New legislation has helped clarify the elements
of South Africa’s Black Economic Empowerment policy to encourage
participation from multinational companies. Lerato Buhlebuyeza Mathopo
and Greg Nott report
South Africa’s business environment is rapidly transforming,
and a large aspect of this transformation process is the role played
by Black Economic Empowerment (BEE). This article will, in broad
terms, capture the objectives of the legislation and policy behind
BEE and touch on some of the issues that challenge foreign investors
and local business alike in complying with BEE.
Broad-based black economic empowerment is an integrated
and coherent socio-economic process which directly contributes to
the economic transformation of South Africa and brings about significant
increases in the number of black people that manage, own and control
the country’s economy, as well as significant decreases in
income inequalities. It was introduced to address the economic inequalities
created by apartheid.
BEE is governed by the Black Economic Empowerment
Act 53 of 2003. The Department of Trade and Industry (DTI) is the
custodian of BEE in the country. In terms of the Act, the minister
of trade and industry may issue codes of good practice and publish
transformation charters or sector charters. Prior to the promulgation
of the Act and the codes, there was no legislation dealing with
BEE.
However, empowerment of black people was included
in the first economic policy of the Government in 1994. The absence
of legislation and any written policy on empowerment resulted in
a lack of uniformity with regards to the measurement and recognition
of BEE. There was also no clarity on what the elements of BEE were.
For instance, between 1994 and 2000 there was a great focus on ownership
and not on the other elements of BEE. Ten percent of Metropolitan
Life was sold to New Africa Investments and all the shares of the
National Sorghum Breweries were sold to black people.
Black shareholders in these transactions were
mainly passive. These transactions were also benefiting particular
individuals as opposed to the black population at large. To encourage
the participation of more black people in BEE transactions, the
codes of good practice under ownership allocate points to the participation
of new black entrants and of broad-based entities such as communities,
women’s organisations and employee trusts.
During this period there was also no clarity with
regard to the interpretation and recognition of BEE. Government
departments and state-owned entities interpreted and recognised
BEE differently. This confusion made it difficult for businesses
to implement BEE.
In May 1998, the Black Economic Empowerment Commission
was established. Its main task was to define BEE and provide clarity
on the measurement and recognition of all the BEE elements. The
commission also consulted with all the stakeholders both in the
public and private sector.
The commission’s recommendations included
the need for a clear government policy on BEE, human resources development,
BEE targets over a 10-year period, procurement and the role of BEE
in the sale of state-owned assets. This was the beginning of a structured
approach to BEE.
From the findings of the BEE commission, the Government
developed the Strategy for Broad-Based Black Economic Empowerment.
This strategy defined BEE and introduced the balanced scorecard
which set out all the elements of BEE. The elements are ownership,
management control, employment equity, skills development, preferential
procurement, enterprise development, and the residual element. Weighting
was also allocated to each element to illustrate its importance.
Following the development of this strategy, the
broad-based Black Economic Empowerment Act 53 of 2003 was promulgated
followed by the codes of good practice. The codes and the Act apply
to government departments and state-owned entities when dealing
with procurement, licensing, public private partnerships and in
transactions involving the sale of state-owned assets.
By implication private sector enterprises must
apply the codes should they wish to interact with the organs of
state and public entities in any of the four aspects. In practice,
when interacting with the state, private companies are required
to provide information with regard to their BEE status.
The codes came out in two phases. Phase one was
issued in November 2004 and deals with the framework for the measurement
of BEE; the measurement of ownership, management control, and sector
codes or charters. Prior to finalisation the codes were published
for public comment allowing all the stake-holders to raise concerns.
In December 2005 the minister issued phase two
of the codes dealing with, among other things, issues; fronting
and misrepresentation of BEE status; the recognition of ownership
contributions by multinationals; employment equity; skills development;
preferential procurement; enterprise development; residual contributions
and BEE for qualifying small enterprises. These codes were also
published for public comment and have been finalised. The DTI has
indicated that they will be submitted to Parliament during October
2006 for approval. Once approved by Parliament, all the codes will
be gazetted and will become law.
