August 2007 Broad-Based Black Economic Empowerment: Legislation and Recent Changes.

August 2007August 2007

Broad-Based Black Economic Empowerment:

Legislation and Recent Changes

Broad-Based Black Economic Empowerment:

Legislation and Recent Changes

What is BEE?

Black Economic Empowerment:

Furthering the economic interests of Black people

Black = African, Coloured or Indian persons, born in SA, a citizen by descent or became a citizen by naturalisation before 27 April ’94

or can demonstrate that they were unable to obtain citizenship by naturalisation under

Apartheid

History of BEE

Black Political Empowerment

1990 – Mandela released

1994 – Elections

1995 – Labour Relations Act

1997 – Basic Conditions of Employment Act

1998 – Skills Development Act

1998 – Employment Equity Act

2000 – Preferential Procurement Framework

Act

2003 – Black Economic Empowerment Act

History of BEE

Black Economic Empowerment

1990s – BEE Equity deals• Focus on ownership

• Creation of Black elite

1998 – BEE Commission appointed

2001 – BEE Commission report

2002 – First Charters

2003 – Broad Based BEE Strategy Document

2003 – BEE Act

1994 ~90% of assets White

owned


owned


owned


owned

BEE Act

• Establish BEE Advisory Council

• Strategy for BEE

• Codes of Good Practice for BEE Balanced Scorecard

• Transformation Charters

Section 12 – Sector Charters

Section 9 – Sector Codes

How is BEE Enforced?

BEE Scorecard

1. Ownership

2. Management

3. Employment Equity

4. Skills Development

5. Preferential Procurement

6. Enterprise Development

7. Socio-economic Development


Scorecard varies by entity size Generic

• More than R35 million turnover per annum

Qualifying Small Enterprises (QSE)

• R5 million to R35 million per annum

Exempted Micro Enterprises (EME)

• Less than R5 million

• NO SCORECARD!

Scorecard Weightings:


100*100TOTAL

255 pointsSocio-economic Development

2515 pointsEnterprise Development

2520 pointsPreferential Procurement

2515 pointsSkills Development

2515 pointsEmployment Equity

2510 pointsManagement

2520 pointsOwnership

QSEGenericElement

*QSEs elect 4 of the 7 elements in which to score


• Verification Agency

• BEE Verification – score Score is broken into levels:

• Level One: 100 or higher

• Level Two: From 85 to 100

• Level……..

• Non compliant: <30

• National Empowerment Database (DTI)

• Measured every 12 months


Public Sector: BEE score incorporated in tender score

Minimum tender requirement

Concessions and Licences

Sale of state owned assets

Public Private Partnerships

Criteria for Rebates and Grants


Private Sector:

Your score counts towards your customer’s score

Your supplier’s score counts towards your score


LowHighNon-compliant

BEE Score

2 days delivery

2 days delivery

5 days delivery

Service

Same brand of paperQuality

R35/reamR35/reamR40/reamPrice

Supplier C

Supplier B

Supplier A

Differentiating Factor

Most likely choice


BEE not a compliance issue……

……..it is a competitiveness issue.

Think of the scorecard as a test….

Question 1: OwnershipCounts 20 marks out of 100

Question 2: ManagementCounts 10 marks out of 100

And so on………

The BEE Scorecard

25%+13Black voting rights

2.5%1Economic interest of Black designated groups; participants in Employee Ownership Schemes; beneficiaries of Broad-based Ownership Schemes; participants in co-operatives

10%2Economic interest of Black women

25%4Black economic interest

10%2Voting rights of Black women

TargetWeight (Points)

Indicator

Generic Scorecard:

1. Ownership

1. Ownership

20TOTAL

Bonus Points

10%2Black New Entrants

10%1Black participants in: Employee Ownership Schemes; Broad-based Ownership Schemes or Co-operatives

Complete1Ownership fulfilment

23TOTAL

Increasing

7Net Value

TargetWeight(Points)

Indicator

Generic Scorecard continued:

1. Ownership

QSE Scorecard

10%2Ownership by Black Women

Bonus Points:

10%1Employee Ownership Schemes, Co-operatives or Broad-based Ownership Schemes

Complete1Ownership fulfillment

25%+16Black voting rights

25TOTAL

Increasing

9Net Value



Indicator

1. Ownership

Net Value

0

5

10

15

20

25

30

1 2 3 & 4 5 & 6 7 & 8 9 & 10

Year

Net

Val

ue

Tar

get

%

1. Ownership

Always trace back to a natural person.

