august 2007 broad-based black economic empowerment: legislation and recent changes
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August 2007August 2007
Broad-Based Black Economic Empowerment:
Legislation and Recent Changes
Broad-Based Black Economic Empowerment:
Legislation and Recent Changes
What is BEE?
Black Economic Empowerment:
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
1994 ~90% of assets White
owned
2004 ~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
2 days delivery
5 days delivery
Service
Same brand of paperQuality
R35/reamR35/reamR40/reamPrice
Supplier C
Supplier B
Supplier A
Differentiating Factor
Most likely choice
Think of the scorecard as a test….
Question 1: OwnershipCounts 20 marks out of 100
Question 2: ManagementCounts 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
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
Increasing
7Net Value
TargetWeight(Points)
Indicator
Generic Scorecard continued:
1. Ownership
QSE Scorecard
10%2Ownership by Black Women
Bonus Points:
10%1Employee Ownership Schemes, Co-operatives or Broad-based Ownership Schemes
Complete1Ownership fulfillment
25%+16Black voting rights
25TOTAL
Increasing
9Net Value
25%9Black economic interest
TargetWeight(Points)
Indicator
1. Ownership
Always trace back to a natural person.
Flow-through Principle
Trust
Company A
Company B
Measured Company
90%
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%
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%
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 = 2.4
1. 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:
Ownership – Example:
NoComplete01Ownership fulfilment
20%
10%
20%
20%
10%
20%
Achieved
16.2
5.6
1
2
3.2
2
2.4
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
Target
Weight
Indicator
1. Ownership
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)2+ 10%=
20% (black) 20% (black
women)2+ 30%=
2. Management
QSE Scorecard
25%2Bonus 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 6-10
Yr 0-5
80%
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 6-10
Yr 0-5
70%
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 6-10
Yr 0-5
20%
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< 30
0.1Level 830 – 40
0.5Level 740 – 45
0.6Level 645 – 55
0.8Level 555 – 65
1.0Level 465 – 75
1.10Level 375 – 85
1.25Level 285 – 100
1.35Level 1100 +
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 Spend
Recognition Level
BEE Level
Actual Spend
Supplier
Calculating a Preferential Procurement Score:
X =
QSE Scorecard
5. Preferential Procurement
Yr 6-10
Yr 0-5
50%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 S
core
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!
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