Overview
The Minister of Trade and Industry published the broad-based black economic empowerment codes of good practice (gazette number 36928) on the 11th of October 2013. The date of gazetting is the 2nd of October, 2013. The codes come into operation within twelve months of this date. The press release that accompanied the gazetting explained that
the revised Broad-Based Black Economic Empowerment (B-BBEE) Codes of Good Practice symbolise a new beginning in the re-orientation of the transformation policy to focus more on productive B-BBEE and the growth of black entrepreneurs through Enterprise and Supplier Development elements.
Gazette 36928 is a dramatic departure from the 2007 COGP (29617). The standard seven elements have been reduced to five elements of which three are regarded as priority elements that require each entity implementing them to meet a certain subminimum of points. A failure to do so will see that entity dropping a level in their ultimate score.
Revised elements
2007 Codes |
2013 Codes |
|||
Element |
Weighting (excluding bonus points) |
Element |
Weighting as per statement 000 |
Actual points as per each code (excluding bonus points) |
Ownership |
20 |
Ownership (priority element) |
25 |
25 |
Management |
10 |
Management control |
15 |
19 |
Employment Equity |
15 |
Skills development (priority element) |
20 |
20 |
Skills development |
15 |
Enterprise and Supplier Development (priority element) |
40 |
40 |
Preferential procurement |
20 |
Socio-economic development |
5 |
5 |
Enterprise Development |
15 |
|||
Socio-economic development |
5 |
|||
TOTAL |
100 |
105 |
109 |
Adjusted points
The points' allocation has also been adjusted, 40 points is now the minimum requirement for a level eight contributor.
Contribution Level |
2007 Codes |
2013 Codes |
Recognition level |
Level One |
≥ 100 points |
≥ 100 points |
135% |
Level Two |
≥ 85 points but < 100 points |
≥ 95 points but < 100 points |
125% |
Level Three |
≥ 75 points but < 85 points |
≥ 90 points but < 95 points |
110% |
Level Four |
≥ 65 points but < 75 points |
≥ 80 points but < 90 points |
100% |
Level Five |
≥ 55 points but < 65 points |
≥ 75 points but < 80 points |
80% |
Level Six |
≥ 45 points but < 55 points |
≥ 70 points but < 75 points |
60% |
Level Seven |
≥ 40 points but < 45 points |
≥ 55 points but < 70 points |
50% |
Level Eight |
≥ 30 points but < 40 points |
≥ 40 points but < 55 points |
10% |
Non-Compliant Contributor |
< 30 points |
< 40 points |
0% |
New thresholds
The three types of entities that exist within the 2007 codes have been retained but the turnover thresholds have been adjusted.
Entity |
2007 Codes |
2013 Codes |
Exempt Micro Enterprise (EME) |
Turnover less than R5m |
Turnover less than R10m |
Qualifying Small Enterprise (QSE) |
Turnover between R5m and R35m |
Turnover between R10m and R50m |
Large enterprise (generally known as a generic entity) |
Turnover in excess of R35m |
Turnover in excess of R50m |
Other distinguishing features
Black new entrants
The formal definition of a black new entrant is "black participants who hold rights of ownership in a measured entity and who, before holding the equity instrument in the measurement entity, have not held equity instruments in other entities which has a total value of more than R50,000,000, measured using a standard valuation method"
This threshold has been increased from R20m in the 2007 codes.
Promotion of contribution level based on race
100% black owned companies who turnover less than R50m are automatically promoted to a level one (in excess of 100 points). Those with more than 51% black ownership (who turnover less than R50m) are promoted to a level 2 (95-100) points. It follows that exempt micro enterprises with the same levels of black ownership will be promoted similarly. EME's with less than 50% black ownership are level 4 contributor.
Priority elements
Statement 000 declares that Ownership, Skills Development and Enterprise and Supplier Development are priority elements. Failure to meet a 40% sub-minimum of the points in each element will result in the entity's score being discounted by a level. If one or all of the priority elements falls below the designated thresholds then only a single level will be dropped.
