Broad-based black economic empowerment – basic principles

Publication | July 2018

Why does South Africa need BEE?

Broad-based black economic empowerment (BEE) is a government policy to advance economic transformation and enhance the economic participation of Black people (African, Coloured and Indian people who are South African citizens) in the South African economy.

The Constitution of the Republic of South Africa, 1996, provides all people in South Africa the right to equality and fulfils the formal element of equality by creating a basis for equal treatment.

Despite the right to equality, not all people in South Africa are born to equal circumstances. The history of South Africa has resulted in an economic and opportunities disparity based on race and has resulted in many Black people in South Africa not enjoying the same opportunities and so being substantively equal to the remainder of South Africa.

The purpose of BEE is to bridge the gap between formal and substantive equality to ensure that all people in South Africa fully enjoy the right to equality.

At Norton Rose Fulbright we intend to use the BEE strategies that we devise for you to help achieve this goal and to ensure that our services brings the BEE Level result you desire as well as helping to transform South Africa.

Our second focus is to create sustainable and multi-year BEE strategies which allow you to grow your supply chain over time to assist in the transformation of your sector, whilst ensuring quality and competitive suppliers and service providers for you to procure from in the future.

What governs BEE?

BEE is governed by:

  • the Broad-Based Black Economic Empowerment Act, 2003 (as amended);
  • the generic Codes of Good Practice on Broad-Based Black Economic Empowerment (BEE Codes). The revisions to the 2007 version of the BEE Codes were issued on 11 October 2013 and came into force on 1 May 2015; and
  • certain sector-specific Codes of Good Practice (Sector Codes). An entity operating in a sector with a Sector Code will be governed by that Sector Code and not the BEE Codes.

A number of the existing Sector Codes are based on the Original Codes but it is intended to revise all of the Sector Codes with the BEE Codes.

Why does a company need a BEE rating?

Obtaining licences, consents, or concessions from organs of state

Certain industries require an entity to have a particular percentage of Black ownership or BEE level in order to receive and maintain a licence to operate.

  • These empowerment requirements are specific to the underlying legislation and relate to the licence to operate.
  • For example, in terms of the Mineral and Petroleum Resources Development Act, 2002an entity must have 26 per cent Black ownership in order to be issued with a mining right.

In addition, entities in certain industries may be asked to indicate their transformation initiatives (which can be different to a BEE score in terms of the BEE Codes) in order to obtain concessions to, for example, export.

Transacting with organs of state

Organs of state are generally required to issue a request for proposal (RFP) for any work that they intend to source from the private sector. The response to the RFP is scored out of 100 in terms of the 90/10 or 80/20 principle, depending on the value of the work to be undertaken.

The pricing portion of the response to the RFP from bidders is scored out of 90/80 points. The BEE rating of the bidder will be scored out of 10/20 points and the two scores will then be combined. A high BEE score can, therefore result in the bidder achieving a better total score than another bidder with a low BEE score even though the bidders have similar scores for the pricing portions of their bids.

Certain organs of state have also been known to set minimum BEE criteria relating to Black ownership or BEE ratings before potential bidders may qualify to even submit bids.

Transacting with private entities

With regards to interactions with private entities, a company will score better for BEE itself if it procures goods and services from other entities with high BEE ratings.

A supplier or service provider’s BEE rating and Black ownership can, therefore, be a consideration along with price and quality when a customer is choosing whether to deal with them. Due to the nature of the preferential procurement element, a customer may prefer to procure from an entity with a low overall BEE score but high Black people and Black women ownership as that supplier will provide the customer with more preferential procurement points towards its own BEE score than a supplier with low Black ownership but a higher BEE score. Accordingly, one should not simply focus on a BEE score but, rather, the interplay between the level of Black ownership, BEE score, and commercial attractiveness to customers.

Private entities who are performing under contracts with organs of state often have specific BEE requirements that they must achieve, including in relation to the BEE status of some of their own suppliers / a portion of their procurement spend.

Suppliers to mining companies should also be aware that mining companies have specific BEE procurement obligations. Whilst these obligations do not bind the suppliers themselves, suppliers should ensure that they have appropriate corporate structures so that they are commercially attractive suppliers to mining companies.

How is a BEE rating determined?

BEE Scorecard

General

The BEE Codes contain a BEE scorecard with five elements. A company is measured against the scorecard in order to determine its BEE score.

Element Weighting: BEE Codes
Ownership 25
Management control 15
Skills development 20
Enterprise development and supplier development 40
     - Enterprise development (5)
     - Supplier development (10)
     - Preferential procurement (25)
Socio-economic development 5
Total 105

Priority elements

An entity which fails to achieve these minimum targets will have their BEE Level discounted/reduced by one BEE Level.

Large enterprises1

The priority elements for large enterprises are:

  • Ownership. Entities must achieve a minimum of 40 per cent of the annual net value targets in the ownership element. In essence, the net value element measures the funding attaching shares held by Black shareholders. The equity value to debt value ratios and repayment of the funding must occur in line with certain ratios and formulae in the BEE Codes in order for an entity to score well for this portion of the ownership element;
  • Skills development. Entities must achieve a minimum of 40 per cent of the target set out in the skills development element; and
  • Enterprise and supplier development. Entities must achieve a minimum of 40 per cent of the target set out in the three of the sub-elements of the enterprise and supplier development.

Qualifying small enterprises2

The priority elements for qualifying small enterprises are:

  • ownership; and one of
  • skills development; or
  • enterprise and supplier development.

BEE Levels and recognition

Once an entity has been measured against the BEE scorecard it will achieve a particular score, which score will determine the entity’s BEE Level (being its BEE Contributor Level and BEE Procurement Recognition Level).

An entity’s BEE Level will be set out in a BEE certificate issued to it and the BEE certificate will be valid for a year from the date on which a certificate is issued.

Procurement recognition level BEE Level Score
135 per cent Level One 100+
25 per cent Level Two 95 – 99
110 per cent Level three 90 – 94
100 per cent Level four 80 – 89
80 per cent Level five 75 – 79
60 per cent Level six 70 – 74
50 per cent Level seven 55 – 69
10 per cent Level eight 40 – 54
0 per cent Non-compliant 0 – 39

  • 1 Large enterprise means an entity with an annual turnover in excess of ZAR50 million in the BEE Codes.
  • 2 Qualifying small enterprise means an entity with an annual turnover in excess of R50 million in the BEE Codes.
Top

Contacts

Amber von Steiger

Amber von Steiger

Johannesburg