Broad-Based Black Economic Empowerment (“B-BBEE”) is a South African government initiative and investment treaty, which echoes the national constitutional commitment to promote equality in order to address the historical imbalances of Apartheid. The B-BBEE structure does so by facilitating economic transformation and the creation of a new indigenous class of Black entrepreneurs in the mainstream economy.
Black people refer to African, Coloured, Indian and Chinese individuals who are South African citizens by birth or decent. It also includes those who were naturalised prior to the commencement of the interim Constitution in 1993, or those who would have been able to acquire citizenship by naturalization prior to 27 April 1994 notwithstanding the presence of the Apartheid policy.
Government in South Africa at present takes the B-BBEE transformation scheme very seriously, which is why it is critical for foreign investors to understand the operating environment and view B-BEEE as a necessary requirement to be complied with. It has also become common practice for B-BBEE compliance to be associated with good governance by improving transparency of all economic activity.
This article expands on two critical amendments introduced by the B-BBEE Amendment Act No. 46 of 2013 (“B-BBEE Amendment Act”), which amended the B-BBEE Act No. 53 of 2003 (“B-BBEE Act”) in order to construct it as the overarching legislation in South Africa with regards to B-BBEE. Notably, the B-BBEE Amendment Act contains a trumping provision whereby any legislation containing its own B-BBEE provisions will be compelled to apply the B-BBEE Act and applicable Code of good practice (“the Codes”).
Previously, an enterprise could apply the B-BBEE requirements according to its own business needs using the B-BBEE framework as a method to measure its B-BBEE rating. The new B-BBEE framework significantly alters the methodology of calculating an entity’s B-BBEE points and has introduced revised Codes, which provide the structures for the B-BBEE Scorecards and certain rules associated with claiming B-BBEE points.
The level of compliance provided for in the aforementioned Codes is measured by using a balanced Scorecard. The Codes comprise of an evaluation system, which assigns a “B-BBEE contributor level status” to a measured enterprise for a number of purposes such as preferential procurement and indicators to measure B-BBEE.
The new B-BBEE framework provides that all organs of state and public entities, as well as any enterprise undertaking to engage in any economic activity with an organ of state and/or public entity, are measureable under the revised Codes.
The revised Generic B-BBEE Scorecard is applicable to entities with a turn over of more than R50 000 000 (fifty million Rand) per annum (“Large Enterprises”). Such Large Enterprises are now required to be measured by accredited B-BBEE verification professionals against all 5 (five) of the B-BBEE Scorecard principal elements set out below.
In order to secure a B-BBEE Certificate, Large Enterprises must qualify as Empowering Suppliers by satisfying a minimum of 3 (three) of the following criteria:
• A minimum of 25% (twenty-five per cent) of costs of sales, excluding labour costs and depreciation, must be acquired from local producers or local suppliers in South Africa (service industry labour cost are included but capped to 15% (fifteen per cent)).
• A minimum of 50% (fifty per cent) of jobs generated must be for Black people, provided that the number of Black employees since the preceding verified B-BBEE measurement is maintained.
• A minimum of 25% (twenty-five per cent) transformation of raw materials, which include local manufacturing, production, assembly, and/or packaging.
• A minimum of 12 (twelve) productivity days per annum utilised in assisting Black Exempted Micro-Enterprises and Qualifying Small Enterprise beneficiaries to increase their operation or financial capacity.
If a Large Enterprise does not meet 3 (three) of the minimum requirements, its B-BBEE status will automatically be demoted. The impact of this is serious for B-BBEE ownership transactions, which often involve financing to the B-BBEE shareholder.
The Generic B-BBEE Scorecard comprises of the following principal elements to which points are allocated:
• The Ownership element totalling 25 (twenty-five) points, which measures the effective ownership of entities by Black people.
• The Management Control totalling 15 (fifteen) points, which measures the effective control of the enterprise by Black people.
• The Skills Development element totalling 20 (twenty) points, which measures the extent to which employers carry out initiatives designed to develop competencies of Black employees both internally and externally.
• The Enterprise and Supplier Development element totalling 40 (forty) points, measuring the extent to which entities buy goods and services from Empowering suppliers with strong B-BBEE recognition levels. This particular element also measures the extent to which an enterprise carries out supplier and enterprise development initiatives for the purpose of assisting and accelerating growth and sustainability of Black enterprises.
• The last element is the Socio-Economic Development and Sector Specific Contributions element totalling 5 (five) points, which measures the extent to which entities carry out initiatives that contribute towards the Socio-economic Development or Sector Specific initiatives that promote access to the economy for Black people.
In accordance with the above B-BBEE Scorecard, the new B-BBEE framework introduces various punitive measures for engaging in the practice of “fronting” and other offences. An enterprise will be liable for an offence if it engages in fronting by knowingly misrepresenting its B-BBEE status, or provides false information to secure a particular B-BBEE status or outcome.
This includes initiatives with the aim to separate or divide a measured enterprise as a means to ensure eligibility, as an Exempted Micro-Enterprise, a Qualifying Small Enterprise or a Start-Up Enterprise may constitute an offence. Such an offender may be subjected to a fine or imprisonment not exceeding 10 (ten) years, or to both a fine and imprisonment. If the offender is an enterprise and not a natural person, it could be subject to a fine of up to 10% (ten per cent) of its annual turnover.
Any representation made by an enterprise regarding its B-BBEE compliance to accredited B-BBEE verification professionals or government and/or public owned entities is required to be supported by suitable evidence or documentation. If an enterprise does not provide such supporting information, it is not entitled to receive any recognition for the initiative, which it has undertaken, or intends to undertake.
The B-BBEE Act and revised Codes do not impose legal obligations on all enterprises to comply with B-BBEE requirements, however an enterprise’s B-BBEE status a critical factor affecting its ability to successfully bid for government and public enterprise tenders and/or obtain certain licences.
This is why there is a general increase in private sector enterprises requiring suppliers to possess a minimum B-BBEE rating in order to advance their own B-BBEE ratings. B-BBEE is accordingly an important strategic factor to be taken into account by any enterprise interested in pursuing business ventures in South Africa.