Large entities must comply with all three priority elements. QSEs only have to comply with ownership.
Transitional period
Paragraph 10 of statement 000 permits measured entities to choose either the 2007 codes of good practice or the 2013 codes to measure their BEE compliance within the first year of the gazetting of the 2013 codes. Paragraph 10.3 maintains that statement 000 of the 2007 codes is also repealed.
It is submitted that paragraph 10 itself is ultra vires because the General Notice (the first page of the codes that the Minister signed) declares that "the codes will come into operation within twelve (12) months from the date of this publication". Chris van Wyk, a respected BEE analyst and legal practitioner opined the following
The effective date of the Revised Codes which, on page 1 of the Notice in terms of which it was issued, states that it will come into effect within 12 months from the date of the publication thereof (11 October 2013). Any practitioner of law reading that provision would tell you that that provision means that nothing in the rest of the 107 pages gazetted is operative until 11 October 2014. Clause 10 of Statement 000 of the Revised Codes however tries to introduce an opt in provision for those entities that would wish to be measured in term of the Revised Code for the 12 months from 11 October 2013 until 11 October 2014 when it becomes effective. Because this clause 10 is not effective itself until 11 October 2014, it loses all its meaning
In spite of this legal anomaly we are anticipating that at the very least EME certificates will be issued for companies turning over less than R10m within a very short space of time.
Empowering Suppliers
The inclusion of empowering suppliers in the Enterprise and Supplier Development element warrants special consideration. The Enterprise and Supplier Development scorecard requires that procurement be measured by the amount spent with Empowering Suppliers. This is procurement spend from QSEs, in excess of 51% black owned suppliers and 30% black women owned suppliers. The only entities that are excluded from the Empowering Supplier requirement are EMEs and Designated Group Suppliers that are 51% black owned. Paragraph 3.3.1 of code 400 (Enterprise and Supplier Development) states that EMEs and start-ups are automatically Empowering Suppliers.
Empowering Supplier Defined
The definition is long winded and is best understood in bullet point form
-
A B-BBEE compliant entity
-
A good citizen
-
A South African entity
-
Comply with all regulatory requirements of the country
A large enterprise needs to meet at least three of the following requirements, a QSE need only meet one of them
-
At least 25% of sales excluding labour cost and depreciation must be procured from local producers or local suppliers in SA. Service industry entities may include labour costs but these are capped to 15%.
-
50% of job created must be for black people provided that the number of black employees since the immediate prior verified B-BBEE measurement is maintained.
-
At least 25% transformation of raw material/beneficiation which includes local manufacturing, production and/or assembly and/or packaging.
-
Skill transfer to black EMEs and QSEs. This involves spending 12 days per annum of productivity in assisting those beneficiaries to increase their operational or financial capacity.
The requirements are onerous and might not fit within a company's natural business model. Companies who import goods will not meet requirements 1 and 4 and if they are large companies could never be regarded as Empowering Suppliers.
The onerousness aside – the burden of proof to establish Empowering Supplier status is overwhelming and can only be verified at a great cost. This cost would have to be borne by all Empowering Suppliers irrespective of level of black ownership.
Narrow-based measurement for black entities
The Minister is on record as saying that he wanted to reduce the cost of verification specifically to black-owned companies. It appears that only EMEs, 100% black owned EMEs and Black Designated Group Suppliers will be able to escape the cost of verification.
100% black-owned suppliers
If the company is an EME then they need only get obtain a sworn affidavit confirming that their annual turnover is less than R10m and the levels of black ownership. This applies to all EMEs and seems to involve them making a sworn affidavit to a commissioner of oaths. They no longer need an accountant's letter or verification certificate.
