The draft Regulations to the Broad-Based Black Economic Empowerment (“BEE”) Act, 2003, published on 17 February 2016 contain some alarming new developments which, if they are finalised in their current form, will severely impact on commercial activities and foreign investment in South Africa.

Firstly, the draft Regulations propose that all organs of state must develop a preferential procurement system for awarding tenders and qualification criteria for awarding licences and other authorisations which:

  • use the BEE status levels of level 1 to level 8;
  • give “more consideration” to  entities that are at least 51% black-owned; and
  • ensure that the information is verified by a verification professional.

In addition, an organ of state may apply to the Minister to “exceed” these qualification criteria for the purposes of accelerating transformation.

In practice, what this will achieve will be a complete disregard of the multi-faceted, broad-based elements of BEE in favour of an over-riding criteria being the achievement of 51% or more black ownership.  While currently only entities falling within the EME or QSE categories (i.e. with an annual turnover below R 50 million) are given preferential treatment for being 51% or more black-owned, these Regulations will ensure that entities of all sizes are primarily judged on whether they are 51% black-owned or not.

These BEE Regulations are at odds with the Regulations to the Preferential Procurement Policy Framework Act (“PPPFA”), which set out the procurement policy to be applied by organs of state and major public entities.  Essentially, the PPPFA Regulations state that once a bidder has met the qualification criteria for functionality and local content, its bid must be assessed based on a system that allocates 90% to price and only 10% to its BEE status level.  This is for tenders in excess of R 1 million.

The BEE Regulations do not explain how this conflict is to be resolved.  However, the trumping provision in the BEE Act states that if there is any conflict between the BEE Act and any other law in force immediately prior to the date of commencement of the BEE Amendment Act, the BEE Act will prevail.

Secondly, the BEE regulations will, once finalised, require all “major BEE transactions” (with a threshold still to be determined) to be registered with the newly created BEE Commission.  The Commission will then assess the transaction to determine its “adherence to the BEE Act” and will advise the parties of any concerns and of any “steps required to be taken by the parties to remedy the transaction, failing which the BEE Commission may proceed to initiate an investigation in terms of section 13F(1)(d) of the BEE Act”.

Therefore the transacting parties could be faced with huge uncertainty in the conclusion of any contract with a third party potentially setting contractual terms for them before the deal can be finalised.

It is not clear from the Regulations or the BEE Act what constitutes a "BEE transaction", but presumably this will encompass all transactions involving sales of equity to black persons or black entities, enterprise development transactions and socio-economic development transactions.

Thirdly, the BEE Regulations enhance the BEE reporting obligations of listed companies imposed by the BEE Act and require that listed companies must now submit an annual compliance report to the BEE Commission reflecting its score on the 5 elements of the scorecard and “any other specific element”. The BEE Commission may conduct a “site visit” to verify the information submitted to it.

Fourthly, the BEE Commission has been given wide powers of search and seizure in terms of the Regulations and the BEE Act to investigate any complaint lodged with it regarding an alleged BEE contravention.

Lastly, any person may apply to the BEE Commission to inspect any of the records or reports held by it unless those records or reports are confidential, which is a matter determined by the Commission itself in terms of the BEE Act.

Interested parties have until 16 March 2016 to comment on the draft Regulations.