The Broad-Based Black Economic Empowerment (BBBEE). How to deal as a foreign investor


Term Paper (Advanced seminar), 2017
28 Pages, Grade: 1,7

Excerpt

Content

List of Figures

List of Tables

List of Abbreviations

1. Introduction

2. History of BBBEE
2.1. Definitions
2.2. Strategy
2.3. Objectives

3. The BBBEE Codes of Good Practise

4. The BBBEE Scorecard
4.1. Generic Scorecard
4.2. BBBEE Criteria
4.3. Preferential Procurement Criterion
4.4. Ownership Criterion
4.4.1. Different forms of Ownership
4.5. Exceptions for EME, QSE, Start-Ups, Multinationals

5. Implementation of the Ownership and Procurement Criteria in case of investment

6. Recommendation and Trends

Appendix

List of Figures

Figure 1: The Broad-Based Black Economic Empowerment Criteria with their weighting

Figure 2: The BBBEE Criteria and the importance of the Ownership Criterion

Figure 3: The Broad-Based Economic Empowerment Levels and classifications

Figure 4: BBBEE Status, Qualification Points and BBBEE Procurement Recognition Levels

Figure 5: Ownership Scorecard and its Code Targets

Figure 6: Ownership options

Figure 7: Modified Flow Through Principle

Figure 8: Possible structure of a system with a trust

List of Tables

Table 1: Ownership Scorecard

Table 2: Management Control Scorecard

Table 3: Skills Development Scorecard

Table 4: Enterprise & Supplier Development Scorecard

Table 5: Skills Development Scorecard

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

South Africa is a country with potential and future. Indicating facts and reasons therefore are major sales market, the well-developed financial sector and infrastructure1 as well as the highest development level on the African continent2. However, dealing with the South African economy more closely, you will identify several obstacles. The latest issue increasing in importance more and more investors faces with is the so-called Broad-Based Black Economic Empowerment (BBBEE). It is a programme of the South African government to support and accelerate the participation of black people in the economy3.

In this paper, this programme will be discussed in order to make a recommendation for an investor whether to invest or not. First, the history including definitions, strategy and objectives will be described. Then, the meaning and importance of BBBEE Codes of Good Practise will be explained. The main part of this paper will focus on the theoretical explanation of the programme and how the main criteria do should be implemented in case of investment. In the end, there will be a short recommendation and a trend for the future.

2. History of BBBEE

The Broad Based Black Economic Empowerment concept was created by the government based on South Africans history4.

In the past, the country has suffered many years from the apartheid where the black society were without rights and complete neglected from the economy. When in 1994 South Africa selected their first democracy’s and political systems were about to change, the new government came up with the program Broad Based Black Economic Empowerment to eliminate past irregularities between the black racial group and the with racial group and to accelerate the access to the economy for black people by putting rules and laws for every company in south Africa5.

After many years of working on the program the BEE commission released a report in 1998 which gave the first attempt at broadly defining BEE. In 2003 suddenly it adopted. Over the years it had a tremendous development, so the Codes of Good Practice were added in the year of 2007. You will learn this issue under the chapter three. Additionally, there were a revision in 2015 were the program was change in a few details and adopted more to the practice.

2.1. Definitions

For a better understanding, a few important terms will be defined. The South African government understand the term Black People to mean Africans, Coloureds and Indians6. The Broad Based Black Economic Empowerment is a program to empower black people including women, workers, youth, black with disabilities, people living in rural areas. The Broad-Based Black Economic Act includes any Code of Good practise or made under this Act of 20037.

2.2. Strategy

The strategy of the Broad Based Black Economic Empowerment is divide in four key principles. The first strategy indicates that the Black Economic Empowerment is broad-based. The Goal of this principle is to accelerate the access of black people to the economy. In addition, it shows the BBBEE as an inclusive process where everyone should have the possibility to participate in this program throughout all sectors. Moreover, the program is associated with good governance which means that quality and transparency of all economic activities are available. Finally, it is part of a growth strategy not only a redistribution of wealth, everybody is included8.

