Introduction
This article aims to provide a basic overview on the workings of Broad-Based Black Economic Empowerment (hereinafter “B-BBEE”), having particular regard to the Codes of Good Practice on Broad-Based Black Economic Empowerment published in terms of section 9(1) of the Broad-Based Black Economic Empowerment Act No. 53 of 2003 (hereinafter “the Act”), as amended from time to time (hereinafter the “Generic Codes”).
Background
The Act, its generic and industry sector codes (hereinafter “its Codes”) were implemented into South African legislation with the primary goal of alleviating the effects of the historic exclusion of black people from participating in the economy. The Act and its Codes provide a framework in which a firm’s B-BBEE rating may be measured. Therefore, there are no legal repercussions or consequences, should an entity not comply with certain ratings. However, business in South Africa is largely dependent on a firm’s compliance with B-BBEE legislation.
Moreover, and with specific reference to the private sector, it is becoming increasingly imperative that entities who tender for business in South Africa are B-BBEE compliant, in order to render these entities as superior to competitors which tender for the same business. Entities who use suppliers that have B-BBEE ratings have an opportunity to increase their own B-BBEE ratings. Naturally, an entities B-BBEE status is an inherent and vital factor in assessing its suitability in tender processes.
An entity’s B-BBEE status is assessed by way of a points system, which is scored by measuring compliance against five B-BBEE elements. Depending on the points achieved under each element, a firm’s level of contribution is determined, with level 1 being the highest possible score, and level 8 being the lowest possible score on the B-BBEE scorecard. The total achievable score on the B-BBEE generic scorecard amounts to 105 points, which points are allocated as follows:
Ownership (25 points);
Management Control (15 points);
Skills Development (20 points);
New Enterprise and Supplier Development (40 points); and
Socio-Economic Development (5 points).
B-BBEE Measurable Enterprises
The codes differentiate between measured entities, with each of these entities having their own applicable B-BBEE scorecard and points allocation. Firstly, an Exempted Micro Enterprise (hereinafter “EME”) is defined as any enterprise with an annual total revenue of R10,000,000.00 (Ten Million Rand) or less. For as long as an EME’s turnover remains within this revenue threshold, it shall have a B-BBEE status of at least a Level Four Contributor, irrespective of its shareholding(s) by black persons. Regardless of the expected total revenue of any Start-Up enterprise, it will be measured as an EME for the first year following its incorporation.
Additionally, a measured entity with an annual total revenue of between R10, 000, 000.00 (Ten Million Rand) and R50, 000, 000.00 (Fifty Million Rand) is considered as a Qualifying Small Enterprise (“QSE”) and is measured against the QSE scorecard, which is distinguishable from the generic scorecard points allocation. Any enterprise with an annual total revenue of R 50,000,000.00 (Fifty Million Rand) and more qualifies as a Large Enterprise.
Key Elements of B-BBEE
According to the Codes, Ownership, Skills Development and New Enterprise and Supplier Development have been identified as three priority elements in achieving the purpose of the Act. Thus, the Codes have set out subminimum requirements applicable in these elements, namely Ownership (being 40% of the net value targets, which targets refer to the portion of black ownership in an entity which ownership is unencumbered by debt), Skills Development (being 40% of the total weighting points on the generic scorecard, i.e. 40% of 20 possible points) and Enterprise and Supplier Development (being 40% for each of the three indicators that fall under the Enterprise and Supplier Development scorecard, namely Preferential Procurement, Supplier Development and Enterprise Development). The Codes require that a Large Enterprise comply with all ofthe subminimum requirements in the priority elements, whereas a QSE need only meet the aforesaid subminimum requirements in Ownership and either one of Skills Development or Enterprise and Supplier Development. Should a Large Enterprise and QSE fail to comply with these sub-minimums, they will be subject to an automatic downgrade in B-BBEE status.
B-BBEE Fronting Practice
According to the Act, a fronting practice is any form of conduct that seeks to circumvent, undermine and/or frustrate the achievement of the objectives of the Act. These practices may include (but are not limited to) the appointment of black individuals to an enterprise, whilst excluding their substantial participation in the core activities of that enterprise. This practice is often referred to as “window dressing”. Alternatively, where economic benefits arise from the B-BBEE status of an enterprise, and these benefits do not flow back to black people in the ratio as specified and regulated in law.
Should an entity be engaged in fronting practices, the Department of Trade and Industry may disregard that entity’s B-BBEE scorecard until such time as the prohibited practice is corrected.
Conclusion
It is becoming increasingly imperative that commercial entities comply with the requirements under the B-BBEE Act and its codes, in order to increase their competitiveness in the market place. However, B-BBEE legislation can be complex and easily misinterpreted.
As such, it is advisable that, when considering a possible re-structure of your business within a specific industry, in order to achieve the desired B-BBEE compliance, that you do so with a firm of attorneys who understand the intricacies of such legislation and accordingly, are able to implement a tailored structure for the desired outcome.
Written by Tayla Bruce, Ayanda Katjitae and Charlotte Clarke