100% black-owned QSEs have to prove that they are an Empowering Supplier. This is in spite of what paragraph 5.3.3 of statement 000 says, namely
A QSE is only required to obtain an (sic) sworn affidavit on an annual basis confirming the following:
-
Annual total revenue of R50million or less; and
-
Level of black ownership
51% black-owned suppliers
The requirements to measure 51% plus black ownership are more stringent even for EMEs. The definition of a 51% black and black women owned company is contained in the definition section of 36928 (Schedule 1). Proving 51% black ownership requires the following
-
Black people hold at least 51% of the exercisable voting rights as determined under Code Series 100
-
Black people hold at least 51% of the economic interest rights as determined under Code Series 100
-
The entity has earned all the points for Net Value under Statement 100
This requires 51% black or black women owned to prove their level of black ownership under Code 100. This doesn't agree with the affidavit that is the requirement under paragraph 5.3.3 of statement 000.
51% owned QSEs also need to prove their Empowering Supplier status.
If the company is an EME then they need only get obtain a sworn affidavit confirming that their annual turnover is less than R10m and the levels of black ownership. This applies to all EMEs and seems to involve them making a sworn affidavit to a commissioner of oaths. They no longer need an accountant's letter or verification.
BEE Charters and 36928
There was talk that the DTI's generic codes should trump all other codes of good practice issued under section 9(1) of the B-BBEE Act. This has not happened in the new codes and the DTI has at long last cleared up the issue of whether a company may elect to choose any code it wishes when it measures its compliance. Paragraph 3.2.3 of statement 000 says
A measured entity in a sector in respect of which a sector code has been issued in terms of section 9 of the B-BBEE Act as amended, may only be measured for compliance in accordance with that code.
The biggest problem with the current sector codes is that they do not measure Empowering Supplier status and as such cannot be used for procurement purposes under 36928. It is therefore vital that the sector codes become aligned with 36928. However if any amendments are made to the sector codes then they have to follow the procedure prescribed in section 9 of the BEE act, which requires at least 60 days for the public to submit comments.
Unpublished statements under 36928
The following statements that exist under the 2007 codes do not form part of the 2013 codes. Schedule defines a variety of actions and entities that are associated with these missing codes, we must assume that they will be published at some stage. What needs to be confirmed is whether their publishing needs to follow the process contained in section 9 of the B-BBEE Act.
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Statement 003 – Guidelines for developing and gazetting transformation charters and sector codes
-
Statement 004 – Scorecard for Specialised Entities (universities, not for profit entities etc.)
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Statement 102 – Recognition in the sale of assets
-
Statement 103 – The recognition of Equity Equivalents for multinationals
Qualifying Small Enterprise scorecard
It's not clear whether this scorecard has been omitted or not. Schedule 1 defines a QSE as "an entity that qualifies for measurement under the QSE scorecard with a turnover of R10million or more but less than R50million". This implies that there is a specific QSE scorecard. However there is also a suggestion that QSEs will follow the proposed large enterprises scorecard with only ownership as a priority element and only having to prove one requirement to become an Empowering Supplier.
We have heard from the DTI that there is in fact a QSE scorecard which has yet to be published.
