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

What is BEE? B lack E conomic E mpowerment: 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

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

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

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

How is BEE Enforced? BEE Scorecard 1. Ownership 2. Management 3. Employment Equity 4. Skills Development 5. Preferential Procurement 6. Enterprise Development 7. Socio-economic Development

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!

Scorecard Weightings: How is BEE Enforced? 100*100TOTAL 255 pointsSocio-economic Development 2515 pointsEnterprise Development 2520 pointsPreferential Procurement 2515 pointsSkills Development 2515 pointsEmployment Equity 2510 pointsManagement 2520 pointsOwnership QSEGenericElement *QSEs elect 4 of the 7 elements in which to score

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

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

How is BEE Enforced? Private Sector:  Your score counts towards your customer’s score  Your supplier’s score counts towards your score

How is BEE Enforced? LowHighNon- compliant BEE Score 2 days delivery 5 days delivery Service Same brand of paperQuality R35/ream R40/reamPrice Supplier CSupplier BSupplier A Differentiating Factor Most likely choice

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

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……… The BEE Scorecard

25%+13Black voting rights 2.5%1Economic interest of Black designated groups; participants in Employee Ownership Schemes; beneficiaries of Broad-based Ownership Schemes; participants in co-operatives 10%2Economic interest of Black women 25%4Black economic interest 10%2Voting rights of Black women TargetWeight (Points)‏ Indicator Generic Scorecard: 1. Ownership

20TOTAL Bonus Points 10%2Black New Entrants 10%1Black participants in: Employee Ownership Schemes; Broad-based Ownership Schemes or Co- operatives Complete1Ownership fulfilment 23TOTAL Increasing7Net Value TargetWeight (Points)‏ Indicator Generic Scorecard continued :

1. Ownership QSE Scorecard 10%2 Ownership by Black Women Bonus Points: 10%1 Employee Ownership Schemes, Co-operatives or Broad-based Ownership Schemes Complete1Ownership fulfillment 25%+16Black voting rights 25TOTAL Increasing9Net Value 25%9Black economic interest TargetWeight (Points)‏ Indicator

1. Ownership Net Value & 45 & 67 & 89 & 10 Year Net Value Target %

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

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

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

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 Ownership – Example: 1. Ownership

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

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

No Complete 01Ownership fulfilment 20% 10% 20% 10% 20% Achieved Score 25%+13Black voting rights 20TOTAL 25%7Net Value 2.5%1Economic interest of Black designated groups 10%2Economic interest of Black women 25%4Black economic interest 10%2Voting rights of Black women TargetWeightIndicator 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.

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

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

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

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

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

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)‏ 0% (black women)‏ % = 20% (black)‏ 20% (black women)‏ % =

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

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

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

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

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

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

5. Preferential Procurement 0Non-compliant< Level 830 – Level 740 – Level 645 – Level 555 – Level 465 – Level 375 – Level 285 – Level Recognition LevelBEE StatusBEE Score BEE Recognition Levels:

5. Preferential Procurement Overall BEE Procurement Spend:R610 / R1000 = 61% R610R1000TOTAL R50.1L8R50D R3300.6L6R550C R1250.5L7R250B R1501.0L4R150A BEE SpendRecognition Level BEE Level Actual Spend Supplier Calculating a Preferential Procurement Score: X=

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

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

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)‏

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

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

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

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

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

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

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

6. Enterprise Development What counts?  Shorter payment periods Percentage of invoice Percentage = 15 days less time from invoice to payment Shorter period no longer than 10 days

Generic Scorecard 7. Socio-economic Development 1% of net profit after tax 5Average annual value of all Socio- economic Contributions made by the Measured Entity as a percentage of the target 5TOTAL TargetWeight (Points)‏ Indicator NOTE: Contributions are measured cumulatively from the Commencement Date (9 Feb 2007) or an Inception Date chosen by the Measured Entity

7. Socio-economic Development QSE Scorecard 1% of net profit after tax 25Average annual value of all Socio- economic Contributions made by the Measured Entity as a percentage of the target 25TOTAL TargetWeight (Marks)‏ Indicator NOTE: Contributions are measured cumulatively from the Commencement Date (9 Feb 2007) or an Inception Date chosen by the Measured Entity

7. Socio-economic Development Qualifying Beneficiaries:  Black people  Organisations where 75% of benefit flows to black people  Where the benefit is less than 75% it counts pro- rata

7. Socio-economic Development What counts?  Grants, discounts and donations – 100%  Overhead costs – 80%  HR Capacity Free professional services – 80% Discounted professional services – 80% Employees time – Salary / 160 = hourly rate

BEE Charters Status of Charters  Generic Codes take precedence  Development of Sector Charters  Not binding on the State  Only Sector Codes have equal status  No gazetted Sector Codes yet

Accountancy Charter Fundamental Principle:  To be gazetted as Sector Charter & Code Stick to the generic code and make slight deviations to the interpretations so as to be suitable to the accounting profession.  Inclusive process with diverse stakeholders  Finalise process in July 2007

Financial Services Charter Significant differences  FSC is a sector charter NOT a sector code and Generic Codes take precedence  Applies to banks, insurance companies, pension funds, stock exchanges  Significant differences between FSC and Generic Codes

BEE and your clients Consider this:  Financial record keeping  Consulting versus Rating  'Independence & impartiality' challenge  Reporting in financial statements

BEE & Financial Record Keeping  Enterprise development  Ownership  Management  Skills development  Preferential procurement

Verification  Need an official verification  Get verified every 12 months  BEE status recorded on National Empowerment Database

Verification Agencies  Private companies  Accredited by SANAS  Approved by DTI  Member of ABVA  Fees – market related

Transitional Period Transitional Score:  First 12 months after Commencement Date  Use full scorecard score OR  GENERIC: Score = 1.92 x (Ownership + Management)‏  QSE: Score = 1.18 x (Ownership + Management)‏

Dynamics of BEE Time BEE Score Your BEE score Pressure from your competitors Limit of your BEE capabilities Practical minimum score 30 (40)‏

Future of BEE Legislation  Codes updated / amended  Accreditation of Verification Agencies  National Empowerment Database  New Charters defined

Future of BEE 2 Years  Lots of change  Benefits to early birds  Failures and frustration 10 Years  Stability to the process  Leveling of the playing field 5 Years  Everybody’s doin’ it!  Benefits to those whose approach is sound  Take 2s!

Thank You Guy Taylor can be contacted on Murray Chabant can be contacted on