Flow-through Principle

Trust

Company A

Company B

Measured Company

90%

90%

65%

26%

Black Person

90% x 90% x 65% x 26% = 13.7%

(90%)

(81%)

(52.7%)

1. Ownership

Modified Flow-through Principle

Trust

Company A

Company B

Measured Company

90%

90%

65%

26%

Black Person

90% x 90% x 100% x 26% = 21.1%

One company in a chain may be considered 100% Black owned if its ownership is measured >50% using the Flow-through Principle.

(90%)

(81%)

(52.7%)

1. Ownership

Exclusion Principle

Trust

Company A

Company B

Measured Company

90%

90%

65%

26%

Black Person

Ownership by an Organ of State is excluded from the calculations

(90%)

(81%)

(52.7%)

23%

Organ of State

90% x 90% x 100% x 26% = 21.1%

21.1% / (100% - 23%) = 27.4%

• Bob sells 20% of his shares in Bob’s Farms to a black consortium

• Zola(45) and Thandi(32) are the members of the consortium each with a 50% share

• Consortium pays for half their shares up front

• Remainder to be paid from their share of future dividends

• The shares have full voting rights

Ownership – Example:

1. Ownership

Black voting rights:

• Target = 25% + 1 vote

• Achieved = 20%

• Weighting = 3 (marks)

• Score = 20/25 x 3 = 2.4

1. Ownership


Voting rights of Black women:

• Target = 10%

• Achieved = 10%

• Weighting = 2 (marks)

• Score = 10/10 x 2 = 2

1. Ownership



NoComplete01Ownership fulfilment

20%

10%

20%

20%

10%

20%

Achieved

16.2

5.6

1

2

3.2

2

2.4

Score 25%

+13Black voting rights

20TOTAL

25%7Net Value

2.5%1Economic interest of Black designated groups

10%2Economic interest of Black women


10%2Voting rights of Black women

Target

Weight

Indicator

1. Ownership

1. Ownership

Multinationals Recognition of Equity Equivalents

Criteria:

• Own and control entire entity

• Ownership subject to global practice

• Can do either equity equivalent or equity sale, but not both.

1. Ownership

Multinationals Equity Equivalents include:

• Approved Public Programme

• Contribute 25% of value of local operation

• OR 4% or local turnover for 10 years

1. Ownership

Organs of State, Public Entities, Section 21 and Companies Limited by Guarantee

Ownership omitted

Score on an Adjusted Scorecard

1. Ownership

“Once empowered always empowered”

Exiting black shareholders

Hold shares for minimum of 3 years

Period for which points are allocated

limited to the length of time the shares

were held

Cannot contribute more than 40% (8

points) on the Ownership scorecard

Generic Scorecard

2. Management

40%1Bonus point: Black independent non-executive board members

40%2Black other top management*

50%3Black board member voting rights*

10TOTAL

40%3Black senior top management*

50%2Black Executive Directors*


Indicator

* Using adjusted recognition for gender

2. Management

Adjusted Recognition for Gender:

Black % Black Women

%2+

Where the Black Women % is limited to half of the target

2. Management

Adjusted Recognition for Gender Say 2 out of 10 people in Other Top

Management are black men:

Say 2 out of 10 people in Other Top Management are black women:

20% (black) 0% (black

women)2+ 10%=

20% (black) 20% (black

women)2+ 30%=

2. Management

QSE Scorecard

25%2Bonus points: Black women representation at Top Manager level

50.1%25Black representation at Top Management Level

25TOTAL


Indicator

Generic Scorecard


15TOTAL

Yr 6-10

Yr 0-5

80%

75%

60%

3%2%2Black people with disabilities*

3Bonus points for meeting or exceeding the EAP targets in each category above.

