On 7 December 2011, the Department of Trade and Industry (DTI) issued for public comment the Broad-Based Black Economic Empowerment Amendment Bill 2011 (the “Bill”) and called upon interested persons and the general public to submit comments on the Bill before 9 February 2012.
Companies required to comply with BEE will therefore need to understand the material changes to the current BEE Act as contemplated in the Bill. Below is a brief summary of such material changes brought about by the Bill.
B-BBEE as defined
The Bill introduces the concept of sustainability in the definition of “Broad-Based Black Economic Empowerment”. Therefore, when structuring a BEE transaction, the sustainability of the transaction and its impact particularly on women, workers, youth, people with disabilities and people living in rural areas will have to be borne in mind.
The Bill requires that preferential procurement should include the promotion of local content. The concept of local content refers to locally produced goods, services or works or locally manufactured goods which satisfy a stipulated minimum threshold for local procurement.
This requirement is in accordance with the regulations passed in terms of the Preferential Procurement Policy Framework Act. Currently, the list of products that will require a minimum level of local content include power pylons, rolling stock, buses, canned vegetables, clothing, textiles, footwear, leather products and set-top boxes.
The subject of fronting is extensively dealt with in the Bill. There is a new definition of “Fronting B-BBEE Practice” which is spelled out widely to capture even the most sophisticated and complex arrangements of fronting. The common fronting arrangements such as those arrangements which do not benefit black people as may be contained in relevant transaction agreements are also captured.
Most importantly, companies should note that fronting practices will now be criminalised and may attract punishment by imprisonment for a period not exceeding 10 years or a fine of 10% of an enterprise’s annual turnover or both imprisonment and fine.
Cancellation of Contracts and Authorisations
The Bill reasserts the common law remedies for misrepresentation as it provides that any contract or authorisation awarded on the basis of false information in respect of an enterprise’s B-BBEE status may be cancelled at the sole discretion of the organ of state or public entity.
Establishment of the B-BBEE Commission
The establishment of an ombudsman in the form of the B-BBEE Commission is also envisaged in the Bill. The function of the B-BBEE Commission will, generally, be to monitor compliance with the B-BBEE Act and to investigate complaints relating to B-BBEE. Companies listed on the JSE will be required to provide to the B-BBEE Commission reports on their B-BBEE compliance as contained in their sustainability reports and any other prescribed information.
The Bill empowers the B-BBEE Commission to join forces with other government investigative institutions such as the Special Investigation Unit and it is required to refer to the National Prosecution Authority matters which involve a criminal offence (e.g. fronting).
Regulation of verification agencies
Finally, the Bill requires that B-BBEE verification exercises be carried out by persons registered by the verification agency regulator and/or the South African National Accreditation System. The Bill further contemplates the establishment of the Independent Regulatory Board of Auditors as the official regulator of B-BBEE verification agencies. Accordingly, it is advisable that companies should ensure that agencies that they engage to conduct B-BBEE verification exercises are duly accredited as required by the Bill.
BBBEE Share Schemes – A Ticking Time Bomb?
At the forefront of these mechanisms are employee share schemes.
Since the promulgation of the amended codes of good practice under the Broad Based Black Economic Empowerment Act 53 of 2003, as amended (“BBBEE” or “the Act”), compliance with the ownership element has become a compulsory compliance element for both Qualifying Small Enterprises (“QSE” having between R10 and 50 million annual turnover) and generic enterprises (over R50 million annual turnover). As a result, businesses have found themselves considering mechanisms which aim to address this element. At the forefront of these mechanisms are employee share schemes.
The first of these structures were constructed in the early 2000’s by JSE listed companies. The aim of these structures were essentially two-fold:
- An employee retention strategy similarly constructed as executive share schemes in many ways, and
- Compliance with BBBEE.
These structures have recently been under the spotlight again . Mainly because of the questions it raises in terms of whether it is true empowerment or not.
For businesses wanting to utilise these structures, a number of aspects are to be considered:
- Employers and employees stand in a vertical relationship with one another. This is because the employer directs the expectations and the standards of the services exchanged between them. Shareholders, on the other hand, are in a horizontal relationship as they are equally entitled to regulate and direct matters which may affect their shareholding or investment. So, to shift from a vertical to a horizontal relationship requires the necessary professional inputs, management and attention.
- These share schemes are separate entities that require the necessary attention and inputs. As such, it is not just a case of setting it up and it simply running itself.
- These structures need to have a shelf life in my view. In this regard, I mean that a clear commercially feasible strategy needs to be devised and implemented in regards to the trust. This would include a structured plan whereby employees would not only be entitled to dividends but would also have the opportunity to up-skill and to improve themselves in various ways. The financial benefits should aim to facilitate direct ownership.
It is important to remember that inviting partners to sit at the table, needs to fully embrace the concept. If it does not, it not only negatively impacts the relationship, but disempowers the people involved. The human aspect thereof is as devastating as the legal non-compliance which may even go as far as constituting fronting.
