The empowerment, transformation and development aims of the Broad-Based Black Economic-Empowerment (BBBEE) Act, No 52 of 2003, are intended to be sustainable and to improve the economy, but are not necessarily to occur slowly, says legal firm Webber Wentzel partner Ana Milovanovic.
The generic and sector-specific BBBEE Codes of Good Practice intend to narrow the wealth, education and ownership gaps that exist in South Africa between historically disadvantaged citizens and historically advantaged citizens who had benefited from the apartheid-era policies, she explains.
“The fact that compliance with the codes is voluntary has increased international investor confidence,” she adds.
Originally, black economic empowerment was ‘narrow’, meaning that the ownership and management of enterprises by black persons were imperative. However, the country realised that this approach would simply lead to a select few individuals amassing considerable wealth, but would not have the effect of truly empowering the majority of the previously disadvantaged individuals, she says.
This resulted in the move towards BBBEE, which awards the efforts made by entities to empower not only black shareholders but also black employees (through employment equity and skills development), black-owned entities within the supply chain or industry (through enterprise development and preferential procurement) and communities at large (through socioeconomic development).
“However, BBBEE may still not become a reality because much of the anecdotal evidence suggests that certain State-owned enterprises do not take into account the points achieved by an entity on the generic scorecard, unless the ownership element has been addressed. In other words, entities that perform very well in all other elements of the broad-based scorecard are not likely to be awarded contracts because they do not score well on the ownership element of the scorecard,” warns Milovanovic.
Generic and Sector Codes
The generic codes consist of seven elements, or pillars, namely the ownership of various private or public entities by black people, including black women, the management and control of those entities, the employment of black people on various levels by the entities, the expenditure incurred as a result of training black people in the work environment, the commitment of the entities to socioeconomic development and the commitment to develop-ing other emerging enterprises.
When originally gazetted, the generic codes were intended to standardise the application of the BBBEE requirements imposed by various State-owned enterprises at the time. The idea was to promote voluntary compliance on the basis that those entities that did not comply would not be awarded tenders by State-owned enterprises, and that private- sector companies should improve their BBBEE profiles because their own clients would benefit from doing business with empowered entities, she explains.
However, it soon became evident that the application of the generic scorecard across all sectors of the South African economy was not possible. Certain industries cannot adopt the generic scorecard and may prioritise different transformative initiatives, for example, in the mining and minerals industry, in particular, beneficiation and the improvement of living conditions in mining towns may be an imperative, while, in other industries the focus may be different, she says.
Sector codes enable deviation from generic code targets and weightings where such deviations are justifiable based on sound economic principles, sectoral characteristics or empirical research. However, the generic codes set out the requirements for gazetting a transformation charter as a sector code and specify that certain standards must be met before they are gazetted as sector codes. This is an extension of the principle of standard-isation, she explains.
“Until such time as the charters are gazetted in terms of section 9 (1) of the BBBEE Act, a charter does not become a sector code and simply expresses an undertaking by the various stakeholders in a particular sector to promote transformation within that sector. Once gazetted as sector codes, however, those codes become applicable in that particular sector,” says Milovanovic.
Meanwhile, in the small to medium-sized enterprise space, which includes companies with a yearly turnover of less than R35-million, these entities are now entitled to select four out of the seven elements of the BBBEE generic codes of good practice with which they can comply. The BBBEE scorecard is adjusted in terms of weightings to allow for this. An enterprise can, therefore, exclude the ownership element from its scorecard if it complies with four other elements of the generic codes, explains Milovanovic.
The employment equity element of the codes is a tool through which government policy is being implemented in the private sphere, and is driven by the preferential procurement element, a clear example that BBBEE is empowering even the lowest-level employees in the private sector, she says.
Preferential Procurement Drives Empowerment Initiatives
Preferential procurement policies drive BBBEE initiatives and aim to benefit both public and private businesses, and promote transform-ation and development, says Milovanovic.
The Preferential Procurement Policy Framework (PPPF) Act (5/2000): Draft Preferential Procurement Regulations, 2009, was published for public comment last year to ensure that government’s preferential procurement procedures were aligned with the aims of the BBBEE Act, No 52 of 2003 and its Generic Codes of Good Practice.
The preferential procurement element of the Generic Codes of Good Practice enables a private-sector entity to score points on a scorecard on the basis of procuring goods and services from entities that have a favourable BBBEE profile, thereby promoting investment in BBBEE entities. In the public sphere, organs of State and public entities are obliged to apply the regulations contained in the PPPF Act to ensure that procurement by State organs recognises the tendering enterprises’ compliance with the BBBEE Act and the generic codes of good practice.
The codes and BBBEE compliance have provided a competitive edge for those companies that have implemented empowerment initiatives.
Also, the draft regulations continue to apply the 80% to 20% principle for contracts up to a value of R1-million, and for contracts with a value above R1-million, 90% to 10%, which effectively means that empowerment counts for as much as 20% in a tender evaluation (the price and quality of service being considered in the 80% category). The contract may, therefore, be awarded for achieving government’s procurement-related socioeconomic aims (according to a company’s BBBEE profile).
“However, there remains an element of scepticism surrounding BBBEE. This is often reflected in the view that BBBEE compliance is merely another cost of doing business in South Africa. On a practical analysis, entities that implement BBBEE as a compliance requirement, in a tick-the-box approach, do not realise the rewards of BBBEE initiatives, as opposed to those entities that seek to unlock value for shareholders by implementing strategies, particularly ownership deals,” Milovanovic emphasises.
“BBBEE initiatives should be viewed as business opportunities, where organisations cooperate with partners who add value to the business, not a cost to be borne by existing shareholders. BBBEE transactions, which are properly structured and executed, unlock the value of the existing shareholders instead of hindering the economic growth or the value of the entity,” she explains.
The success of the transaction, from the BBBEE partner’s perspective, is measured by the BBBEE shareholder’s ability to extract value from the investment, while simultaneously servicing any acquisition debt the shareholder may have needed to raise to implement the transaction, she adds. The benefit for the company implementing the transaction and its original shareholders is a competitive edge over other businesses.
Placing individuals in positions to generate an acceptable scorecard, while disinter- mediating them from proper management functions, referred to as fronting, is a challenge, particularly when an enterprise approaches BBBEE transformation from a cost-to-business perspective without commitment to transformation or development. The Department of Trade and Industry aims to tackle this by implementing reporting procedures through verification agencies and its website, she says.
Another significant challenge is the drafting of the generic codes and the various sector codes that are open to various interpretations and, accordingly, to abuse. While ‘substance over form’ is a principle enshrined in the codes themselves, the codes leave much to be desired in terms of legal certainty; and it is sometimes difficult to adopt the intended effect of a provision because the language used can be interpreted differently, Milovanovic explains.
Another important legal issue is that of ‘lock-ins’, where BBBEE shareholders are prevented from selling their equity for a limited time, which may prevent the BBBEE party from realising the value of the investment at an opportune time.
However, the ‘lock-in’ principles are balanced by the requirements of the measured entity to retain its targeted level of compliance for a period after implementing the ownership deal, often implemented at a discounted rate favourable to BBBEE investors, she says.
Another recent development was the establishment of the BBBEE Council, which will advise the President on policy issues relating to BBBEE. The Council represents the political will to continue implementing BBBEE in all sectors of the economy, she adds.
Therefore, she concludes: “The role of the BBBEE Council will be valuable in consulting on issues of inconsistencies, explanatory memoranda or actual revision of the codes, which will further standardise their application among verification agencies, which must themselves be subject to clear requirements and guidelines in relation to verification of scorecards.”