A Guide to B-BBEE in South Africa

B-BBEE in South Africa is the government’s policy initiative to redress apartheid’s legacy of economic exclusion and inequality by bringing the black majority (African, Indian and Coloured) into the economic mainstream, “many of whom were systematically excluded from meaningful participation in the country’s economy”, writes Louis Pulzone, CEO of the LFP Group. Furthermore, B-BBEE is a growth strategy to help realise the country’s full economic potential. Through its B-BBEE policy, the government aims to achieve the following objectives:

• Empower more black people to own and manage enterprises. Enterprises are regarded as black-owned if 51% of the enterprise is owned by black people, and black people have substantial management control of the business.
• Achieve a substantial change in the racial composition of ownership and management structures and in the skilled occupations of existing and new enterprises.
• Promote access to finance for black economic empowerment.
• Empower rural and local communities by enabling their access to economic activities, land, infrastructure, ownership and skills.
• Promote human resource development of black people through, for example, mentorships, learnerships and internships.
• Increase the extent to which communities, workers, co-operatives and other collective enterprises own and manage existing and new enterprises, and increase their access to economic activities, infrastructure and skills.
• Ensure that black-owned enterprises benefit from the government’s preferential procurement policies.
• Assist in the development of the operational and financial capacity of BEE enterprises, especially small, medium and micro enterprises (SMMEs) and black-owned enterprises.
• Increase the extent to which black women own and manage existing and new enterprises, and facilitate their access to economic activities, infrastructure and skills training.

The Broad-Based Black Economic Empowerment Act 53 of 2003 (“BBBEE Act”) and the Codes of Good Practice for Broad-Based Black Economic Empowerment provide a legislative framework for the promotion and implementation for Broad-Based Black Economic Empowerment (BBBEE) in the country. The first phase of the codes are binding on all entities, public and private, and requires them to apply them when making economic decisions on:

• procurement,
• licensing and concessions,
• public-private partnerships, and
• the sale of state-owned assets or businesses.

The second phase of the codes went beyond ownership and management and covered the seven components of the B-BBEE scorecard, namely ownership, management control, employment equity, skills development, preferential procurement, enterprise development, and socio-economic development (including industry-specific and corporate social investment initiatives). The amended Codes came into effect on 1 May 2015, with a reduced number of elements to five ownership, management control, skills development, enterprise and supplier development and socio-economic development. According to the Department of Trade and Industry, the codes were amended “to do away with the formalistic tick-box approach to B-BBEE that has generally been adopted by corporates”. One of the most significant revisions to the codes is a stricter focus on active development by corporate South Africa of businesses with at least 51% black ownership and an R 50 million or less yearly turnover. Other highlights from the revised B-BBEE codes include:

• The code’s elements consolidated to five in the generic scorecard.
• Ownership points broadened to include designated groups in the main points.
• Exempted micro-enterprises and qualifying small enterprises thresholds adjusted.
• All companies are required to comply with all five elements.
• Revised qualification points for BBBEE recognition.
• New priority elements – Ownership, skills development and supplier development
• 100% black-owned enterprises qualify as level 1.
• 50% and above black-owned qualify as level 2.
• BBBEE employment equity elements aligned with the Employment Equity Act.
• Qualifying small enterprises to comply with all five elements.

BEE refers to the government’s policy, BBBEE is the implementation of the policy. Both refer to the same strategic framework that seeks to right the wrongs of the past and promote the economic participation of black people in the South African economy.

It is commonly accepted that in order to qualify for this form of aid under Broad-Based Black Economic Empowerment (BBBEE or BEE), a person must also be an African, Coloured, or Indian citizen of South Africa.

The five BEE components — ownership, management and control, skills development, enterprise and supplier development, and socio-economic development — make up the BEE score. It’s important that businesses understand the scoring in order to implement it correctly. Ownership – looks at the amount of shares held by black people. The sub-minimum requirement for ownership is 40% of net value. This category will contribute 25 points towards the total score, currently, it’s 20 points. Skills Development – 40% of the targets set out in the Skills Development Element must be achieved to score points. Points are allocated for the following:

• Skills Development spend on learning programmes for black people in general and black employees with disabilities,
• and bursaries for black students at Higher Education institutions.
• learnerships, internships, and apprenticeships for black people;
• the absorption of black people into the workforce of the measured company or into the industry at the end of the learnership, internship, and apprenticeship programmes.

The Skills Development Scorecard constitutes 25 points towards the BEE Scorecard. Enterprise and Supplier Development This is the highest contributor among all elements. The sub-minimum requirement is 40% for each of the following three categories; preferential procurement, supplier development and enterprise development. It counts for 40 points of which 23 are awarded to majority black ownership. Management and Control Measures the management make up in the company, according to the codes at least 10% of managerial positions must be awarded to black people. It currently contributes up to 15 points. Socio-economic Development Measures contributions made by businesses to needy local communities. It has been reduced to 5 points. It currently counts for 25 points.