68%4Black Junior Management*

63%4Black Middle Management*

43%5Black Senior Management*

TargetWeight(Points

)

Indicator



QSE Scorecard

25TOTAL

Bonus points for meeting or exceeding the EAP targets in each category above.

Yr 6-10

Yr 0-5

70%

60%40%15Black representation in all Management*

60%10Black employees as a percentage of all employees*


Indicator


Generic Scorecard

15TOTAL

5%6Adjusted* number of black employees participating in Learning Programmes as a percentage of total employees

0.3%3Adjusted* spend on skills development for black disabled as percentage of Leviable Amount

3%6Adjusted* spend on Black skills development as percentage of Leviable Amount


Indicator




QSE Scorecard

25TOTAL

2%25Adjusted* Skills Development Spend on Learning Programmes for black employees as a percentage of Leviable Amount


Indicator


Generic Scorecard


*TMPS – Total Measured Procurement Spend

Yr 6-10

Yr 0-5

20%

15%

70%50%12BEE Procurement Spend from suppliers as percentage TMPS*

20TOTAL

15%5BEE Procurement Spend from 50% Black owned or 30% Black women owned suppliers as percentage TMPS*

10%3BEE Procurement Spend from QSE or EME suppliers as percentage TMPS*

TargetWeight(Points

)

Indicator


0Non-compliant< 30

0.1Level 830 – 40

0.5Level 740 – 45

0.6Level 645 – 55

0.8Level 555 – 65

1.0Level 465 – 75

1.10Level 375 – 85

1.25Level 285 – 100

1.35Level 1100 +

Recognition LevelBEE StatusBEE Score

BEE Recognition Levels:


Overall BEE Procurement Spend: R610 / R1000 = 61%

R610R1000TOTAL

R50.1L8R50D

R3300.6L6R550C

R1250.5L7R250B

R1501.0L4R150A

BEE Spend

Recognition Level

BEE Level

Actual Spend

Supplier

Calculating a Preferential Procurement Score:

X =

QSE Scorecard


Yr 6-10

Yr 0-5

50%40%25BEE Procurement Spend from all Suppliers based on the BEE Procurement Recognition Levels as a percentage of Total Measured Procurement Spend

25TOTAL

TargetWeight(Points

)

Indicator


Inclusions Operational expenses, cost of sales and

capital expenditure Procurement from monopolistic suppliers Third-party procurement recorded in your

books Labour brokers and independent

contractors Pensions and medical aid – the admin

related fee, not the investment


Inclusions External commissions – ie. Not paid to

employees Costs related to facilitating BEE

contributions – Enterprise & Socio-economic Development

Intra group expenses Bodies listed in Schedules 2 & 3 of the

PFMA Imports (certain exclusions can be made)


Exclusions Taxes or levies Organ of state or public entity with

regulated monopoly Bodies listed in Schedule 1 of PFMA Salaries and wages Pass through third party procurement

where it is not recorded in your books Investments in or loans to an Associated

Enterprise


Exclusions Investments, loans or donations made for

Enterprise Development and Socio-economic Development

Imports:• Capital goods or components for value-

adding in South Africa provided that there is no existing local equivalent

• Or one can differentiate local from imported on the basis of brand or technical specifications

Generic Scorecard

3% of net profit

after tax

15Average annual value of all Enterprise Development Contributions and Sector Specific Programmes made by the measured entity as a percentage of the target.

15TOTAL


Indicator


NOTE: Contributions are measured cumulatively from the Commencement Date (9 Feb 2007) or an Inception Date chosen by the Measured Entity


QSE Scorecard

2% of net profit

after tax

25Average annual value of all Enterprise Development Contributions and Sector Specific Programmes made by the measured entity as a percentage of the target.

