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Broad-Based Black Economic Empowerment: Legislation and Recent Changes

Broad-Based Black Economic Empowerment: Legislation and Recent Changes. August 2007. What is BEE?. B lack E conomic E mpowerment:. Furthering the economic interests of Black people.

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Broad-Based Black Economic Empowerment: Legislation and Recent Changes

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  1. Broad-Based Black Economic Empowerment: Legislation and Recent Changes August 2007

  2. What is BEE? Black Economic Empowerment: Furthering the economic interests of Black people Black = African, Coloured or Indian persons, born in SA, a citizen by descent or became a citizen by naturalisation before 27 April ’94 or can demonstrate that they were unable to obtain citizenship by naturalisation under Apartheid

  3. History of BEE Black Political Empowerment 1990 – Mandela released 1994 – Elections 1995 – Labour Relations Act 1997 – Basic Conditions of Employment Act 1998 – Skills Development Act 1998 – Employment Equity Act 2000 – Preferential Procurement Framework Act 2003 – Black Economic Empowerment Act

  4. History of BEE Black Economic Empowerment 1990s – BEE Equity deals • Focus on ownership • Creation of Black elite 1998 – BEE Commission appointed 2001 – BEE Commission report 2002 – First Charters 2003 – Broad Based BEE Strategy Document 2003 – BEE Act 1994 ~90% of assets White owned 2004 ~90% of assets White owned

  5. BEE Act • Establish BEE Advisory Council • Strategy for BEE • Codes of Good Practice for BEE • Balanced Scorecard • Transformation Charters • Section 12 – Sector Charters • Section 9 – Sector Codes

  6. How is BEE Enforced? BEE Scorecard • Ownership • Management • Employment Equity • Skills Development • Preferential Procurement • Enterprise Development • Socio-economic Development

  7. How is BEE Enforced? Scorecard varies by entity size • Generic • More than R35 million turnover per annum • Qualifying Small Enterprises (QSE)‏ • R5 million to R35 million per annum • Exempted Micro Enterprises (EME)‏ • Less than R5 million • NO SCORECARD!

  8. How is BEE Enforced? Element Generic QSE Ownership 20 points 25 Management 10 points 25 Employment Equity 15 points 25 Skills Development 15 points 25 Preferential Procurement 20 points 25 Enterprise Development 15 points 25 Socio-economic Development 5 points 25 TOTAL 100 100* • Scorecard Weightings: *QSEs elect 4 of the 7 elements in which to score

  9. How is BEE Enforced? • Verification Agency • BEE Verification – score • Score is broken into levels: • Level One: 100 or higher • Level Two: From 85 to 100 • Level…….. • Non compliant: <30 • National Empowerment Database (DTI)‏ • Measured every 12 months

  10. How is BEE Enforced? Public Sector: • BEE score incorporated in tender score • Minimum tender requirement • Concessions and Licences • Sale of state owned assets • Public Private Partnerships • Criteria for Rebates and Grants

  11. How is BEE Enforced? Private Sector: • Your score counts towards your customer’s score • Your supplier’s score counts towards yourscore

  12. Most likely choice Supplier A Supplier B Supplier C Price R40/ream R35/ream R35/ream Quality Same brand of paper Service 5 days delivery 2 days delivery 2 days delivery BEE Score Non-compliant High Low Differentiating Factor How is BEE Enforced?

  13. How is BEE Enforced? BEE not a compliance issue…… ……..it is a competitiveness issue.

  14. The BEE Scorecard • Think of the scorecard as a test…. • Question 1: Ownership Counts 20 marks out of 100 • Question 2: Management Counts 10 marks out of 100 And so on………

  15. Indicator Weight (Points)‏ Target Black voting rights 3 25%+1 Voting rights of Black women 2 10% Black economic interest 4 25% Economic interest of Black women 2 10% Economic interest of Black designated groups; participants in Employee Ownership Schemes; beneficiaries of Broad-based Ownership Schemes; participants in co-operatives 1 2.5% 1. Ownership Generic Scorecard:

  16. 1. Ownership Generic Scorecard continued: Indicator Weight (Points)‏ Target Ownership fulfilment 1 Complete Net Value 7 Increasing TOTAL 20 Bonus Points Black New Entrants 2 10% Black participants in: Employee Ownership Schemes; Broad-based Ownership Schemes or Co- operatives 1 10% TOTAL 23

  17. Indicator Weight (Points)‏ Target Black voting rights 6 25%+1 Black economic interest 9 25% Ownership fulfillment 1 Complete Net Value 9 Increasing TOTAL 25 Bonus Points: Ownership by Black Women 2 10% Employee Ownership Schemes, Co-operatives or Broad-based Ownership Schemes 1 10% 1. Ownership QSE Scorecard

  18. 1. Ownership Net Value % 30 25 20 Net Value Target 15 10 5 0 1 2 3 & 4 5 & 6 7 & 8 9 & 10 Year

