • There are a number of detailed changes to the points allocated and weightings.  For instance, only value adding suppliers (not all suppliers) are now measured, and 8 points (instead of 12 points) are allocated if 80% of a measured entity’s procurement is from such suppliers (previous target was 70%).  This scorecard now provides less points based on the attainment of a higher compliance target.  There are a number of other changes to the scorecard which are not dealt with herein.

  • Measured entities are now required to spend 2% of their net profit after tax annually on supplier development and a further 1% of the net profit after tax on enterprise development and sector specific programmes.  These two categories together make up the 15 points that was previously attainable under Enterprise Development.

  • The minimum threshold requirement for Enterprise and Supplier Development to be met, so as to ensure that the discounting of BEE level status does not apply, is that the measured entity must achieve a minimum of 40% on three of the specific sub-categories on this scorecard.

  • There are also three bonus points for certain additional categories.

  • There are a number of changes to the key measurement principles for preferential procurement and enterprise development, however these are not set out herein.  

• socio-economic development

  • An average is no longer applied to socio-economic spend, 1% of the net profit after tax is required to be spent annually.

  • 100% of the funds must now benefit black people and not 75%.

In addition to the above, a number of new definitions have been introduced and a number definitions have been amended.

Save as amended in the Revised BEE Codes, the balance of the BEE Codes will remain as is.  It is not clear at this stage when the BEE Bill and the Revised BEE Codes will become law or whether any further amendments are possible pursuant to comments received by the Department.  We can safely assume that the BEE Bill and the Revised BEE Codes will in all likelihood become law at the same time.  The various sectoral charters and sectoral codes should be next on the Department’s agenda to bring them in line with the finalised Revised BEE Codes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.