2.3. Objectives

There are a few important objectives which should accelerate the access to the economy for the black society in South Africa. The most important one is to increase the number of black people who have ownership and control of existing and to increase new enterprises. Furthermore, it is important to support the number of black people in executive and senior management positions and to make sure that there are no income inequalities between black and white people. Thus the concept is about skills development and economic growth, companies have to increase the acquisition of skills in order to develop their employees and to improve the participation in productive economic activities in under-developed regions9.

3. The BBBEE Codes of Good Practise

The B-BBEE Codes of Good Practice were published in 2007. The Codes are instruments which are used to measure the program across all sectors. The main idea of the codes is to avoid disadvantages and inequities between industries. That means that every company has to follow the same framework in order to give a black person a sustainable and appropriate access to your company.

In particular, the codes were aimed at achieving the following objectives:

- Ensuring financial sustainability of financial transactions,
- Creating uniform standards and measurements and

Clarifying policy position on sector charters, multinationals and small business10.

4. The BBBEE Scorecard

4.1. Generic Scorecard

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: The Broad-Based Black Economic Empowerment Criteria with their weighting; Source: Own presentation (2017) based on the dti, 2002, Online

The figure above illustrates the five criteria with different weighting: Ownership, Management Control, Skills Development, Enterprise and Supplier Development, Socio-Economic Development. The total score of points an enterprise can earn are 105 points.11 The criteria Ownership, Skills Development and Enterprise and Supplier Development are priority elements after the revision in 2015. In practise, it leads to the fact that at least 40% of the target has to be fulfilled in order to be declared as compliant.12 Moreover, the revised Codes bring further strict regulations. Due to the new discounting principle, a criterion fulfilled less than by 40% has the consequence that the enterprise will be downgraded13. A company has now to follow stricter rules in order to achieve a high level.

Abbildung in dieser Leseprobe nicht enthalten

Figure 2: The BBBEE Criteria and the importance of the Ownership Criterion; Source: Own presentation (2017) based on BASF “BBBEE Framework – New Program”, Dr. Fritzmann

After the revision the Ownership criterion has been growing significantly in importance by having double weight. Figure 2 illustrates that the Ownership Criterion has a greater weight than the Generic Scorecard. One part of the Ownership element leads to the Generic Scorecard affecting the Scorecard with 28%. The second and more important arm leads to the so-called Points offering to Customer affecting company´s supply chain again by the Self-Policing Concept with 72%. The Points offering to Customer comprises two components. The first component is to transfer at least 51% of shares to black People, the second one has the objective to transfer at least 30% of shares to black women.14 The topic “Points offering to Customers” and “Self-Policing Concept” will be explained in the next chapters.

Abbildung in dieser Leseprobe nicht enthalten

Figure 3: The Broad-Based Economic Empowerment Levels and classifications; Source: Own presentation based on BEE Online (Online)

The Broad-Based Economic Empowerment is a level system consisting of nine levels. Figure 3 shows these levels and their classifications. The score achieved in the Scorecard by an enterprise determines its level. Scoring more than 40 points on the total scorecard declares the company as compliant. An enterprise is non-compliant by achieving less than 40 points which corresponds to Level 9.15 Being non-compliant it is more difficult, but not impossible, for an enterprise to do business in South Africa because partners and suppliers prefer to cooperate with compliant ones16.

The fact make the BBBEE program more complicated is that the Generic Scorecard does not refer to all companies, but depends on the Return On Invest. This scorecard has to be considered by companies exceeding a turnover of 50 million Rand17. Therefore, there are two more classifications for smaller enterprises: Exempted Micro Enterprises showing a turnover less than 10 million Rand and Qualifying Small Enterprises having a turnover between 10 million and 50 million Rand18. The detail differences between them will be explained in Chapter 4.5.

Another case where the Generic Scorecard will not be taken into account is if Charters and Sector Codes have been developed.19 A “Sector Code means a Code which is applicable to a particular sector”20. Such Codes have further liabilities which leads to the fact that companies in such a sector may fulfil other (and stronger) requirements and have to use these Codes.21

4.2. BBBEE Criteria

The Generic Scorecard has five criteria.22 The Ownership Criterion is a priority element and has 25 points of the total score.23 Its task is to evaluate ownership structures. How this element affects the Scorecard in details and which forms exist it will be discussed in Chapter 4.4. “Ownership Criteria”.24

