OVERVIEW OF B-BBEE

HISTORY

B-BBEE is an empowerment initiative introduced by the South African government after the change from Apartheid to the current regime in 1994. The initiative aims to fast track the development of South African economy, focusing the empowerment initiatives on citizens who were disempowered under the Apartheid regime.

CURRENT STATUS

At present, the initiative is focused on local manufacture and economic participation of these previously disadvantaged individuals, referred to as black people (Black people, Coloured people and Indian people who are citizens of the Republic). Such initiatives are not uncommon in developing economies, with similar structures in place in India, China, Botswana and Namibia for example. India requires 50% shareholding by an Indian citizen to trade within their country. The Chinese government requires 50% turnover in some industries directed to the Chinese Government. Botswana requires 50% local shareholding as well as 50% local workforce employment within 3 years of establishing a business in that country. South Africa requires a level of compliance with the Broad-based Black Economic Empowerment Scorecard.

The mechanism that has been leveraged in implementing B-BBEE is the purchasing power of government. To this end, the South African government has implemented a procurement policy based on a level of compliance with a B-BBEE Scorecard. 20% of the government’s procurement decisions must be made on the basis of compliance with the B-BBEE Scorecard. This purchasing power has infiltrated the private sector as each company’s scorecard is dependent on the level of compliance of the suppliers from whom they procure goods and services. This knock-on effect has proven very effective in the implementation of the B-BBEE Scorecard throughout the private sector, where companies require a specific level of compliance before they procure goods or services from another company, as this directly impacts on their own level of compliance.

LICENSING

The government has then gone one step further in that they have made specific levels of B-BBEE compliance mandatory for the award of various licenses such as mining licenses issued by the Department of Mineral Resources, gaming licenses issued by the Gaming Board, liquor licenses issued by the Health Department etc.

LEVEL OF COMPLIANCE

A company’s level of B-BBEE Compliance is measured against a B-BBEE Scorecard, which summarises a company’s compliance with various elements of B-BBEE. The level of compliance is established on an annual basis by an independently accredited rating agency against evidence of compliance with the scorecard provided to the agency by the company.

These rating agencies are regulated and inspected, accredited by the Independent Regulatory Board of Auditors of South Africa (IRBA) or by the South African National Accreditation Service (SANAS) to ensure that misrepresentation of evidence/compliance is kept to a minimum. This ensures that the B-BBEE initiative has been implemented with a material impact and a certain level of assurance to the market.

B-BBEE CERTIFICATE

Once a company’s level of B-BBEE compliance is verified by an independent rating agency, the rating agency issues a B-BBEE Certificate outlining the company’s level of compliance against a pre-defined scale. The scale runs from a high level of compliance (Level 1) down to a low level of compliance (Level 8) and ultimately to Non-Compliant, which is any a score below a Level 8 compliance. Non-compliant companies cannot offer their suppliers any benefit on their clients’ Scorecard, thereby narrowing their avenues for income and business opportunities in the South African marketplace, as well as with the South African government.

The B-BBEE Certificate issued by a rating agency is only valid for the period of one year and can only be issued by rating agencies who are accredited by the above-mentioned bodies. Each company is then faced with obtaining a new and valid B-BBEE Certificate on expiry of the current B-BBEE Certificate, based on the most recent financial year. Companies often fall under tremendous pressures from their clients or a licensing authority to obtain a new and valid B-BBEE Certificate timeously. Threats are often made for companies to obtain a certain level of compliance or face losing supplier status or not having their licensing renewed.

Misrepresentation of any facts to a rating agency or implementing any measures that circumvent the requirements of B-BBEE is called “Fronting. Fronting constitutes a criminal offence and carries hefty fines, jail time and permanent black-listing as a supplier to government. It is also allowed to “name and shame” such companies in the media, as a B-BBEE Certificate is a public document.

CODES OF GOOD PRACTICE

Each element has its own Scorecard, called a Code. These Codes are published by the South African Department of Trade and Industry in the form of the Codes of Good Practice.

These Codes dictate how the Scorecards are implemented and interpreted and how the scoring is measured. The Codes contain the specific measures for each element, the target and the applicable weighting. The Codes have become complex in an attempt to prevent Fronting.

These calculations ultimately become an actuarial dance to navigate the requirements and keep the cost of implementing the scorecard to a minimum. The cost of implementing a Level 4 B-BBEE compliance can add up to 10% of a company’s net profit after tax – effectively making B-BBEE a very expensive tax and a commodity in the South African marketplace.

The Codes of Good Practice are legislated in terms of the Black Economic Empowerment (BEE) Act, promulgated in 2003, with the first Codes of Good Practice introduced in 2007. These Codes have recently been amended in 2013 with the date of implementation being 1 st May 2015. These amended Codes nominate the following elements as Priority Elements:

1.      Ownership

2.      Skills Development

3.      Enterprise and Supplier Development

These Priority Elements in turn have a minimum level of compliance required. Where this level of compliance is not met, the company faces a penalty: their entire B-BBEE compliance level is dropped by one level.