Colour coding

The Broad Based Black Economic Empowerment (BBBEE) Act of 2003 essentially applies to government departments, public entities or state-owned enterprises and organs of state, ie the public sector. It does, however, have a knock-on effect on the private sector because indirectly the government is able to put pressure on the private sector to achieve its goals of transforming the economic landscape of the country.

During 2003, the South African government developed and released a strategy document defining BBBEE as “an integrated and coherent socio-economic process that directly contributes to the economic transformation of South Africa and brings about significant increases in the numbers of black people that manage, own and control the country’s economy, as well as significant decreases in income inequalities.”

The wide-ranging BBBEE process, therefore, includes elements of HR development, employment equity, enterprise development, preferential procurement, as well as investment, ownership and control of enterprises.

Why the need for BBBEE codes?
The BBBEE strategy document recognised that, with debt equity financing, black people were sold shares in corporations for astronomical amounts of money and with huge interest on loans secured to pay for the shares. Those black people who were fortunate enough to get loan financing were tied to these huge debts for years.

Another obstacle facing a black potential shareholder in the past was discrimination in the access to finance. As black people were economically unable to raise finance, any approach to a commercial finance institution was met with scepticism, as black people historically had few assets that could be used as security. Of course, the black persons (a select few) who were economically sound were able to purchase equity in large corporations relatively easily and they became the ‘darlings’ of black economic empowerment, creating a thriving and influential black upper class. This became an untenable situation and the South African government needed to set proper guidelines.

The BBBEE Codes went through two phases before their final versions were accepted by parliament. The drafting of Phase 1 commenced in December 2004 and Phase 2 in November 2005. The full set of codes (Phases 1 and 2) were finally approved in December 2006 and gazetted on 9 February 2007.

Impact of the codes
The BBBEE Codes are very specific in their application and the four grey areas that raised questions during the drafting period have now been put to rest, these being the status of verification agencies, fronting practices, BBBEE in multinational enterprises and compliance with the codes. Companies are now able to rate themselves according to a score under the generic scorecard and use other elements, such as skills development and employment equity, and rely not only on black equity ownership.

Verification of one’s suppliers became crucial with the introduction of the BBBEE strategy during 2003. This created an anomaly because it saw the proliferation of various so-called verification agencies that were used by both the South African government and private sector companies. No guidelines had yet been set and each verification agency used and applied different standards and methodologies, and certain entities showed a preference for certain verification agencies.

The South African National Accreditation System, (Sanas) has been tasked with the accreditation process of verification agencies as well as to develop accreditation standards. Sanas is a public entity that operates under its own constitution and is an independent, non-profit organisation with its office in Pretoria, South Africa. It is recognised internationally and its involvement in the verification process will be to create a single set of standards and to provide for the regulation of the industry.

With the advent of pressure on entities to implement BBBEE, one of the objectives was fronting, which entailed using black persons as fronts in an entity presenting a shareholder register that appears favourable. During 2005 the Department of Public Works lost R414m (£28.94m) to companies with no BBBEE status at all.

Fronting practices by unscrupulous companies has resulted in all entities, whether South African or multinational, now having to have an accreditation certificate (from a verification agency) before they do business with government. In order to obtain an accreditation certificate, companies have to spend another few hundred rand, which could be anything between R3,500 (£244.64) and R106,500 (£7,444), before being eligible to submit a tender. The process is therefore one of prevention rather than cure. An accreditation certificate goes a long way towards saving the South African government R414m, which is extremely difficult to recover once lost.

Multinational enterprises
The BBBEE Codes now clarify one major grey area for multinational enterprises that have operations within South Africa or that would like to commence operations in the country. Many questions have been asked as to whether they would need to sell equity to black persons in order to comply. The problem faced by multinational enterprises operating within South Africa, but wholly owned by the holding companies situated outside South Africa’s borders, is that the local operation is not in a position to dispose of any equity held. As the BBBEE Codes require immediate compliance, many of these enterprises would be in an invidious position.

One of the statements in the final BBBEE Code series, the Recognition of Equity Equivalents for Multinationals (Statement 103), has brought relief to the concerns of local multinational enterprises. By means of equity equivalent programmes, a multinational can now score points under the ownership indicator of the generic scorecard and be deemed to have disposed of equity to a black shareholder. However, only equity-equivalent programmes approved by the minister of trade and industry will be recognised as a contribution to this indicator. Local multinational enterprises may make written submissions to the minister in this respect of other programmes they would wish to have recognised.v
Current examples of recognised programmes include:
• the Accelerated and Shared Growth Initiative for South Africa (AsgiSA);
• the Joint Initiative for Priority Skills (Jipsa), part of the AsgiSA;
• the National Skills Development Strategy, a new strategy that outlines the strategic objectives and success indicators for skills development until 2010, which is run under the auspices of the Department of Labour; and
• any programmes that promote enterprise creation in respect of cooperatives that are:
– more than 50 per cent owned by black people; or
– more than 50 per cent owned by black women; or
– more than 50 per cent owned by members of black designated groups.

In addition to scoring points under the ownership indicator, multinational enterprises may also score under the other elements, such as ‘management control’, ‘employment equity’ and ‘socio-economic development’. When calculating any contribution towards the ownership element, it is only measurable against the value of its South African operations, meaning that any non-South African operations will have to be excluded from the calculation.

Many companies have been concerned by the period within which they need to become compliant. At the moment the BBBEE Act does not empower government to take action against any non-compliant entity that refuses to recognise the importance of the BBBEE Codes. The Department of Trade and Industry is looking at amending the BBBEE Act in order to compel non-compliant companies to adhere to the codes. For now, only companies that do business with government have to be compliant and may be punished for non-compliance. A non-compliant application for business with government is simply turned down.

The BBBEE Codes are applicable immediately; however, companies are given a year from the publication of the final codes to either use the generic scorecard or the transitional scorecard. The transitional scorecard may be beneficial to certain entities as it allows them to be rated only on the ownership and management control elements. After this transitional period, all entities, excluding the qualifying small enterprises, are obliged to use the generic scorecard for compliance measurement under the codes. The minister of trade and industry is empowered to adjust thresholds after the first year of implementation of the codes, namely January 2008.

Jay-Ann Jacobs is a director at Cliffe Dekker