The second criterion is Management Control having 15 points. It evaluates to which extent management is controlled by black people and whether racial equality exists. In this criterion there are three main targets have to be met:

If 50% of the Board Voting Rights are held by Black Board Members, 50% of Executive Board Members are Black and 40% of the senior top management or top management are black, the company will score points in the Management Control Scorecard. Moreover, there are bonus points which could be achieved in case of employing black women on their board or in top management.25

The second priority element is Skills Development weighted at 20 credits. This criterion evaluates the extent and quality of initial and continuing education and how the employment of black people is after initial and continuing education. For this reason a learning programme is often used in form of leadership. This is a structured experiential learning in the workplace that is required after the achievement of formal qualification.26

The largest impact on the Generic Scorecard is the priority element Enterprise and Supplier Development because it influences total score with 38%. It consists of Preferential Procurement, Supplier Development and Enterprise Development.27 Its function is to evaluate how enterprises support and accelerate development and sustainability of other black enterprises and suppliers. Additionally, it also evaluates the supplier´s and client´s status of BBBEE28. Its affection on the decision whether to invest or not will be explained below.

The last and smallest criterion is the Socio-Economic Development. Industry specific contribution29 and corporate social investment are the two components may be considered to score points in this Scorecard. Additionally, in order to achieve maximum points in this element, a company must contribute 1% of their EBITDA30.

4.3. Preferential Procurement Criterion

The preferential procurement is part of the Enterprise and Supplier Development criteria and shows the way companies are buying their good and services. At this point companies can score points depending on the extent to which companies purchase goods and services from black empowered suppliers31

Abbildung in dieser Leseprobe nicht enthalten

Figure 4: BBBEE Status, Qualification Points and BBBEE Procurement Recognition Levels; Source: Own presentation based on BEE Online (Online)

It is important to be compliant and to have a good scorecard level in order to be competitive in the value supply chain so enterprises can increase scores if they procure a greater percentage of goods and services from suppliers with higher B-BBEE ratings and from small businesses. Figure 4 illustrates the Levels and their equivalent Recognition Levels. When companies buy from a supplier that is more empowered, it will enjoy greater preferential procurement recognition that it would be when buying from a supplier which is less empowered. The aim is to encourage the usage of black owned professional services and entrepreneurs as suppliers. The better your scorecard, the more attractive you are as a potential supplier32.

The scorecard level is also important, when it comes to applying for a tender from the government. The government goes after an 80/20 or 90/10 principle (80 % represents the price in comparison to the competitor and 20 % shows the scorecard level). Price is the dominant basis on which government makes procurement decisions. Let’s assume, a company with the lowest price on the market can score 80 %, and with a good scorecard level it can score up to 20 %, adding both together gives the government a ranking which company is the most competitive one on the market and should get the tender. Which system will be used of this both (80/20) or (90/10) depends only on the size of the tender33.

Another important point is the local production and content, which says that in specific industries where tenders are prescribed, only locally manufactured products with a minimum threshold for local production will be considered but it doesn’t count for every industry34.

In summary, the more companies are following this rules and are compliant, the more economic stimulation takes places which means that the production is stimulated. When production is stimulated we have more consumers and can generate a sustainable outcome.

4.4. Ownership Criterion

Within the ownership criteria there are five elements that have to be considered. Each of them are weighted differently and have various targets. Figure 5 illustrates these elements and targets: A company has to prove a certain percentage of voting rights in the hands of black people and a certain share of black people with economic interest. Here is the target 25%. These criteria may apply on black women with a target of 10%.35 Showing a “certain percentage of shareholding owned by black people belonging to a designated group”36 has a target of 3%. If the target is achieved, the company will score points in the Ownership Scorecard.37

[...]


1 Cf. GTAI, Germany Trade & Invest: SWOT-Analyse – Südafrika, in: https://www.gtai.de/GTAI/Navigation/DE/Trade/Maerkte/Geschaeftspraxis/swot-analyse,t=swotanalyse--suedafrika,did=1576264.html (access: 17.12.2017).

2 Cf. Rödl & Partner: Erfolgreich investieren in Südafrika, in: http://www.roedl.de/themen/internationalisierung/suedafrika (access: 28.11.2017).