  19. 1. Ownership Flow-through Principle Always trace back to a natural person. Black Person 90% Trust (90%)‏ 90% Company A (81%)‏ 65% Company B (52.7%)‏ Measured Company 26% 90% x 90% x 65% x 26% = 13.7%

  20. 1. Ownership Modified Flow-through Principle One company in a chain may be considered 100% Black owned if its ownership is measured >50% using the Flow-through Principle. Black Person 90% Trust (90%)‏ 90% Company A (81%)‏ 65% Company B (52.7%)‏ Measured Company 26% 90% x 90% x 100% x 26% = 21.1%

  21. 1. Ownership Exclusion Principle Ownership by an Organ of State is excluded from the calculations Black Person Organ of State 90% Trust (90%)‏ 23% 90% Company A (81%)‏ 65% Company B (52.7%)‏ Measured Company 26% 90% x 90% x 100% x 26% = 21.1% 21.1% / (100% - 23%) = 27.4%

  22. 1. Ownership Ownership – Example: • Bob sells 20% of his shares in Bob’s Farms to a black consortium • Zola(45) and Thandi(32) are the members of the consortium each with a 50% share • Consortium pays for half their shares up front • Remainder to be paid from their share of future dividends • The shares have full voting rights

  23. 1. Ownership Ownership – Example: Black voting rights: • Target = 25% + 1 vote • Achieved = 20% • Weighting = 3 (marks)‏ • Score = 20/25 x 3 = 2.4

  24. 1. Ownership Ownership – Example: Voting rights of Black women: • Target = 10% • Achieved = 10% • Weighting = 2 (marks)‏ • Score = 10/10 x 2 = 2

  25. 1. Ownership Indicator Weight Score Target Achieved Black voting rights 3 2.4 25%+1 20% Voting rights of Black women 2 2 10% 10% Black economic interest 4 3.2 25% 20% Economic interest of Black women 2 2 10% 20% Economic interest of Black designated groups 1 1 2.5% 10% Ownership fulfilment 1 0 Complete No Net Value 7 5.6 25% 20% TOTAL 20 16.2 • Ownership – Example:

  26. 1. Ownership Multinationals • Recognition of Equity Equivalents • Criteria: • Own and control entire entity • Ownership subject to global practice • Can do either equity equivalent or equity sale, but not both.

  27. 1. Ownership Multinationals • Equity Equivalents include: • Approved Public Programme • Contribute 25% of value of local operation • OR 4% or local turnover for 10 years

  28. 1. Ownership Organs of State, Public Entities, Section 21 and Companies Limited by Guarantee • Ownership omitted • Score on an Adjusted Scorecard

  29. 1. Ownership “Once empowered always empowered” • Exiting black shareholders • Hold shares for minimum of 3 years • Period for which points are allocated limited to the length of time the shares were held • Cannot contribute more than 40% (8 points) on the Ownership scorecard

  30. 2. Management Indicator Weight (Points)‏ Target Black board member voting rights* 3 50% Black Executive Directors* 2 50% Black senior top management* 3 40% Black other top management* 2 40% TOTAL 10 Bonus point: Black independent non-executive board members 1 40% • Generic Scorecard * Using adjusted recognition for gender

  31. 2. Management Adjusted Recognition for Gender: Black % + Black Women % 2 Where the Black Women % is limited to half of the target

  32. 2. Management Adjusted Recognition for Gender • Say 2 out of 10 people in Other Top Management are black men: • Say 2 out of 10 people in Other Top Management are black women: 20% (black)‏ + = 10% 0% (black women)‏ 2 20% (black)‏ + = 30% 20% (black women)‏ 2

  33. Indicator Weight (Points)‏ Target Black representation at Top Management Level 25 50.1% TOTAL 25 Bonus points: Black women representation at Top Manager level 2 25% 2. Management QSE Scorecard

  34. 3. Employment Equity Indicator Weight (Points)‏ Target Yr 0-5 Yr 6-10 Black people with disabilities* 2 2% 3% Black Senior Management* 5 43% 60% Black Middle Management* 4 63% 75% Black Junior Management* 4 68% 80% TOTAL 15 Bonus points for meeting or exceeding the EAP targets in each category above. 3 • Generic Scorecard * Using adjusted recognition for gender

  35. Indicator Weight (Points)‏ Target Yr 0-5 Yr 6-10 Black representation in all Management* 15 40% 60% Black employees as a percentage of all employees* 10 60% 70% TOTAL 25 Bonus points for meeting or exceeding the EAP targets in each category above. 3. Employment Equity QSE Scorecard * Using adjusted recognition for gender

  36. 4. Skills Development Indicator Weight (Points)‏ Target Adjusted* spend on Black skills development as percentage of Leviable Amount 6 3% Adjusted* spend on skills development for black disabled as percentage of Leviable Amount 3 0.3% Adjusted* number of black employees participating in Learning Programmes as a percentage of total employees 6 5% TOTAL 15 • Generic Scorecard * Using adjusted recognition for gender

