South Africa: The New Balanced Approach To Black Economic Empowerment

Last Updated: 27 September 2007
Article by Allison Gibbs

Initially BEE involved only the concept of "ownership"- usually in the form of introducing a high profile black businessman into the ownership of a company. Understandably, however, this did nothing to help the situations of the majority of black South Africans and led to "empowerment of the few" - and the "few" that did not really need it, at that.

Consequently, when the Codes of Good Practice promulgated in terms of the Broad-Based Black Economic Empowerment Act, 2003 were released and became law on 9 February this year, it was encouraging to see that this issue had been addressed and that instead of judging entities only on ownership, the Codes made provision for calculating a BEE score based on seven elements or criteria, namely: ownership (20 points), management control (10 points), employment equity (15 points), skills development (15 points), preferential procurement (20 points), enterprise development (15 points) and socio economic development (5 points).

If one considers the scorecard prescribed in terms of the Codes, it is evident that the ownership element is still awarded a substantial number of points, but so is the preferential procurement element and it is this element that can be considered to be the main thrust of BEE and the one the effectively promotes BEE compliance and encourages transformation throughout the entire South African economy. The preferential procurement element effectively deals with an entity’s supply chain and measures the extent to which that entity procures its goods and services from BEE compliant or black-owned entities. As a result, although the BBBEE Act and the Codes strictly only apply to organs of State and public entities (listed in schedules to the Public Finance Management Act), this preferential procurement element of the scorecard creates a "filtering down" effect, so to speak, in that everybody’s score impacts on everybody else’s and, in this way, anybody that sells goods and services within South Africa will ultimately be caught by the tentacles of BEE.

Having said this, Government has also been mindful of the fact that BEE compliance can be an expensive exercise and it has introduced thresholds into the Codes to ensure that small businesses are not hit unduly hard by BEE. For example, the new Codes stipulate that companies and the like that have an annual turnover of less than R5 million are exempt from compliance with the Codes and are automatically deemed to be 100% BEE compliant. Companies that earn annual turnovers of between R5 and 35 million are considered "Qualifying Small Enterprises" and only need to elect four of the seven elements of the scorecard and each element then carries an equal weighting of 25 points. (It is conceivable therefore that many South African entities could avoid the ownership element of BEE all together as many enterprises will fall within this category).

For the "big guns" though - that is companies that earn over R35 million in annual turnover, the Codes require that all seven elements of the scorecard be complied with and these entities will therefore need to ensure compliance with the ownership element. This means that points will need to be earned by selling equity to black persons (as defined in the Codes) or by selling assets or businesses to such persons (bearing in mind that there are also additional options open to multinational companies). However, because of the new balanced approach to BEE, scores that may otherwise have been low if ownership were the only criteria, and if a "narrow-based" approach to BEE were still being adopted, can be improved by focusing on the other elements of the scorecard - such as, for example, employment equity (the representation of black employees); skills development (the training and development of black employees) and enterprise development (the involvement of entities in access to finance for black-owned entities, as well as non-financial assistance to such entities). There is therefore a great deal of scope under the new Codes for BEE points to be obtained for criteria other than ownership.

We can therefore see that BEE has come a long way since the inception of the concept and that the new Codes that were promulgated earlier this year have greatly facilitated many more black people benefiting from BEE. Government ought to be congratulated for its efforts in this regard - particularly as the road to finalizing the new Codes was not easy. That said, it is pertinent to note that the socio-economic element of the scorecard is awarded only 5 points. Considering that this is the element that seeks to encourage initiatives that enhance the ability of black persons who do not participate in the "economic mainstream", it seems that despite the improvement brought about by the new Codes, there are still many people that will fall outside of the BEE benefits and the message from Government (in awarding only 5 points for this element on the scorecard) seems to be clear - leave the unemployed to us to take care of!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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