Media Statement on the Codes of Good Practice on Broad-Based Black Economic Empowerment, 14th December 2006
By: DTI Press Release
The Department of Trade and Industry submitted the Codes of Good Practice on Broad Based BEE to Cabinet for approval and gazetting on the 26 October and 8th November 2006. The meeting of the 8th of November deferred the approval of the Codes with the proviso that further work needed to be done on them specifically regarding the simplification thereof. It was decided in this meeting to table these codes in Cabinet again on the 6th of December 2006 with the view for final approval. Cabinet has approved these codes subject to further work being done on the statement dealing with the process of verification, how to deal with fronting practices as well as compliance reporting by complex structures.
In the same vein, the Cabinet also approved the gazetting of both phases one and two of the Codes, which is intended to take place in January 2007.
The process of developing the codes began in April 2004, with the drafting of the first phase of the Codes of Good Practice, which was approved by Cabinet in 2005. The first phase included code 000 dealing with the conceptual framework for BEE. The code provides statement 001 dealing with BEE verification, Fronting and Complex structures, statement 002, which provides for the gazetting of transformation charters and statement 003, which provides separate scorecards for specialized entities such as SOEs and NGOs. Phase I also included Code 100, statement 100, which measures effective ownership of enterprises by black people and statement 102, which measures ownership points in the case of the sale of assets and businesses in lieu of equity transactions. Finally, Code 200, statement 200, measures effective control of enterprises by black people.
The drafting of phase two of the codes, dealing with the remaining five elements of the generic scorecard as well as pertinent issues such as the measurement of small enterprises and the matter of fronting began in April 2005. In this final round, Cabinet was approving the second phase of the codes. Thus, bringing to finality the completion of the approval of the entire codes of good practice including its gazetting. These five elements of the second phase include: Code 300, statement 300, which measures initiatives intended to achieve equity in the workplace. Code 400, statement 400, which measures the extent that employers carryout initiatives designed to develop the competencies of black employees. Code 500, statement, measures the extent that enterprises buy goods and services from BEE compliant suppliers as well as black owned entities. Code 600, statement 500, measures the extent to which enterprises carryout initiatives contributing to enterprise development. Finally, Code 700, statement 700, measures the extent to which enterprises carryout initiatives contributing to socio-economic development.
As per the BEE Act no. 53 of 2003, the Department of Trade and Industry (the dti) was mandated to draft the Codes of Good Practice for BEE. These Codes are meant to provide generic standards and a framework for the implementation of BEE throughout the whole economy.
The BEE Codes are viewed as standards structured along the lines of standards issued by the accounting and auditing fraternity. Likewise, they simply provide universal standards for the implementation of BEE initiatives and the measurement of such initiatives with the view of providing consistency, transparency and clear direction on BEE.
The codes of good practice were developed and finalised through an extensive consultation process involving chambers of business, big business, black business, labour and civil society. International road shows involving foreign investors were conducted to solicit inputs into the drafting process. Extensive workshops were held with government departments as well as content experts to explain the codes and to solicit inputs into the drafting process. Feedback was received from various interested parties and technical working groups were established to provide further inputs as well. Parliament through the portfolio committees was consulted to make inputs into the drafting process as well. The codes are truly a South Africa product with extensive support from the international community.
After the release of the codes for public comment in December 2005, approximately 180 submissions were received from across the economy, including big business, black business, government, and State-Owned entities during the public commentary process, which were all analysed and most recommendations used to finalise the codes.
GENERAL CONCERNS
These codes have taken on board a number of concerns raised by all the stakeholders. The language style used in the codes has been simplified for ease of reading and understanding. To further address the concern that was raised pertaining to the complexity of the codes, an interpretive guide has been produced to aide BEE practitioners to gain further clarity and understanding of the Codes. A summary of the Codes has also been produced aimed at the ordinary person to fully grasp the codes and BEE.