  37. Indicator Weight (Points)‏ Target Adjusted* Skills Development Spend on Learning Programmes for black employees as a percentage of Leviable Amount 25 2% TOTAL 25 4. Skills Development QSE Scorecard * Using adjusted recognition for gender

  38. 5. Preferential Procurement Indicator Weight (Points)‏ Target Yr 0-5 Yr 6-10 BEE Procurement Spend from suppliers as percentage TMPS* 12 50% 70% BEE Procurement Spend from QSE or EME suppliers as percentage TMPS* 3 10% 15% BEE Procurement Spend from 50% Black owned or 30% Black women owned suppliers as percentage TMPS* 5 15% 20% TOTAL 20 • Generic Scorecard *TMPS – Total Measured Procurement Spend

  39. BEE Score BEE Status Recognition Level 100 + Level 1 1.35 85 – 100 Level 2 1.25 75 – 85 Level 3 1.10 65 – 75 Level 4 1.0 55 – 65 Level 5 0.8 45 – 55 Level 6 0.6 40 – 45 Level 7 0.5 30 – 40 Level 8 0.1 < 30 Non-compliant 0 5. Preferential Procurement BEE Recognition Levels:

  40. Supplier Actual Spend BEE Level Recognition Level BEE Spend A R150 L4 1.0 R150 X = B R250 L7 0.5 R125 C R550 L6 0.6 R330 D R50 L8 0.1 R5 TOTAL R1000 R610 5. Preferential Procurement Overall BEE Procurement Spend: R610 / R1000 = 61% Calculating a Preferential Procurement Score:

  41. 5. Preferential Procurement Indicator Weight (Points)‏ Target Yr 0-5 Yr 6-10 BEE Procurement Spend from all Suppliers based on the BEE Procurement Recognition Levels as a percentage of Total Measured Procurement Spend 25 40% 50% TOTAL 25 • QSE Scorecard

  42. 5. Preferential Procurement Inclusions • Operational expenses, cost of sales and capital expenditure • Procurement from monopolistic suppliers • Third-party procurement recorded in your books • Labour brokers and independent contractors • Pensions and medical aid – the admin related fee, not the investment

  43. 5. Preferential Procurement Inclusions • External commissions – ie. Not paid to employees • Costs related to facilitating BEE contributions – Enterprise & Socio-economic Development • Intra group expenses • Bodies listed in Schedules 2 & 3 of the PFMA • Imports (certain exclusions can be made)‏

  44. 5. Preferential Procurement Exclusions • Taxes or levies • Organ of state or public entity with regulated monopoly • Bodies listed in Schedule 1 of PFMA • Salaries and wages • Pass through third party procurement where it is not recorded in your books • Investments in or loans to an Associated Enterprise

  45. 5. Preferential Procurement Exclusions • Investments, loans or donations made for Enterprise Development and Socio-economic Development • Imports: • Capital goods or components for value-adding in South Africa provided that there is no existing local equivalent • Or one can differentiate local from imported on the basis of brand or technical specifications

  46. 6. Enterprise Development Indicator Weight (Points)‏ Target Average annual value of all Enterprise Development Contributions and Sector Specific Programmes made by the measured entity as a percentage of the target. 15 3% of net profit after tax TOTAL 15 • Generic Scorecard NOTE: Contributions are measured cumulatively from the Commencement Date (9 Feb 2007) or an Inception Date chosen by the Measured Entity

  47. Indicator Weight (Points)‏ Target Average annual value of all Enterprise Development Contributions and Sector Specific Programmes made by the measured entity as a percentage of the target. 25 2% of net profit after tax TOTAL 25 6. Enterprise Development QSE Scorecard NOTE: Contributions are measured cumulatively from the Commencement Date (9 Feb 2007) or an Inception Date chosen by the Measured Entity

  48. 6. Enterprise Development What if I make a loss? • If a loss was made in last financial year or on average for last 5 years • OR NPAT was less than ¼ industry norm in last financial year • Then take last year when profit was greater than ¼ industry norm and multiply profit margin for that year by turnover for last financial year to get deemed net profit

  49. 6. Enterprise Development What counts? • Grants, discounts and donations – 100% • Overhead costs – 80% • Loans: • Interest free, no security – 100% • Standard loan to QSE or EME – 70% • Standard loan to other beneficiaries – 60% • Guarantee – 3% • Lower interest rate: Prime - Actual

  50. 6. Enterprise Development What counts? • Equity Investments • Minority stake in EME or QSE – 100% • Minority stake in other beneficiary – 80% • Investment with lower interest to financier: Ordinary dividend rate – Actual dividend rate • HR Capacity • Free professional services – 80% • Discounted professional services – 80% • Employees time – Salary / 160 = hourly rate

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