Broad-based Black Economic Empowerment (BBBEE) is a South African Government initiative to address fundamental inequalities that exist within the country and encourage black individuals and companies to participate fairly in the economy.
The BEE Act was first promulgated in 2003 with the BEE Codes introduced in 2007. Since then BEE has evolved and the codes were revised by the government in October 2013, with the Amended Codes applicable from May 2015.
There are different levels of BEE status, depending on the company’s contribution to transformation. If your company has a BEE certificate, then your customers can claim vital BEE points when buying from your business. Depending on how important BEE points are to these customers, the more they will consider your BEE score alongside elements such as price, quality and service.
The amendments to the BBBEE Act and the Codes fundamentally change the current black empowerment policy and are a powerful expression of the Government’s intention to foster black-owned small businesses.
The Department of Trade and Industry’s (DTI) Amended Codes change the way in which a company’s BEE rating is evaluated and places an increased focus on the BEE priority elements of ownership, enterprise and supplier development (ESD) and skills development. For these priority elements, there is a sub-minimum achievement of 40% of the compliance target for each element to avoid penalty.
Strategic implementation of BBBEE using the Amended Codes is vital to achieving a high BEE rating. The impact of the Amended Codes will be substantial, a current level 4 could drop to a level 8 or even be non-compliant.
The Amended Codes also increase the total number of available points from 107 to 118. This means that number of BBBEE points required to achieve a particular level have also increased. Companies that have obtained a good BEE rating in the past will need to assess their BEE strategy and make plans to achieve the extra points required.
The new DTI BEE scorecard reduces the number of elements from seven to five by combining enterprise development and preferential procurement, and management control and employment equity.
• The Generic Scorecard has been adjusted in accordance with government key priorities.
• Five scorecard elements reduced from seven.
• Ownership, enterprise and supplier development and skills development considered priority elements.
• Total points increased from 107 to 118.
• All companies except Exempted Micro Enterprises (EMEs) to comply with all elements.
• Scorecard points and qualification criteria for awarding of BBBEE status levels adjusted.
• Enhanced the recognition status of black owned EMEs and Qualifying Small Enterprises (QSEs).
• New legal penalties have been introduced to deter fronting practices.
The new BEE scorecard calculation and weightings for each of the five elements are set out and compared in the following table:
| Weighting Points (Amended Codes) | Weighting Points (Old Codes) | |
|---|---|---|
| Ownership | 25 | 20 plus 3 bonus points |
| Management Control (including Employment Equity) | 15 plus 4 bonus points | Management control – 10 plus one bonus point Employment equity – 15 plus three bonus points |
| Skills Development | 20 plus 5 bonus points | Skills development – 15 |
| Enterprise and Supplier Development (including Preferential Procurement) | 40 plus 4 bonus points | Preferential procurement – 20 Enterprise development – 15 |
| Socio-Economic Development | 5 | 5 |
| Total | 118 | 107 |
A definition of enterprise and supplier development
Under the new BEE Codes, enterprise development and supplier development have been combined into a new element in the BEE Scorecard. This new element is called enterprise and supplier development or ESD. It can be defined as any support given by a company to help smaller black-owned businesses overcome obstacles, increase their competitiveness and access new markets.
The ultimate intention of enterprise and supplier development is to create new jobs as these small businesses expand. The benefits are not one-sided: companies which play an active role in this space gain a competitive advantage from a diversified supplier base and the addition of an agile small business.
Although the BBBEE Act and Codes do not impose any legal obligations on firms that don’t comply with BEE targets, there may downfalls of non-compliance. Most South African businesses are affected by BEE in some way. Companies increasingly select business partners who have the best BEE rating. This can leave companies without a strong BEE score out in the cold.
Exempted Micro-Enterprises (Turnover less than R10m)
Under the old codes, Exempted Micro-Enterprises (EMEs) were deemed to have a Level 4 BBBEE status and start-up enterprises (in their first year of formation or incorporation) are measured as EMEs. This is not changing, but the threshold for qualifying as an EME has been increased from R5 million (or less) to R10 million (or less) of total annual turnover.
Smaller companies are set to benefit from a deemed Level 4 status.100% Black-owned companies are automatically considered Level 1 BBBEE contributors, while majority black-owned businesses are automatically considered to be Level 2.
| Black Ownership | BEE Status Level | Procurement Recognition |
|---|---|---|
| 100% black owned EME | Level 1 | 135% |
| More than 51% black owned EME | Level 2 | 125% |
| Less than 51% black owned EME | Level 4 | 100% |
EMEs are required to produce an affidavit declaring their status as Exempted Micro Enterprises. Customers are able to claim BEE points from buying from EMEs businesses. The majority of points are achieved from buying from a black-owned EME. This gives these small companies a significant advantage and real potential to enter corporate supply chains.
Qualifying Small Enterprises (Turnover between R10m and R50m)
The threshold for being a Qualifying Small Enterprise (QSE) has increased to companies with a total annual turnover of between R10 million and R50 million. This is up from between R5 million and R35 million.
The amendments also provide that the BBBEE status of QSEs will be measured by reference to all five BEE elements and are subject to an automatic downgrade in status if the minimum requirements are not met. Under the previous codes, QSEs could choose to be measured by reference to any four of the seven elements.
QSEs that are 100% black-owned will be deemed to have a Level 1 BBBEE status. Majority owned black-owned businesses will automatically qualify as Level 2 BBBEE contributors. Conversely, QSEs that are not 51% or more black-owned will be subject to a more onerous regime than under the current codes.
Generic Enterprises (Turnover R50m+)
The threshold for being considered a Generic Enterprise has shifted from R35m+ to R50m+. These larger companies will be subject to full compliance with the codes; all will be measured against all five of the BEE Scorecard elements.
These larger companies are required to qualify under five of the following criteria:
At least 25% of cost of sales excluding labour cost and depreciation must be procured from local producers or local supplier in SA, for service industry labour cost are included but capped to 15%
Job creation – 50% of jobs created are for Black people provided that the number of Black employees since the immediate prior verified B-BBEE Measurement is maintained.
At least 25% transformation of raw material/beneficiation which include local manufacturing, production and/or assembly, and/or packaging.
Skills transfer – at least spend 12 days per annum of productivity deployed in assisting Black EMEs and QSEs beneficiaries to increase their operation or financial capacity
At least 85% of labour costs should be paid to South African employees by service industry entities.
If a Generic Enterprise does not meet five of these criteria they will not be eligible for a BEE certificate.