25TOTAL


Indicator



What if I make a loss? If a loss was made in last financial year or

on average for last 5 years OR NPAT was less than ¼ industry norm in

last financial year Then take last year when profit was greater

than ¼ industry norm and multiply profit margin for that year by turnover for last financial year to get deemed net profit


What counts? Grants, discounts and donations – 100% Overhead costs – 80% Loans:

• Interest free, no security – 100%• Standard loan to QSE or EME – 70%• Standard loan to other beneficiaries – 60%• Guarantee – 3%• Lower interest rate: Prime - Actual


What counts? Equity Investments

• Minority stake in EME or QSE – 100%• Minority stake in other beneficiary – 80%• Investment with lower interest to financier:

Ordinary dividend rate – Actual dividend rate

HR Capacity• Free professional services – 80%• Discounted professional services – 80%• Employees time – Salary / 160 = hourly

rate


What counts?

Shorter payment periods• Percentage of invoice• Percentage = 15 days less time from invoice

to payment• Shorter period no longer than 10 days

Generic Scorecard


1% of net profit

after tax

5Average annual value of all Socio-economic Contributions made by the Measured Entity as a percentage of the target

5TOTAL


Indicator



QSE Scorecard

1% of net profit

after tax

25Average annual value of all Socio-economic Contributions made by the Measured Entity as a percentage of the target

25TOTAL

TargetWeight(Marks)

Indicator



Qualifying Beneficiaries: Black people

Organisations where 75% of benefit flows to black people

Where the benefit is less than 75% it counts pro-rata


What counts? Grants, discounts and donations – 100% Overhead costs – 80% HR Capacity

• Free professional services – 80%• Discounted professional services – 80%• Employees time – Salary / 160 = hourly rate

BEE Charters

Status of Charters

Generic Codes take precedence

Development of Sector Charters

Not binding on the State

Only Sector Codes have equal status

No gazetted Sector Codes yet

Accountancy Charter

Fundamental Principle:

To be gazetted as Sector Charter &

Code

Stick to the generic code and make slight deviations to the interpretations so as to be suitable to the accounting profession.

Inclusive process with diverse

stakeholders

Finalise process in July 2007

Financial Services Charter

Significant differences

FSC is a sector charter NOT a sector

code and Generic Codes take

precedence

Applies to banks, insurance

companies, pension funds, stock

exchanges Significant differences between FSC

and Generic Codes

BEE and your clients

Consider this:

Financial record keeping

Consulting versus Rating

'Independence & impartiality'

challenge Reporting in financial statements

BEE & Financial Record Keeping

Enterprise development

Ownership

Management

Skills development

Preferential procurement

Verification

Need an official verification

Get verified every 12 months

BEE status recorded on National

Empowerment Database

Verification Agencies

Private companies

Accredited by SANAS

Approved by DTI

Member of ABVA

Fees – market related

Transitional Period

Transitional Score: First 12 months after Commencement

Date

Use full scorecard score

OR

GENERIC:

• Score = 1.92 x (Ownership + Management)

QSE:

• Score = 1.18 x (Ownership + Management)

Dynamics of BEE

Time

BEE S

core

Your BEE score

Pressure from your competitors

Limit of your BEE capabilities

Practical minimum score

30 (40)

Future of BEE

Legislation Codes updated / amended

Accreditation of Verification Agencies

National Empowerment Database

New Charters defined

Future of BEE

2 Years Lots of change Benefits to early birds Failures and frustration

10 Years Stability to the process Leveling of the playing field

5 Years Everybody’s doin’ it! Benefits to those whose approach is sound Take 2s!

Thank You

Guy Taylor can be contacted on 082 221-9893011 [email protected]

Murray Chabant can be contacted on082 851-0230031 [email protected]

August 2007 Broad-Based Black Economic Empowerment: Legislation and Recent Changes.

Documents

bee act

bee scorecard

ownership slide

black person ownership

ownership ownership

bee commission report

apartheid slide

s bee equity deals