3 Cf. GTAI, Germany Trade & Invest: Südafrika – Wer oder was ist B-BBEE?, in: https://www.gtai.de/GTAI/Navigation/DE/Trade/Recht-Zoll/Wirtschafts-und-steuerrecht/recht-aktuell,t=suedafrika--wer-oder-was-ist-bbbee,did=1217714.html (access: 28.11.2017).

4 The dti (2014), „Government Gazette “, p. 2, [Online] Available from: http://www.dti.gov.za/business_regulation/acts/BEE-Amendment_ACT2013.pdf [Accessed 15th December 2017]

5 Cf. BEEBIZ, [Online] Available from: https://www.beebiz.co.za/history-of-bee.html [Accessed 15th December 2017]

6 Cf. The dti: Broad-Based Black Economic Empowerment Act – Section 9(5): Codes of Good Practise, in: https://www.thedti.gov.za/economic_empowerment/docs/2nd_phase/Code1000Statement1000.pdf (access: 14.10.2017).

7 Cf. The dti: Broad-Based Black Economic Empowerment Act - Section 9(1): Codes od Good Practise, in https://www.thedti.gov.za/economic_empowerment/docs/bee_archive_docs/Code100Statement10028Oct.pdf (access: 14.10.2017).

8 Cf. South African’s Transformation a Strategy for BBBEE, pp.16-17 [Online] Available from: http://www.empowerdex.com/Portals/5/docs/dti%20BEE%20STRATEGY.pdf [Accessed 15th December 2017]

9 Cf. Empowerdex, South African’s Transformation a Strategy for BBBEE, p.16 [Online] Available from: http://www.empowerdex.com/Portals/5/docs/dti%20BEE%20STRATEGY.pdf [Accessed 15th December 2017]

10 Cf. The dti, Background to, intention & application of the Codes of Good Practice (2007), pp.1-5 [Online] Available from: https://www.thedti.gov.za/economic_empowerment/docs/Inside.pdf [Accessed 15th December 2017]

11 Cf. The dti: Amended Broad-Based Black Economic Empowerment – Codes of Good Practise, in: https://www.thedti.gov.za/economic_empowerment/docs/bee_launch.pdf, p. 16 (access: 21.10.2017)

12 Cf. SEESA: BEE Priority Elements Made Easy, in: http://www.seesa.co.za/bee-priority-elements-made-easy/ (access: 16.10.2017).

13 Cf. The dti: Amended Codes of Good Practise For Broad-Based Black Economic Empowerment, in: http://www.sapvia.co.za/wp-content/uploads/2015/07/CODES-OF-GOOD-PRACTICE-FOR-B-BBEE-SAPVIA-23072015.pdf, p. 5 (access: 16.10.2017).

14 Cf. Fritzmann, Thomas (BASF): BBBEE Framework – New Program, S. 20.

15 Cf. The dti: Amended Broad-Based Black Economic Empowerment – Codes of Good Practise, in: https://www.thedti.gov.za/economic_empowerment/docs/bee_launch.pdf, p. 17 (access: 21.10.2017).

16 Cf. BEE Navigator: BEE Info, in: http://www.bee-scorecard.co.za/bee_information.html (access: 2.11.2017).

17 50 million Rand is equivalent to 3,1 million €.

18 Cf. The dti: Amended Broad-Based Black Economic Empowerment – Codes of Good Practise, in: https://www.thedti.gov.za/economic_empowerment/docs/bee_launch.pdf, p. 14 (access: 21.10.2017).

19 Cf. The dti: B-BBEE Sector Charters, in: https://www.thedti.gov.za/economic_empowerment/bee_sector_charters.jsp (access: 14.10.2017).

20 Cf. An EMPOWERDEX Guide: The Codes of Good Practise – Codes Definitions, in: http://empowerdex.com/Portals/5/docs/EmpowerdexGuide/Definitions.pdf (12.11.2017).

21 Cf. The dti: Presentation to the Portfolio Committee on Trade and Industry on the Amended B-BBEE Codes of Good Practise, in https://www.thedti.gov.za/parliament/2015/BBEE09062015.pdf, p. 20 (access: 16.10.2017).

22 Cf. The dti: Amended Broad-Based Black Economic Empowerment – Codes of Good Practise, in: https://www.thedti.gov.za/economic_empowerment/docs/bee_launch.pdf, p. 16 (access: 21.10.2017).

