The South African Department of Trade and Industry recently published a number of draft amendments to the Broad-Based Black Economic Empowerment Codes (B-BBEE Codes) for public comment.
According to Sanjay Kassen, a director at ENSAfrica, the proposed changes appear to signify the government’s drive to achieve more black ownership and control in South African business.
However, they may come at cost – especially when it comes to actually transforming business in South Africa, he said.
“In an effort to promote startups 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,” Kassen said.
“In this regard, startups and small businesses with an annual turnover of R10 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%),” he said.
“Furthermore, EMEs and businesses with an annual turnover of between R10 million and R50 million (referred to as 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?
According to Kassen, 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 R50 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, Kassen said that generic enterprises would not qualify for enhanced B-BBEE recognition levels if they use 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
Why is it a problem?
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, said Kassen
“However, 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,” he said.
“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.”
According to Kassen, these include areas 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.”