BEE Codes Clear Confusion

The Codes of Good Practice clearly set out the requirements of empowerment deals and explain in more detail the empowerment scorecard.

The muddy waters of broad-based black economic empowerment (BEE) are clearing with the release of the first phase of the final Codes of Good Practice for BEE. This is expected to end uncertainty about empowerment deals, and boost economic growth.

Released early last month by the Department of Trade and Industry (DTI), this follows the Broad-Based Black Economic Empowerment Act of 2003 and the department’s BEE Strategy Document. That document gave an outline of the broad-based BEE scorecard, together with weightings, but did not detail measurement principles and how the scorecard was to be applied.

Now, however, the Codes of Good Practice contain frameworks for determining BEE, including the generic scorecard, guidelines and BEE agencies, and how the different parts of the scorecard are to be measured in companies.

Overview Of The Codes

Debated since a draft was released in December 2004, the codes ensure that the days of high-profile black business people representing faceless members of “broad-based” groups in empowerment deals are numbered.

They also aim to ensure that empowerment benefits not only the black elite but also women, workers, youth, people with disabilities and people living in rural areas. And they strongly discourage “fronting”, or schemes that claim to be broad-based but which are found to be wanting when their composition is unpacked.

The new codes relax the regime for empowerment partners who borrow heavily to finance their stakes. In previous drafts, eight of a possible 20 points on the ownership scorecard were withheld until debt was repaid. This is now reduced to one, with seven points accruing gradually as repayments are made.

A revised point-scoring formula is included in the new codes. It encourages companies to enter into deals with groups that are not necessarily 100 percent black-owned.

The change allows a company whose empowerment is being measured to treat one 51 percent-or-more black-owned company in its corporate structure as if it was 100 percent black owned, increasing the points awarded.

Aim Of The Codes

The codes are issued in terms of Section 9 the Broad Based Black Economic Empowerment Act of 2003, with the aims of: transforming South Africa’s economy to allow meaningful participation by black people changing the racial profile of companies’ owners, managers and skilled professionals increasing the ownership and management of companies by black women, communities, workers, co-operatives and others, and helping them gain access to more economic opportunities promoting investment that leads to broad-based and meaningful participation in the economy by black people helping rural and local communities get access to economic opportunities, and promoting access to finance for black economic empowerment.

In terms of the Act, “black people” are African, coloured or Indian South African citizens, and those entitled to become citizens. Once gazetted, the Codes of Good Practice will be binding on all organs of state and public entities.

In terms of the BEE Act, the government must apply the codes when entering into the following decisions: procurement, licensing and concessions, public-private partnerships, and the sale of state-owned assets or businesses. Private companies must apply the codes if they want to do business with any government enterprise or organ of state – that is, in order to tender for business, apply for licenses and concessions, enter into public-private partnerships or buy state-owned assets.

Companies are also encouraged to apply the codes in their interactions with one another because preferential procurement will effectively impinge on most private sector enterprises throughout the chain of supplier, from first-tier suppliers to the government downwards.

Also, BEE charters drawn up by the different industries will have to comply with the Codes of Good Practice if they are to be passed into law. Once passed into law, the codes will be reviewed by the minister of trade and industry after 10 years.

The 10 codes deal with the different elements of BEE, how they are to be weighted and how BEE compliance is to be regulated.

Code 000 – A framework for the measurement of BEE, including the generic BEE scorecard, which gives a general weighting to companies’ BEE status in terms of management, ownership, skills development and so on; guidelines for the development and gazetting of industry charters; and the approval, accreditation and regulation of BEE verification agencies.

Code 100 – Measuring the ownership element of the BEE scorecard, including the general BEE ownership scorecard. Code 200 – Measuring the management and control element of the scorecard. Code 300 – Measuring employment equity. Code 400 – Measuring skills development. Code 500 – Measuring preferential procurement. Code 600 – Measuring enterprise development. Code 700 – Measuring the residual element. Code 800 – Industry sector charters. Code 1000 – Measuring BEE in small enterprises. Codes 000 to 200 fall into phase one.

The drafting of phase two of the codes, dealing with the remaining five elements of the generic scorecard as well as issues such as fronting and the measurement of small, medium and micro enterprises (SMMEs), began in April. It will go through 60 days of public comment before it is finalised. Both phases will be passed into law in 2006.

Code 800, BEE industry charters, will be included in the Codes of Good Practice as and when each industry charter is passed into law, after the gazetting of phases one and two of the codes.

The Generic BEE Scorecard

The generic scorecard is a way to measure the BEE status of a business, giving it a score out of 100.

Direct empowerment: According to the DTI’s BEE Strategy Document, economic empowerment must include increasing black people’s ownership and control of the economy. A significant proportion of their ownership of assets and enterprises must be a controlling interest, reflecting genuine participation in decision-making and the assumption of real risk.

The emphasis on control does not detract from the role passive ownership of assets through pension and provident funds, unit trusts, and other collective investment schemes can play in BEE. But without active participation, investors have little control over the direction of investment decisions. Passive ownership of enterprises can also lead to “fronting”.

Measurement of the ownership element is set out in Code 100, while Code 200 deals with determining management and control.

Human development and employment equity: Given the apartheid legacy of systematic labour market discrimination and inferior education, accelerated skills and advanced professional skill development is important.

The measurement of how well a company complies with employment equity legislation is set out in Code 300, while the formula for determining the skills development portion is set out in Code 400.

Indirect empowerment: Preferential procurement by the state and the private sector is an effective and efficient instrument to drive BEE as it provides emerging black enterprises with opportunities to expand their output.

Criteria for the preferential procurement score are set out in Code 500. Enterprise development can involve either investment in black-owned and black-empowered enterprises, or joint ventures with black-owned and black-empowered enterprises that result in significant skills transfer. Code 600 deals with enterprise development.

The residual 10 percent on the scorecard is left to sectors and enterprises to determine. It could include infrastructural support to suppliers in the same community, labour-intensive production methods, investment in enterprises operating in poorer rural communities, and spending on workers’ housing, transport and health care. Determining the residual score is explained in Code 700.

The codes provide a standard framework for the measurement of broad-based BEE across all sectors of the economy. This means that no industry will be disadvantaged over another when presenting their BEE credentials. The intention of the Codes of Good Practice is to level the playing field for all by providing clear and comprehensive criteria for the measurement of broad-based BEE.

For more detailed information on the Codes of Good Practice, go to the Department of Trade and Industry website. The site also offers the full text of the Broad- based Economic Empowerment Act of 2003 and the department’s Black Economic Empowerment Strategy Document.