The number of indicators being measured on the codes have been reduced from 42 to approximately 23. It is believed that this action will result in a significant reduction in the amount of time that enterprises will need to spend in trying to achieve BEE compliance. Final targets were a product of extensive research and consultations with all critical stakeholders, and were modified accordingly where required.
GENERAL PRINCIPLES OF THE CODES
The Parity Principle, a specific target has been set for ownership by black women in order to ensure that benefit accrues to both black men and black women. This principle emphasizes that black women must accrue 40-50% of benefit across all the elements of the scorecard. For the black designated groups 2-3% of benefit must also accrue to them as well on all the elements of the scorecard.
SMALL AND MICRO ENTERPRISES:
Government has singled out small enterprises as vital in the fight against unemployment. Aiming therefore to ease the regulatory burden on small enterprises, many of which are already struggling under financial and capacity constraints, the Codes provide less onerous BEE compliance requirements for small and micro enterprises. Thresholds for Qualifying Small Enterprises (QSE) have been increased substantially to range between R5million and R35million based on annual turnover. Thresholds for Exempted Micro Enterprises (EME) have been increased substantially from the original R300 000 to R5million based on the annual turnover. Only one threshold based on turnover is being used for determining QSE as opposed to the original sector specific definitions for QSE. Head count has been removed due to its unintended consequences of curbing employment in enterprises.
The effect of these thresholds is that a significant number of enterprises is excluded from having to comply with BEE requirements. Such excluded entities contribute the least to our GDP. Those medium to large entities that are required to implement all the 7 elements of the scorecard make up less than 2% of the total number of economically active entities and contribute the most to our GDP.
In contrast to the generic scorecard, the QSE scorecard allocates an equal 25% weighting to each of the seven elements or pillars of BEE. The overall weighting of the elements on the scorecards adds up to 175%, but because QSE only have to elect four of the elements, selected elements of compliance will end up totalling 100%.
Start-up enterprises are measurable as EMES for the first year following their formation or incorporation. This provision applies regardless of the expected total revenue of the start-up enterprise.
CODE 100 - OWNERSHIP
Statement 100 provides specific incentives in the ownership scorecard to ensure participation of black women, black designated groups and new entrants and to ensure that only real economic interest in the hands of black people is measured and recognised. Thus emphasising the principle of substance over form when measuring BEE. The compliance target for ownership remains 25%+ 1 vote. Weighting points for new entrants are two bonus points and broad based schemes 1-bonus points. Flow through and modified flow-through principles are included to ensure that the objectives of BEE ownership will not be circumvented through complex structures. This principle traces ownership measurement through the chain of ownership to the natural black person. The modified flow through principle allows for the participation of non-BEE funders at one tier of ownership.
The Exclusion Principle allows for ownership by certain entities to be excluded from calculation of ownership up to a maximum of 40% of the measured entity. These include ownership by government entities, section 21 companies; and mandated investments (i.e. pension funds, medical scheme, insurance funds, medical scheme, banking investment friendly society, mutual schemes and unit trusts, etc.).
The recognition of ownership after the sale or loss of shares by black partners: Continuing Consequence Principle, enables a company to include up to 40% of the ownership points after a BEE partner exits or loses its shares to a funder if the following conditions are met: the shares were held for more than 3 years prior to sale or loss, value was created in the hands of black people and there is a level of transformation within the measured entity. This allows for black shareholders in a company to be able to liquidate their investment in order to realise value while allowing the measured entity to retain some of the points it had attained towards the ownership element of its scorecard.
Code 100 on ownership also provides detailed requirements for the recognition and measurement of trusts and broad-based schemes as black ownership. Code 100, statement 103 provides recognition of equity equivalents on ownership for subsidiaries of foreign multinationals in South Africa. Any equity equivalent contributions towards the ownership element made by Multinationals are measurable against the value of their operations in South Africa. Equity Equivalent programmes will have to be approved by the Minister of Trade and Industry and the line Ministry and may involve social development programmes as well as enterprise creation programmes. The valuation of such programmes will be determined by the use of acceptable valuation standards.
