Government’s drive to achieve black ownership and control, but at what expense?
Parusha Desai Valodia
The South African Department of Trade and Industry (“DTI”) recently published certain draft amendments to the Broad-Based Black Economic Empowerment Codes (“B-BBEE Codes”) for public comment. The proposed changes appear to signify the government’s drive to achieve more black ownership and control in South African business.
B-BBEE is a policy of the South African government which is aimed at increasing participation by previously disadvantaged South Africans in economic activities. The Broad-Based Black Economic Empowerment Act, 2003, as amended (the “B-BBEE Act”), the B-BBEE Codes, as well as various sector-specific codes are the primary legislation through which this B-BBEE policy is implemented.
The B-BBEE Codes set out the details of how B-BBEE scores are measured, namely:
- ownership of entities
- board participation, management control and employment equity
- skills development of employees and unemployed people
- enterprise and supplier development, including preferential procurement aimed at ensuring that black people benefit from South African procurement of goods and services
- socio-economic development contributions
In an effort to promote start-ups and new businesses in South Africa, the B-BBEE Codes were always forgiving of such businesses by prescribing less onerous B-BBEE requirements to be complied with. In this regard, start-ups and small businesses with an annual turnover of ZAR10-million or less (referred to as an “Exempted Micro Enterprises” or “EMEs”) would automatically qualify for a Level 4 B-BBEE rating (with a B-BBEE recognition level of 100%). Furthermore, EMEs and businesses with an annual turnover of between ZAR10-million and ZAR50-million (referred to a “Qualifying Small Enterprises” or “QSEs”) have the benefit of enhanced B-BBEE recognition levels to the extent they are black-owned and controlled. In this regard, an EME or a QSE that is at least 51% black-owned would automatically qualify for a Level 2 B-BBEE rating (with a B-BBEE recognition level of 125%) and an EME or a QSE that is 100% black-owned would automatically qualify for a Level 1 B-BBEE rating (with a B-BBEE recognition level of 135%).
What will the changes entail?
The most significant proposed changes to the B-BBEE Codes are the following:
- EMEs and QSEs would not qualify for enhanced B-BBEE recognition levels if their black ownership is measured on the application of the modification flow-through principle (ie, the 51% or 100% ownership must be measured on an direct flow-through basis).
- large/generic enterprises (being businesses with an annual turnover over ZAR50-million or more) would also qualify for enhanced B-BBEE recognition levels to the extent they are 51% black-owned or 100% black-owned (in much the same way as EMEs and QSEs currently qualify) without having to comply with the remaining elements of the B-BBEE Codes.
Notably, generic enterprises would not qualify for enhanced B-BBEE recognition levels if they utilise or recognise any one or more of the following in their black ownership calculation:
- the modified flow-through principle
- the exclusion of ownership by organs of state or public entities
- the exclusion of any B-BBEE facilitators
- private equity funds as contemplated in the B-BBEE Codes
- the exclusion of mandated investments
- the sale of assets, equity instruments and other instruments
- ownership following the sale/exit by black shareholders
If these proposed changes are implemented in their current form and passed into law, there would certainly be a far greater drive and incentive to create more direct and effective black-owned and controlled businesses.
While the ability of large enterprises to benefit from enhanced B-BBEE recognition levels may contribute towards creating a more transformed business environment from an ownership perspective, this would be at the expense of the remaining (and equally important) elements of the B-BBEE Codes. In other words, the proposed amendments will result in businesses focusing far more on achieving black equity ownership and control (which has arguably resulted in little actual economic benefit for black shareholders given complex and often onerous debt and security structures) and not on the remaining critical transformation components of the B-BBEE Codes, such as black management control, employment equity, skills development of employees and unemployed people, enterprise and supplier development, including preferential procurement and socio-economic development.
Large enterprises typically have the levels of resources and expertise required to make a significant and meaningful contribution to transformation in these critical areas and the proposed changes now seek to remove the incentive for them to do so.
Please contact our B-BBEE practice group if you require any assistance with your B-BBEE requirements or compliance.
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