Complying with BBBEE is a requirement if you will be doing work with the government, state-owned enterprises and large corporates, advises Louis Pulzone, CEO of LFP Group. Private companies must apply the codes if they want to do business with any government enterprise or organ of state – that is, to tender for business, apply for licences and concessions, enter into public-private partnerships, or buy state-owned assets. Companies are also encouraged to apply the codes in their interactions with one another since preferential procurement will affect most private companies throughout the supply chain.

B-BBEE Levels

The size of a business determines the necessary levels of BEE compliance. The Codes provide for three levels of compliance based on the size of a business:

• Exempted Micro Enterprises (EMEs) are businesses with an annual turnover of less than R 10 million (this is a new amendment; previously, EMEs were businesses with a turnover of less than R 300 000 per annum and less than 5 staff members);
• Qualifying Small Enterprises (QSEs) are businesses with an annual turnover of between R 10 million and R 50 million; and
• Medium to large enterprises (M&Ls) with an annual turnover of more than R 50 million.

Enterprises can get a BBBEE certificate from an accredited BEE Verification Agency which issues an annual BBBEE certificate confirming the firm’s BBBEE status. Such certificates may be used by the firm for the purposes of its business, including when submitting tenders to customers. A certificate is only valid for 12 months from the date of issue and cannot be renewed. Once expired a new application must be filed.

Exempted Micro Enterprises (EME)

To qualify as an Exempted Micro Enterprises (EME) the business must have an annual turnover lower than R10 million. This indicates that a small business can attain a BEE level without conducting a thorough BEE verification. BEE Exempt certificates provide the holders with an exemption from the requirements of the B-BBEE Codes of Good Practice. As such, any companies that qualify for BEE-exempt certificates are advised to get their certificates, to ensure they can favourably compete with larger firms with high a BEE Score.

Enterprise Development (ED) and Supplier Development (SD) are one of the three priority elements of the Broad-Based Black Economic Empowerment (B-BBEE) Scorecard. Included in this element is preferential procurement, supplier development, enterprise development, supplier diversity, and supplier empowerment. Enterprise development targets smaller, earlier-stage businesses that need training and support through enterprise development programmes and incubators. On the other hand, supplier development typically refers to later-stage businesses with at least 3 years in operation, these businesses have existing corporate contracts or have the potential to supply a corporate. Both ED and SD are designed to create sustainable small black-owned businesses. The implementation of an ESD programme is how corporates can boost their Broad-Based Black Economic Empowerment (BEE) scorecard. Hasnayn Ebrahim, founder and CEO of Strategi exe, proposes that corporates design programmes that facilitate access to, and improvement of three basic ingredients:

• Mentorship, specialist support and networking opportunities that seeks to build the capacity of the SME to deliver;
• Access to capital that allows for further investment into the SME;
• Procurement of goods or services by the corporation from participating SMEs that provides sustainable revenue streams.

Access the full guide: Enterprise Supplier Development (ESD) Guide  “For a corporate, there is both a direct and indirect benefit for a successful ESD Programme. The direct benefit is that there are more suppliers into their supply chain, which means greater competitiveness and improved pricing from suppliers,” Ebrahim, adds. Thakhani Tshivhase, head of business optimisation at Lean Enterprise Acceleration Programme (LEAP), a Johannesburg-based organisation that provides enterprise supplier development (ESD) offers the following recommendation for corporates to get the most from their ESD efforts. “The B-BBEE codes stipulate that 2% of NPAT (net profit after tax) needs to be used to ensure maximum points for ESD are achieved, thus companies need to ensure that they are spending in the right way to ensure not only maximum points but also maximum impact and return on investment.”

Below are 5 best practice principles for corporates to implement a successful and impactful ESD programme. 1. Ensure the SME is a right fit for your business and can be integrated into the existing supply chain. 2. Build and optimise a programme for your unique business needs. 3. Get the support of an integration partner who can support your business in implementing a comprehensive ESD programme – either be either be an employee or outsourced to an outside agency. 4. Have a goal for your programme and define what success looks like. 5. Keep the lines of communication open with your SMEs throughout the process. The guide below outlines 5 ways SMEs can prepare before committing to a corporation’s ESD programme. 1. Understand your personal requirements and what you need from the programme. 2. Research a programme that aligns with your business’s goals. 3. Understand what each ESD programme is looking for in partner SMEs and the requirements to participate. 4. Tailor your business plan to the programme and ensure it includes the following details – “where you are, where you want to be, what you need to get there and why is your product or service worth investment from the corporate you are looking at”. 5. Get compliant: Make sure you gather all the necessary compliance documents, such as company registration documents, B-BBEE certificate/affidavit, financial statements and business plan. More advice for SMEs: How to Build a Business Corporates Want to Work With