CODE 200 & 300 MANAGEMENT CONTROL AND EMPLOYMENT EQUITY
The Management scorecard places emphasis on black representation at senior executive levels. Management also encourages a proper representation of black people on company boards in executive and non-executive capacity. This counters the market trend of appointing black non-executives rather than executives. Compliance targets for management have been split as follows: 40% top management 50% Board Representation. Weighting points for management remain 10 points.
The Employment Equity scorecard provides for measurement based on occupational levels in schedule EEA9 in terms of the EE Act. It specifically measures the representation of black people in senior, middle and junior management occupational levels, but excludes semi-skilled and unskilled occupational levels. This aims to deal with the lack of transformation on all these occupational levels within an organisation. It is also aligned with EE Act in order to prevent contradiction in terminology and efforts in the implementation of Employment Equity initiatives in both EE Act and BEE Act. Compliance targets have been split into 5-year targets and 10-year targets. Senior management 5 year targets 43% and 10 year targets 60%. Middle management 5-year target 63% and 10 year target 75%. Junior management 5-year target 68% and 10 year target 80%. Weighting points for the employment equity element of the scorecard has been increased from 10 to 15 points.
CODE 400 SKILLS DEVELOPMENT
The Skills Development scorecard provides a target 3% of payroll to be spent towards the skilling of black employees. This code has been aligned with the Skills Development Act and the Skills Development Strategy. It specifically encourages that skills development should take place in the priority skills areas as identified from time to time and including those currently identified by ASGISA. The scorecard measures skills spend and also allows for the measurement of output through the use of the learning programme matrix as issued by the Department of Labour. The weighting points have been decreased from 20 to 15 points.
CODE 500: PREFERENTIAL PROCUREMENT
The Preferential Procurement element promotes BEE compliance by all entities regardless of their ownership status. Compliance targets for preferential procurement have been split as follows: A 50% target has been set for preferential procurement over a five year period and a 70% target has been set for preferential procurement over a 10 year period. Out of these targets specific allocations have been made for procurement from BEE compliant suppliers in general based on their performance on the scorecard, small and micro enterprises as well as black owned and black women owned entities. In trying to encourage procurement locally produced goods and services, the scorecard also provides enhanced recognition for procurement from value adding suppliers. In also trying to encourage the promotion and sustainability of small enterprises, we have also provided enhanced recognition for procurement from beneficiaries of Enterprise Development initiatives.
CODE 600: ENTERPRISE DEVELOPMENT
This element provides for the measurement of enterprise development and industry specific initiatives. ED encourages entities to implement/support initiatives that facilitate access to finance such as loans, equity, seed capital and non-financial assistance such as training and mentoring, preferential credit facilities, capacity building programmes for QSE and access to low or no cost infrastructure, etc. Enterprises are encouraged to make either monetary or non-monetary contributions. A target of 3% of Net Profit After Tax (NPAT) has been set or alternatively a target of 0.375% of Total Revenue. The weighting points have been increased from 10 to 15 points.
CODE 700: SOCIO- ECONOMIC DEVELOPMENT
This element provides for the measurement of Socio-Economic Development Contributions. The key principle is for these initiatives to result in the beneficiaries having sustainable access to the economy. A target of 1% of Net Profit After Tax has been set and alternatively 0.125% of Total Turnover. The maximum number of points in this element is 5.
CONCLUSION
The dti is confident that the Cabinet adopted Codes of Good Practice on BEE have gone a log way towards providing certainty and predictability in the economy and that these codes have addressed all the concerns raised by all the key stakeholders. We are now certain that the implementation of BEE will gain momentum. This also opens the door for the speedy gazetting of transformation sector charters under section 12 and 9 of the BEE Act.