23 Cf. The dti: Amended Broad-Based Black Economic Empowerment – Codes of Good Practise, in: https://www.thedti.gov.za/economic_empowerment/docs/bee_launch.pdf, p. 16 (access: 21.10.2017).

24 Cf. GOLEGAL: What is the new B-BBEE scorecard and how does it work? in: https://www.golegal.co.za/new-b-bbee-scorecard-how-work/ (access: 10.11.2017).

25 Cf. Cacharter: Management Control, in: http://www.cacharter.co.za/DisplayContent.asp?ContentPageID=1136&Menu=&ContentPageName=&ContentPageParentId=842 (13.11.2017).

26 Cf. An EMPOWERDEX Guide: The Codes of Good Practise – Scorecard Essentials, in: http://www.empowerdex.com/Portals/5/docs/EmpowerdexGuide/Skills%20Development.pdf, (21.11.2017).

27 Cf. Empowerdex: Amended B-BBEE Codes – Enterprise an Supplier Development, in: http://www.blackumbrellas.org/assets/empowerdex-presentation.pdf, p.4+5 (21.11.2017).

28 Cf. Shoeman Tshaka: Enterprise and Supplier Development under the BBBEE Codes, in: https://www.schoemanlaw.co.za/wp-content/uploads/2014/04/Enterprise-and-Supplier-Development-Under-The-BBBEE-Codes.pdf (21.11.2017).

29 Cf. An EMPOWERDEX Guide: The Codes of Good Practise – Codes Definitions, in: http://empowerdex.com/Portals/5/docs/EmpowerdexGuide/Definitions.pdf (12.11.2017).

30 Cf.SAB&T BEE Services: BEE and Socio-Economic Development, in: http://www.sabtbee.co.za/bee-and-socio-economic-development/ (27.11.2017).

31 Cf. Shoeman Tshaka: Enterprise and Supplier Development under the BBBEE Codes, in: https://www.schoemanlaw.co.za/wp-content/uploads/2014/04/Enterprise-and-Supplier-Development-Under-The-BBBEE-Codes.pdf (21.11.2017).

32 Cf. Mpowered Business solutions, [Online] Available from: https://mpowered.zendesk.com/hc/en-us/articles/200424437-Preferential-Procurement-Explained [Accessed 15th December 2017]

33 Cf. Mpowered Business solutions, [Online] Available from: https://mpowered.zendesk.com/hc/en-us/categories/200039477-Generic-B-BBEE-Codes [Accessed 15th December 2017]

34 Cf. The dti, Designation of industries, sectors & products for local procurement in the public sector (2016), p.3, [Online] Available from: https://www.thedti.gov.za/parliament/2016/Local_Procurement.pdf [Accessed 15th December 2017]

35 Cf. The dti: Broad-Based Black Economic Empowerment Act - Section 9(1): Codes od Good Practise, in https://www.thedti.gov.za/economic_empowerment/docs/bee_archive_docs/Code100Statement10028Oct.pdf (access: 14.10.2017).

36 Cf. The dti: Broad-Based Black Economic Empowerment Act - Section 9(1): Codes od Good Practise, in https://www.thedti.gov.za/economic_empowerment/docs/bee_archive_docs/Code100Statement10028Oct.pdf (access: 14.10.2017).

37 [37] Cf. The dti: Broad-Based Black Economic Empowerment Act - Section 9(1): Codes od Good Practise, in https://www.thedti.gov.za/economic_empowerment/docs/bee_archive_docs/Code100Statement10028Oct.pdf (access: 14.10.2017).

Excerpt out of 28 pages

Details

Title
The Broad-Based Black Economic Empowerment (BBBEE). How to deal as a foreign investor
College
University of Applied Sciences Ludwigshafen
Grade
1,7
Author
Year
2017
Pages
28
Catalog Number
V502212
ISBN (eBook)
9783346048202
ISBN (Book)
9783346048219
Language
English
Tags
broad-based, black, economic, empowerment, bbbee
Quote paper
Kristina Wagner (Author), 2017, The Broad-Based Black Economic Empowerment (BBBEE). How to deal as a foreign investor, Munich, GRIN Verlag, https://www.grin.com/document/502212

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