A facelift in the South African BEE Law: Some Highlights and Possible Shortfalls

The Broad-Based Black Economic Empowerment Act (No. 53 of 2003) (henceforth “the Act”) is a central instrument with which the South African government has sought to achieve economic transformation in South Africa. The primary aim of the old Act is, inter alia, to reduce inequality in South Africa by increasing the economic participation of Black people in the South African economy.

BEEThe Act has seven codes (henceforth “the old codes”) with which companies operating in South Africa, be it public or private, need to be in compliance – namely: Ownership (O); Management Control (MC); Employment Equity (EE); Skills Development (SD); Preferential Procurement (PP); Enterprise Development (ED) and Socio-Economic Development (SED).

The old codes draws a distinction between three types of companies, that is; those which make a turnover of between R0 to R5 million (Exempted Micro-Enterprises), those which make a turnover of between R5 to R35 (Qualifying Small Enterprises) and those which make a turnover of R35 million and above (Generic).

This distinction is both significant and relevant because the Act sets different standards of compliance for different types of companies.

In any event, the South African authorities have observed that Black Economic Empowerment (henceforth “BEE”) fronting has – since the adoption of the Act – been a major challenge in South African businesses. As a result, they have made a determination to substantively amend the old codes – not only for want of fast tracked transformation, but also, in order to curb BEE fronting by business. This decision follows a National Summit which was recently held in Johannesburg.

Changes in BEE Codes

According to the new codes, EMEs are defined as companies with a turnover of between R0 to R10 million. QSEs are regarded as companies with a turnover of between R10 to R50 million. Generic companies on the other hand are those whose turnover exceeds an amount of R50 million.

Furthermore, the codes have been reduced from seven to five. Currently, the Act makes provision for the following codes – namely; O, MC, SD, SED and Enterprise and Supplier Development (ESD).

What is noteworthy in the changes is that MC and EE have been consolidated into a single MC which includes the EE element. On the other hand, PP and ED have been consolidated into ESD.

In light of this, a higher degree of priority is placed on three codes – being; O, SD and ESD. Each of these three priority codes demands that a sub-minimum of 40% of Net Value Points should be met by a company, if a company does not want to have 1 level discounted from its BBBEE Contribution Level Score.

Moreover, whereas it is now mandatory for new companies to comply with the three priority codes, however; the law – as it stands – provides that QSEs should comply with the O code and either with the SD code or the ESD code. Unlike in the past, QSEs and large entities would now be measured on the same scorecard – according to the new weightings.

In terms of the new BBBEE scores, EMEs which have less than 51% of their ownership in the hands of Black people will – by automatic operation of the law – score a rating of level four. On the other hand, EMEs and QSEs who have 51% and more of their ownership in Black hands will automatically score a rating of level two and one, respectively.

In addition, unlike QSEs who have less than 51% of Black ownership and, as a result, which have to undergo a process of BBBEE verification, EMEs and QSEs who have 51% or more of Black ownership are under no legal obligation to undergo such a verification process. Instead, they may solely obtain a sworn affidavit confirming both their turnover and their Black ownership – as a way of confirming their BBBEE status.

In any case, these new changes have been received with mixed emotions. On the positive, it is believed that the new changes would not only ‘seal the leaks’ in the current law, but would – on the same breath – foster the culture of entrepreneurship amongst the South African Black nationals.

On the negative, it is believed that these changes are too narrow and – since companies have a period of twelve months within which to comply with the new changes – it would be difficult for companies to attain compliance within this short period of time. The SD code is criticised on the basis that it places companies under immense pressure to increase their skills development budgets – as, according to the present law, health and safety training no longer counts as part of skills development. Critiques foresee that the ESD code will inconveniently demand companies to revise and restructure their existing deals.

Conclusion

In any case, the O code is one of the most controversial codes. This is not only apparent in the fact that its points have increased from 20 to 25 – but equally, this is evident in the fact that the threshold for Black new entrants has increased from R20 million to R50 million. The MC code has great racial implications, as it compels companies to take into account local racial compositions in hiring process. Whether or not it will ‘wake up the sleeping lion’ remains an event to be seen. The ESD code – which by far has the highest weight of 40 out of 105 points – would seem to be a strategic approach for ensuring that companies do comply with the Act. Finally, the SED code has been immune from the tide of change.

Picture source: beever.co.za

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