1 the code of good practice on black economic empowerment

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The Code of Good Practice onBlack Economic Empowerment

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AN IMPLEMENTATION FRAMEWORK FOR BROAD-BASED BLACK ECONOMIC

EMPOWERMENT


EMPOWERMENT

STRUCTURE OF THE CODE OF GOOD PRACTICESTRUCTURE OF THE CODE OF GOOD PRACTICE

CODE 000: IMPLEMENTATION FRAMEWORKCODE 000: IMPLEMENTATION FRAMEWORK

CODE 100: EQUITY OWNERSHIPCODE 100: EQUITY OWNERSHIP

CODE 200: MANAGEMENTCODE 200: MANAGEMENT

STRUCTURE OF THE CODE OF GOOD PRACTICE

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Current Achievements:

• BBBEE Act provides an enabling framework

• The BBBEE Strategy stipulates the BEE intents and principles of Government

• Massive increase in BEE across all sectors of the economy

• BEE is recognized as a business imperative and deals are more broad-based than previously

• BEE Charters in strategic sectors (Mining, FSC, ICT, Tourism, Liquor, Agriculture, Transport, Health)

Progress on the B-BBEE Process

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• Lack of full understanding and appreciation of the principles of broad-based BEE

• Inconsistent application of BEE

• Extensive debates could result in delays – biggest risk is slow or no progress on BEE

• Disparity in Charter Definitions and Targets

• Lack of Implementation Guidelines can result in ‘Fronting’ or ‘Sham’ transactions promoted

Concerns and Risks around the B-BBEE Process

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Code of Good Practice as the BEE Implementation Framework

Broad-based BEE ActNo. 53 of 2003

Broad-based BEE Strategy

Codes of Good Practice

Legislative Enabling FrameworkStrategic

Framework

Implementation Frameworkand Guidelines

InterpretBEE

Definitions

Set BEEIndicators,Weightings

andTargets

Guidelinesto drawup BEEcharters

Guidelinesto maintainInstitutionalFramework(BEE Council /Accreditation

Agencies)

Generic or Sector-specific

BEE Scorecards

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Agenda

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Code of Good Practice (Structure)

Code 000: Framework

Statement 000: Conceptual Framework

Code 100: Ownership

Code 200: Management

Code 300: Employment Equity

Code 400: Skills Development

Code 500: Affirmative Procurement

Code 600: Enterprise Development

Code 700: CSI and Industry Specific

Code 800: BEE Practice Notes

Codeof

GoodPractice

Phase 1

Phase2

Statement 010: Charter Guidelines

Statement 020: BEE Council

Statement 030: Broad-based BEE

ImplementationStatement 040:

Glossary

Statement 050: BEE Rating agencies

accreditation

Statement 100: Ownership

Statement 200: Management

Each Code explains all issues pertaining to a key BEE element and can consist of

one or more statements

A Statement include a related set of principles that guides the

implementation of one BEE issue

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Structure of the Code:

The Benefits of the Adopted Structure:

• Logical Flow of the Structure: The Code is structured according to the logical flow of BEE scorecard.

• Flexibility of the Structure: It enables the Minister and DTI to expand, amend or remove individual statement as and when required, without having to re-issue the entire Code of Good Practice.

• Best Practice: The structure is similar to those used by the Generally Accepted Accounting Practice internationally.

Structure of the Code of Good Practice

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Agenda

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Objective of this Code:

This code comprises of statements that:

• Establish the conceptual framework• Summarizes the indicators, weightings and targets for each element of the Scorecard

BEE elements

• Provide application guideline for the generic BEE Scorecard• Establish different institutional framework to facilitate the implementation of the Strategy and the Code of Good Practice.

Code 000 – Implementation

Framework

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Code 000 – Implementation Framework

Statement(s) currently contained in this Code:

• Statement 000: Conceptual Framework• Statement 010: Sector Transformation Charters• Statement 020: BEE Advisory Council• Statement 030: Implementation of Broad-based BEE• Statement 040: Glossary• Statement 050: Accreditation Agencies

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Key Principles

Description Implication

Substance over Form

Broad-based BEE must be measured and reported according to economic reality rather than legal form

• Penalize the use and reporting of ‘fronting’ or ‘sham’ BEE structures and entities. • Prevent BEE from becoming a box-ticking exercise and lose its socio-economic substance.

Broad-based BEE Scorecard

BEE is an integrated socio-economic process which aims at empowering all black people

BEE is measured based on seven core elements: ownership, management, employment equity, skills development, affirmative procurement, enterprise development and residual

Statement 000 – Conceptual Framework

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Old scorecard vs

New scorecard

Old New

No targets included Targets included

No points allocated for women

Points allocated for women

Preferential procurement based on black ownership

Preferential procurement based on BEE contribution

No bonus points for over-performance

Bonus points given for over-performance

Indicators limited More options for indicators

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Statement 010 – Sector Transformation

Charter

• Outline the process to be followed in formulating a sector charter

• Establish the status of sector transformation charter

• Identify principles to be applied to harmonise the different charters

• Outline the process of constituting Charter Councils and prescribe the powers of these Councils

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Key Principles


Qualification Criteria

Only sectors interacting directly with the government, as determined by government are encouraged to develop sector charters.