Elements of the scorecard
There are seven elements, each with an allocated
weighting, in the balanced scorecard against which an entity will
be evaluated on. They are: ownership (20%); management control (10%);
employment equity (10%); skills development (20%); preferential
procurement (20%); enterprise development (10%); and the residual
element, which incorporates corporate social investment (10%).
The total allocated to an entity determines its
BEE contribution. The BEE contribution levels vary from level one
to level eight. Level one is for an entity that gets 100% entities,
level eight is for 30%-40%. Any entity scoring below level eight
is a non-contributor to BEE.
Each of the elements of the scorecard has sub-elements.
For example, owner-ship also includes ownership by black women.
Ownership contributions for multinationals
Draft codes were created to accommodate multinational
companies operating in South Africa. The codes distinguish between
three types of multinationals — multinationals headquartered
in South Africa, multinationals that used to be headquartered in
South Africa and businesses that were never headquartered in South
Africa.
Multinationals have the following options in fulfilling
the ownership element of the scorecard. They can sell:
. equity in South African operations;
. assets in South African operations;
. equity in their offshore businesses —
applicable to a South Africa multinational; or
. equity equivalents. Equity equivalents were
developed to accommodate multinationals which cannot sell equity.
An entity wishing to apply for an equity equivalent must fulfil
the following requirements:
. the multinational business must own and control
the entire equity in the South African entity;
. the multinational business must be subject to
a global policy restricting the alienation of equity or the sale
of assets in all its multinational operations; and
. the multinational business will suffer substantial
economic harm if it were to implement any transaction designed to
give effect to the ownership element of the scorecard.
An equity equivalent is a public programme approved
by the DTI involving a value contribution to the South African economy.
There is no clarity on what the equity equivalents are, however
we hope that the final codes will shed some light in this regard.
Sector charters
Sector charters are industry commitments to transformation.
They address sector-specific BEE concerns. For instance, the health
charter, in addition to the generic scorecard requirements, deals
with access to healthcare services by poor people. The financial
services charter deals with access to financial services including
banking the un-banked. The charters that currently exist (either
in draft form or finalised) are in liquid fuels, mining, financial
services, property, tourism, information and communication and technology
(ICT), healthcare, forestry, agriculture, transport, construction,
advertising, accounting, wine and legal.
Currently the charters have different requirements
on the various elements of the scorecard, For instance, the codes
set the minimum target of 25% for ownership, but the target in the
property and the construction charter is 30%.
Some of the charters were developed prior to the
codes being published. This led to confusion as to whether companies
must comply with the codes or with the sector charters. The BEE
Act clarified the position. Under the Act sector charters may be
gazetted in terms of both section 12 and section nine. Under section
nine the minister may issue guidelines to a particular sector for
the drawing up of the sector charter. Charters gazetted under section
nine will have the same legal status as the codes and will be binding
on the organs of state and public entities.
Under section 12 the minister may gazette, for
general information, the charter for a particular sector if he is
satisfied that the charter has been developed by major stakeholders
in that sector and it advances the objectives of the Act. Transformation
charters gazetted under section 12 will be for information purposes
only and will not be legally binding.
Financing of BEE deals
The early generation of empowerment deals was
characterised by the use of special purpose vehicles. These structures
were created mainly because the black shareholders did not have
money to make the initial capital investment to the transactions.
This led to various finance structures which were highly geared
leaving black shareholders in a lot of debt. Most of the funding
structures were based on the funding of shares.
The bank relied on the dividends for repayment.
In South Africa dividends are paid out of pre-tax cash flow and
are subject to Secondary Tax for Companies by the borrower, in this
instance the BEE partner.
When the Asian stock markets crashed in 1998,
some of the deals financed on this basis collapsed. As a result
of this the codes deal with the financing of BEE transactions and
the accrual of economic interest to the BEE partners in the calculation
of ownership.
To sustain and grow the BEE Strategy, the Government
has found a role for its entities in BEE financing. The National
Empowerment Fund, the Industrial Development Corporation and Khula
Financial Services are some of the government institutions focusing
on BEE financing.
Lerato Buhlebuyeza Mathopo is an associate
and Greg Nott is managing partner at LeBoeuf Lamb Greene & MacRae
in Johannesburg.
