Codes for better BEE
The Department of Trade and Industry has released the final Codes of Good Practice for black economic empowerment (BEE), which will end uncertainty over empowerment deals while boosting South Africa's economic growth.
The release of the codes follows the Broad-Based Black Economic Empowerment Act of 2003 and the BEE Strategy Document drawn up by the Department of Trade and Industry (DTI). That document gave an outline of the broad-based BEE scorecard, together with weightings, but didn't detail measurement principles and how the scorecard was to be applied.
The Codes of Good Practice contain frameworks for the determining BEE, including the generic scorecard, guidelines and BEE agencies, as well how the different parts of the scorecard are to be measured in companies.
This article is an overview of the codes, not a comprehensive guide. It is organised in the following sections:
For more detailed information, download the Codes of Good Practice, along with a layperson's guide to the codes, from the
Department of Trade and Industry website.
The site also offers the full text of the
Broad-Based Black Economic Empowerment Act of 2003, and the department's
BEE Strategy Document.
Overview of the codes
The Black Economic Empowerment Codes of Good Practice, which have been strongly debated since a draft was released in December 2004, have been found to be flexible and to close many loopholes.
They ensure that the days of high-profile black business people
representing faceless members of "broad-based" groups in empowerment deals are numbered.
They aim to ensure that empowerment benefits not only the black elite but also women, workers, the youth, people with disabilities and the rural poor. They also strongly discourage fronting - schemes that claim to be broad-based but which are found to be wanting when their composition is unpacked.
The new codes also 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.
The codes also introduce a revised point-scoring formula that encourages companies to enter into deals with groups that are not necessarily 100% black-owned.
The change allows a company whose empowerment is being measured to treat one 51%-or-more black-owned company in its corporate
structure as if it were 100% 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. They function to promote the objectives of the Act, which are to:
- transform South Africa's economy to allow meaningful participation by black people;
- substantially change the racial profile of companies' owners, managers and skilled professionals;
- increase the ownership and management of companies by black women, communities, workers, cooperatives and others, and help them access more economic opportunities;
- promote investment that leads to broad-based and meaningful participation in the economy by black people;
- help rural and local communities access economic opportunities; and
- promote access to finance for black economic empowerment.
In terms of the Act, "black people" means 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 decisions on:
- 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 licences or 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, as preferential procurement effectively impinges on most private sector enterprises throughout the chain of supply, from first-tier suppliers to 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 DTI minister after a 10-year period.
Content of the codes
The 10 codes deal with the different elements of BEE, how they are to be weighted, and how BEE compliance is to be regulated. They are as follows:
- Code 000 - A framework for the measurement of BEE. This includes 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, with their final versions released on 1 November 2005.
The second phase of the codes, released on 20 December 2005, cover a further five components of the BEE scorecard: preferential procurement, employment equity, skills development, enterprise development, residual elements, as well as the qualifying small enterprise sections. Other statements covered include
fronting practices, specific verification issues relating to the complex structures,
multinationals, and state-owned or public entities.
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, set out in Code 000, 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 that 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".
The measurement of the ownership element is set out in Code 100, while Code 200 deals with determining management and control.
Human resource development and employment equity - Given the apartheid legacy of systematic labour market discrimination and inferior education, accelerated skills and advanced professional skills 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 both 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. The 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% 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.
Industry transformation charters
By the beginning of 2004, when the BEE Act was promulgated, many sectors of the economy had drafted industry charters on BEE and transformation. While some contained scorecards loosely based on the generic scorecard contained in the DTI's Strategy Document, others were merely written
undertakings of commitment to transformation.
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. This can occur when a stringent transformation charter is applied to one entity, while a transformation charter with far more lenient measurement criteria is applied to another.
Code 000 provides guidelines for the alignment of transformation charters to be gazetted as Codes of Good Practice, and will ensure that even when different gazetted charters are applied to different entities presenting their BEE credentials, no entities will be unfairly disadvantaged because of the application of a more stringent industry charter.
The intention of the Codes of Good Practice is thus to level the playing field by providing clear and comprehensive criteria for the measurement of broad-based BEE.
So far, BEE charters have
been drawn up by the following industries:
- maritime transport and service;
- forwarding and clearing;
- information and communication technology (working draft);
- mining;
- tourism (including a scorecard);
- petroleum and liquid fuels; and
- financial sector.
These charters can be downloaded from the Department of Trade and Industry website.
SouthAfrica.info reporter
Black economic empowerment benefits not only the black elite but also women, workers, young people, people with disabilities and the rural poor (Image: Government Communications)