• Ensure that charters are only developed in key economic sectors. • Preclude entities from avoiding the application of the generic scorecard through sector charters.

Guideline for setting targets, weightings and indicators

The charters cannot deviate from the definitions and principles of the Code.

• Prevent sectors from circumventing the BEE principles of the Act, Strategy and the Code through charters• Reduce confusion resulting from multiplicity of definition for the same BEE principles in different charters.

Publication of charter in the Gazette

Minister to publish in the Gazette as a charter if meet all s12 requirements. Minister can also elect to publish charter as a Code (s9) if it meet all requirement of the Strategy and this Statements.

• Gazetted Charter are an evidence of sector commitment to transformation• On the other hand, Charter gazetted as a Code of Good Practice has same status as a Code (can be used in determination of BEE status)

Statement 010 – Sector Transformation Charter

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Statement 030 – Implementation of Broad-based BEE

• Identify policy instruments and initiatives that can promote broad-based BEE

• Align the implementation of policy instruments and initiatives to broad-based BEE

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Key Principles


Policy Instruments

Identifies policy instruments and initiatives that can be used to promote broad-based BEE

• Increase awareness of public and private sector decision maker of when broad-based BEE status can be applied

Application of Broad-based Principle

Differentiate between the use of broad-based measures (based on the scorecard) and narrow-based measure (based solely on ownership). Identify the risk of narrow-based application to the BEE process and the economy.

• Provide implementation and reporting guidelines to align policy instruments to broad-based BEE• Raise the awareness of the risks and potential conflicts around the use of narrow-based BEE measures• Promote the adoption of the scorecard as contained in the strategy and the Code.

TransitionalProvisions

Entities currently applying measures that are either narrow-based or that are contrary to the Code will be given 12 months to adapt their decision-making and reporting mechanisms.

• Align all public and private sector policy instrument and initiatives to broad-based BEE over 12 months• Enhance the multiplier effects as envisaged in the broad-based BEE model

Statement 030 – Implementation of Broad-based BEE

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Key Principles


Advisory Council(020)

Establish the guidelines for the creation and the operations of the BEE Advisory Council

• Facilitate the creation and operation of the BEE Advisory Council

Glossary(040)

Provide a standard glossary of all terms and definitions used in the Code of Good Practice

• Collate all BEE terms and definitions used in the Code of Good Practice• Provide a centralized source of BEE definitions that can assist sector organizations, entities and practitioners

Approved Accreditation Agencies(050)

Establish the technical and BEE qualification criteria for accreditation agencies. Create an approval mechanism for dti to approve accreditation agencies.

• Create a framework whereby Government can leverage the work and information of the accreditation agencies to accelerate BEE• Provide an approval framework to ensure that all accreditation agencies have the necessary technical and BEE credentials to evaluate BEE

Other Statements within Code 000

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AN IMPLEMENTATION FRAMEWORK FOR BROAD-BASED BLACK ECONOMIC EMPOWERMENT

AN IMPLEMENTATION FRAMEWORK FOR BROAD-BASED BLACK ECONOMIC EMPOWERMENT





Agenda

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• This code comprises of statements that inform the recognition and measurement criteria for black ownership.

• The code also ensures that the BEE process can result in the transfer of genuine, substantive and sustainable ownership to black people.

• The Code also aims to reduce ‘fronting’ and misrepresentation of black ownership by companies through the stipulation of a standard set of principles and guidelines for its measurement and reporting.

Code 100 – Ownership

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Code 100 – Ownership


• Statement 100: Recognition and Measurement of BEE Ownership

Objectives

• To increase the number of black people that manage, own and control enterprises and productive assets.

• Provide recognition and measurement criteria for black ownership

• Provide key principles to be used in determining ownership by black people

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Key Principles


Ownership as Economic Interest and Voting Rights

Ownership is measured as an entitlement to both voting rights and economic interests.

• Prevent transactions where black people are given voting right but no economic interest.• Prevent fronting transactions where no real economic transfer take place.

Flow Through Principle

Ownership is included if it is held by natural person. In the case of holding by a juristic person such as a company, only the portion of ownership in that entity by a natural black person will be included.

• Pierce through pyramid holding structures that are been used to inflate black ownership in entities• Measures and reports the actual levels of economic ownership held by black people• Will determine what are the actual economic benefits flowing to the BEE equity holders.