Code 100 – Ownership (Priority Element)
Ownership. Total points - 25 |
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Description |
Weighting points |
Compliance Target |
|
Voting rights |
|||
Exercisable voting rights in the enterprise in the hands of black people. |
4 |
25% + 1 Vote |
|
Exercisable voting rights in the enterprise in the hands of black women. |
2 |
10% |
|
Economic interest |
|||
Economic interest in the enterprise to which black people are entitled |
4 |
25% |
|
Economic interest in the enterprise to which black women are entitled |
2 |
10% |
|
Economic interest of the following black natural people in the enterprise
are entitled |
3 |
3% |
|
Involvement in the ownership of the Enterprise of black new entrants |
2 |
2% |
|
Net value |
8 |
25% |
Code 200 – Management Control
Management Control. Total points - 19 |
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Description |
Weighting points |
Compliance Target |
|
Board participation |
|||
Exercisable voting rights of black board members as percentage of all board members |
2 |
50% |
|
Exercisable voting rights of black female board members as percentage of all board members |
1 |
25% |
|
Black Executive directors as a percentage of all executive directors |
2 |
50% |
|
Black female Executive directors as a percentage of all executive directors |
1 |
25% |
|
Other Executive Management |
|||
Black Executive Management as a percentage of all executive directors |
2 |
60% |
|
Black female Executive Management as a percentage of all executive directors |
1 |
30% |
|
Senior Management |
|||
Black employees in Senior Management as a percentage of all senior management |
2 |
60% |
|
Black female employees in Senior Management as a percentage of all senior management |
1 |
30% |
|
Middle Management |
|||
Black employees in Middle Management as a percentage of all middle management |
2 |
75% |
|
Black female employees in Middle Management as a percentage of all middle management |
1 |
38% |
|
Junior Management |
|||
Black employees in Junior Management as a percentage of all junior management |
1 |
88% |
|
Black female employees in Junior Management as a percentage of all junior management |
1 |
44% |
|
Employees with disabilities |
|||
Black employees with disabilities as a percentage of all employees |
2 |
2% |
Code 300 – Skills Development (Priority Element)
Code 400 – Enterprise and Supplier Development (Priority Element)
Enterprise and Supplier Development. Total points - 44 (including 4 bonus points) |
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Description |
Weighting points |
Compliance Target |
|
Preferential Procurement |
|||
B-BBEE procurement spend from all Empowering Suppliers based on the B-BBEE procurement recognition levels as a percentage of total measured procurement spend |
5 |
80% |
|
B-BBEE procurement spend from all Empowering Suppliers that are QSEs based on the applicable B-BBEE procurement recognition levels as a percentage of total measured procurement spend |
3 |
15% |
|
B-BBEE procurement spend from all Exempted Micro Enterprises based on the applicable B-BBEE procurement recognition levels |
4 |
15% |
|
B-BBEE procurement spend from all Empowering Suppliers that are at least 51% black owned based on the applicable B-BBEE procurement recognition levels as a percentage of total measured procurement spend |
9 |
40% |
|
B-BBEE procurement spend from all Empowering Suppliers that are at least 30% black women owned based on the applicable B-BBEE procurement recognition levels as a percentage of total measured procurement spend |
4 |
12% |
|
Bonus points |
|||
B-BBEE procurement spend from Designated Group Suppliers that are at least 51% black owned |
2 |
2% |
|
Supplier Development |
|||
Annual value of all supplier development contributions made by the measured entity as a percentage of the target |
10 |
2% of NPAT |
|
Enterprise Development |
|||
Annual value of all Enterprise Development and Sector Specific Programmes made by the measured entity as a percentage of the target |
5 |
1% of NPAT |
|
Bonus points |
|||
Bonus points for graduation of one or more Enterprise Development beneficiaries to graduate to the Supplier Development level |
1 |
||
Bonus points for creating one or more jobs directly as a result of Supplier and Enterprise Development initiatives by the measured entity |
1 |
Sub-minimum requirements
The 40% subminimum needs to be achieved in each of the three subdivisions of this element. The bonus points do not contribute to this subminimum target.
Subdivision |
Total Points |
Required subminimum |
Preferential Procurement |
25 |
10 |
Supplier Development |
10 |
4 |
Enterprise Development |
5 |
2 |
TOTAL |
40 |
16 |
Code 500 – Socio-Economic Development
The socio-economic development requirement is largely unchanged from the 2007 codes. There are only two requirements to be met to earn the five points.
-
Contributions must be made with the specific objective of facilitating income generating activities for targeted beneficiaries.
-
75% of the benefits need to accrue to black people
When the code was presented to the public in October 2012 it was greeted with a great deal of concern. The two main issues were the raising of the percentage of beneficiaries to 100% black which was technically impossible to measure and the insistence that contributions must be made with the specific objective of facilitating income generating activities. After much protest the DTI withdrew the whole code. It is therefore strange that the term "facilitating income generating activities" remains in the new code.
Socio-Economic Development. Total points – 5 |
||
Description |
Weighting points |
Compliance Target |
Average annual value of all Socio-Economic Development contributions as a percentage of the target |
5 |
1% of NPAT |
Comments