On 11 October 2013 the Department of Trade and Industry (DTI) published the new Codes of Good Practice for the measurement of broad-based black economic empowerment (B-BBEE) (the Revised Codes) as part of what appears to be the start of a new, more stringent era of black economic empowerment (BEE).
The DTI Codes currently in force (the Current Codes) were published on 9 February 2007 to specify the elements of an enterprise that will be measured for purposes of BEE; the method of measuring each element; the targets against which enterprises' BEE contributions will be assessed; and to provide for the independent verification of an enterprise's BEE status measured against a Generic Scorecard. Each element listed in the Generic Scorecard carries a weighting used to calculate an enterprise's overall score.
Although entities may elect to be measured against the Revised Codes immediately, a 12-month transitional period is provided, with entities having until 11 October 2014 to comply with the new scorecards.
One of the main changes brought about by the Revised Codes is the reduction of seven elements of the Generic Scorecard contained in the Current Codes to only five elements: ownership; management control (which now includes the previous employment equity element); skills development; enterprise and supplier development (a consolidation of the previous preferential procurement and enterprise development scorecards); and socio-economic development.
The Revised Codes also introduce the concept of priority elements to the Generic Scorecard. If an entity does not meet certain sub-minimum targets for the three priority elements, namely ownership, skills development and enterprise and supplier development, it will automatically be downgraded one level in its BEE rating.
The weighting of the ownership element has increased, from 20 to 25 points out of 105, and the criteria has been significantly amended, with one of the main amendments being that in order for a deal to qualify for ownership points, at least 40% of the net value of the enterprise must be held by black shareholders. This new, stricter measurement of ownership is likely to make it more difficult for entities to maintain their BEE rating.
The turnover threshold for an entity to be recognised as a qualifying small enterprise (QSE) has been raised from between R5m and R35m to between R10m and R50m. The Revised Codes also now include "enhanced recognition criteria", whereby if a QSE is 100% black-owned, it automatically qualifies as a level one BEE contributor, with a QSE that is at least 51% black-owned qualifying for level two BEE contributor status. The QSE scorecard has been discarded and QSEs are now measured in terms of all five elements, with QSE's only required to comply with the minimum threshold requirements for ownership as a priority element and either of the other two priority elements in order to avoid the penalty of being downgraded one level.
Under the Revised Codes, QSEs are no longer required to undertake the verification process and acquire verification certificates from ratings agencies. They need only obtain a sworn affidavit on an annual basis confirming that their annual total revenue is R50m or less and what their level of black ownership is. The threshold to be exempt entirely from all forms of BEE has been increased from R5m to R10m.
In the Current Codes as well as the draft Revised Codes of October 2012, the DTI emphasised the importance of a Value Adding Supplier (VAS). A VAS is one whose net profit before tax combined with its total labour cost is equal to or more than 25% of its annual turnover. This means that if a business does not meet the criteria, it will be regarded, to some extent, as one that does not add value to the South African economy.
The concept of a VAS has now been replaced by the term "empowering supplier", which is defined as "a broad-based BEE-compliant entity which can demonstrate that its production or value adding activities take place in the country". The empowering supplier concept focuses on four mechanisms: the development of local production, job creation, localisation of business activities, and skills transfer to small black businesses whose annual turnover is less than R50m. Large businesses should aim to comply with three out of the four mechanisms, while QSEs need only comply with one.
While the Minister of Trade and Industry, Dr Rob Davies has branded the Revised Codes a "new beginning", the change will be futile unless it is followed by an equally significant change in sector-specific transformation charters.
Under the Current Codes, an entity can elect whether it wishes to be measured against its specific sector's scorecard or the Generic Scorecard provided in the DTI Codes. The Revised Codes stipulate that an entity must be measured in terms of any BEE code that applies to the sector in which such an entity operates. The Revised Codes have, however, left the charters regime unchanged, with Davies indicating that revisions to statements relating to charters will be published in the near future.
Davies has stated that sectors that have gazetted sector charters will have 12 months to align their charters to the Revised Codes, failing which the generic codes will apply. This requirement is, however, neither formally captured in the Revised Codes nor in the new B-BBEE Bill. This means that a significant portion of the economy, including the mining, financial and the ICT industries are excluded from the new, tougher Revised Codes.
Aligning sector charters to the B-BBEE Codes has always proved challenging and most sectors are adamant about retaining their targets and principles. The gazetting of the Financial Sector Charter (FSC) in November 2012, for instance, means that the "once empowered, always empowered" principle stands where the financial industry is concerned, whereas the rest of the economy will be required to adhere to strict vesting requirements. Similarly, the ICT charter has maintained the controversial R7.5bn cap principle, allowing large corporations that have done equity transfer deals valued at R7.5bn to claim full ownership points irrespective of the real market value of the company.
While private enterprises are not obliged by law to meet the targets specified in the Current Codes (or the Revised Codes), insofar as they seek a licence, concession, contract or partnership agreement with any organ of state or public entity, they will most likely be prejudiced by their failure to ensure adequate B-BBEE status, as B-BBEE is one of the factors which will be taken into account in deciding whether or not to award government contracts. The commercial pressure to implement BEE is also "trickled down" to entities that do not themselves seek any such licence, concession or contract, by way of the procurement element of BEE. The element encourages measured enterprises to procure goods and services from enterprises that have good B-BBEE credentials, because this will improve the B-BBEE status of the measured enterprise.
At the National Summit for B-BBEE in October 2013, the DTI explained that "the new Codes of Good Practice are aimed at fostering real black economic empowerment in the economy, rather than empowerment on paper". The revisions contained in the Revised Codes could fundamentally change the BEE fortunes of entities who do not adopt a proactive approach to their current B-BBEE score.