Restrictions Identifies and exclude any equity subject to any rights limitations

• Penalize transactions where the rights attached to the equity holding of black owners are limited• Reduce ‘Fronting’ transactions

Statement 100 – Ownership

Black Individual

Holding Company 1

Holding Company 2

Company C

51%

51%

51%

Non-BEE Shareholders

49%

49%

49%

Flow Through Principle

Effective black ownership in Company C is 51%*51%*51% = 12.5 percent

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Determinant of Ownership Score

MEASUREMENT PRINCIPLE:

Recognize and reward companies for the ability of black people to exercise and benefit from

ownership rights, as well as the extent of the beneficiary base. (2 Ways to allocate scores for BEE Ownership)

• Allocation by black people’s ability to exercise ownership rights including:– unrestricted voting right– the right to receive economic interest such as dividends and capital gains– unrestricted and unencumbered entitlement to economic interest

• Allocation by the beneficiary base, taking into accounts participation by: – black women– new entrants, and – black designated groups (such as black workers, black youth, black people with

disability and black people living in rural areas)

Voting Right

Economic Benefit

Unencumbered Interest

Ownership(20% of

BEE Scorecard)

Black Women

Broad-based Groups

New Entrants

All Black S/H

Determinant of Ownership Score

Black Women

Broad-based Groups

New Entrants

All Black S/H

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Ownership Score Allocation

Point Allocation by Categories of Ownership Rights

Unemcumbered Economic Interest

40%

Economic Interest

35%

Voting Rights25%

Allocation by categories ensures that only companies with black women and designated group participant get 100%.

All Black People

(including black

women and designated

groups)75%

Black Women

20%

Black Designated

Groups5%

Allocation by ownership right differentiate between the rights accrual to black investors

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Ownership Indicator Weighting points

Compliance target

Measurement Principles

1.1.1 Voting Rights:

1.1.1.1 Unrestricted Voting Rights in the Enterprise in the hands of Black people

3 25%+1 vote

1.1.1.2 Unrestricted Voting Rights in the Enterprise in the hands of Black women

2 10%

1.1.2 Economic Interest:

1.1.2.1 Economic Interest in the Enterprise to which Black people are entitled

4 25%

1.1.2.2 Economic Interest in the Enterprise to which Black women are entitled

2 10%

1.1.2.3 Economic Interest in the Enterprise to which Black designated groups are entitled

1 2.5%

1.1.2.4 Level of Unrestricted entitlement of Black people to receive their Economic Interest in the Enterprise

8 25%

1.1.3 Bonus points:

1.1.3.1 Involvement of new entrants who are Black people in the ownership of Enterprises

1 As specified below

1.1.3.2 Performance in excess of the requisite targets for Unrestricted Voting Rights or Unrestricted Economic Interest

1 As specified below

Ownership measured through the matrix table, allocating point for different categories of rights and different beneficiaries

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Key Principles

• Options and Contingent Claims: Where an option is used where the economic interest is contingent upon a future event, the economic interest will be projected on a fair and reasonable basis, but will be recognized as restricted economic interest.

• Organs of State, Pension Funds and Superannuation Schemes: The BEE ownership by organs of state, pension funds and superannuation schemes are specifically excluded from the calculation from both numerator and denominator. The amount excluded from total ownership (denominator) is limited to the lower of 25 percent or the level of economic interest owned by black people. An enterprise with more than 75 percent ownership by the state is specifically exempted from the application of this statement.

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Key Principles (Continued)

• Bonus Points: The statement provide for: – one (1) bonus point to be awarded for new entrants,

where the black people buying into the enterprise have not entered into a previous transaction where the fair market value of the company exceed R 20 million in value.

– The statement also provide one (1) bonus point to be awarded to company who have exceeded the 25 percent target for voting right or economic benefits

• Non-Circumvention: The non-circumvention principle allows for identification of fronting or other structures which aims to misrepresent the level of ownership. Rating agencies are required to maintain a database of such structures. In order to ensure that ownership information is not misrepresented, enterprises are required to provide appropriate documentation to evidence their ownership.

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Agenda

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• This code contains the statements which guide the

recognition and measurement of black management

representation. Management represent the second leg

of direct empowerment component of the BEE

balanced scorecard.


• Statement 200: Recognition and Measurement of

Management

Code 200 – Management

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Key Principles


Weighted Measurement Criteria

The measurement criteria for management is weighted to give recognition to key executive (2), executive (1) and non-executive positions (0.5)

• Reward enterprises for appointing black management into key executive rather than non-executive positions• Prevent black management requirement from becoming a numbers game

Management Target

The management target is currently set at 40 percent of the weighted score

• Similar to mining charter requirements• Percentage score calculated as a percentage of the target

Limitation of non-executive recognition

The statement limit the recognition of non-executive to 10 percent of the scorecard

• Prevent enterprise from achieving quota by only appointing black non-executives• Counters market trend in appointing black non-executives rather than executives

Additional Recognition for Women

Black women management at all levels are allocated more significant weightings

• Provide bonus and reward enterprise which appoint black women management

Statement 200 – Management

• Provide Recognition and Measurement Criteria for Management

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05

10

1520253035

4045

R Bn

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Bee deals in R billion - source E & Y

0

50

100

150

200

No

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Number of BEE deals - source E & Y

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Thank You

1 the code of good practice on black economic empowerment

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