Related: The 5 Elements Of BBBEE
In order to avoid this, these structures need to be setup correctly and managed correctly, which means:
- The trust deed must clearly define the beneficiaries and the proportion of their right to receive distributions;
- The trustees must actively take part in managing the trust at a level similar to the management role of shareholders in a company having a shareholding;
- Based on the aforesaid, in my view, the trustees should be appointed by the beneficiaries;
- A written record must be kept identifying the beneficiaries as well as prove that they fall within the designated groups as defined in the Act. The trustees must have no discretion in this regard;
- A written record must be kept of fixed percentages of claims or outlining formulas for calculating claims. The trustees must have no discretion in this regard;
- The trustees must present the financial reports of the trust to the beneficiaries yearly at an annual general meeting of the Trust;
- The trust deed or other relevant statutory documents of the trust must be made available, or on request, to any beneficiary in an official language in which that person is familiar;
- On winding up or termination of the trust, all accumulated interest must be transferred to the beneficiaries or to an entity representing the interests of the participants or class of beneficiaries.
Expert professional guidance is therefore crucial in order to avoid these structures becoming your own ticking time bomb.
How Incubator Project National Gives Your Enterprise a One-Stop-B-BBEE Shop
Turn your B-BBEE compliance spend into investment spend in 2017.
- Contact: +27 (0)12 259 0057
- Email: firstname.lastname@example.org
- Visit: www.theinvestmenthouse.co.za.
B-BBEE does not have to be a one-sided redistribution of wealth and power. “There certainly is a way to turn your compliance spend into investment spend. This year we are giving corporates the one-time opportunity to be part of our unparalleled Project National,” says Jack Janse van Rensburg, director of The Investment House.
“Project National is a complex incubation model that provides a one-stop-solution to empower, develop and skill South African entrepreneurs.”
Related: How To Get Your B-BBEE Money Back
The Investment House’s incubator concept, Business Mastery Program, is designed for “strategic accelerated business serendipity,” according to Janse van Rensburg.
Project National is realised nationwide in multi-industrial hubs, which create a strategic accelerated business serendipity through establishing a complete supply chain, or ‘one-stop shop’ for the public, for large scale tenders and corporates.
The unique benefits for participating enterprises include:
- Increased opportunities to be part of complex tenders and contracts
- Immediate market access through internal hub usage of each other’s services and products
- Increased marketing and sales opportunities through beneficial location strategy (at convenient, easily accessible and visible shopping malls/office parks)
- The greater chance of interactions that give birth to new ideas and collaborations
- Increased learning and development opportunities through small, medium and corporate business partnership (business skills transfer, mentoring, industry-specific training).
Project National is an unparalleled incubator concept in South Africa that brings a wide array of business advantages and B-BBEE-ROI opportunities to corporates, who can choose to make either monetary or non-monetary contributions within their B-BBEE spend.
Related: To B-BBEE Or Not To B-BBEE
How your B-BBEE compliance spend turns into investment spend with Project National:
1Create a consistent supply chain
Through your involvement in Project National, your struggle with inconsistent and unreliable supply chains can be over. Project National provides you with suppliers who can supply on demand, in the right quantity, to the right quality and the right price. More control and insight into your supply chain creates better competitiveness for your business.
2Extend your sales arm into new markets
Project National entrepreneurs provide you with an extended and widened sales arm into various different markets and distribution chains through the development of entrepreneurs acting as resellers of your product.
3Diversify your product range
Buying and financing assets can be a difficult task, therefore it’s often not possible for companies to diversify their range. Project National’s black owned start-up enterprises are more likely to obtain funding for assets and equipment and can therefore be a great asset to you when becoming a supplier to your company, allowing you to diversify your product range by outsourcing production of new components.
4Allow for lower imports
It can be hard to compete with Chinese imports on a price and now even a quantity level. While the demand for low quantities and tailor-made products is high, it’s hardly profitable for many big corporates. Project National’s entrepreneurs leave the doors open for you as they are smaller and organisational overheads are lower; making it profitable to manufacture lower quantities.
Be part of The Investment House’s unique incubator concept and see your ROI on your B-BBEE spend flowing.
How To Get Your B-BBEE Money Back
B-BBEE does not have to be a one-sided redistribution of wealth and power. In fact, B-BBEE done properly can offer a highly valuable return on investment — especially within the Enterprise and Supplier Development (ESD) element.
“There certainly is a way to turn your compliance spend into investment spend. And this year we are giving corporates the one-time opportunity to be part of our unparalleled ‘Project National’,” says Jack Janse van Rensburg, director of The Investment House.
“‘Project National’ is a complex incubation model, providing a one-stop-solution to empower, develop and skill South African entrepreneurs,” he explains.
The Investment House’s incubator programme, Business Mastery Program, is designed to display fundamental insights into business environments and requirements as well as social and educational challenges in South Africa. It provides a sustainable and integrated solution for long-term entrepreneurial development.
Related: To B-BBEE Or Not To B-BBEE
The advantage it has over other incubation centres is the strategic concept of ‘Project National’, which combines different industries in one hub. All these industries make use of each other’s services and products and are able to provide combined services to their clients — especially complex contracts and tenders.
Unique incubator concept of ‘Project National’
‘Project National’ incubator hubs offer a one-stop-shop and therefore a convenient solution for any corporate or government institution looking for a comprehensive and wide array of services or products.
Business Ripple Effect
Through this supply chain model every additional large business contract for one enterprise automatically benefits other enterprises in the hubs due to the multiplication of services required.
Entrepreneurs in the hubs use each other’s services immediately and therefore create immediate markets for each other.
Fostering Entrepreneurial Culture
Our multi-industry incubation hubs foster an entrepreneurial culture of innovation, networking and technology transfer. Multi-industrial hubs increase the prospect of interactions that give birth to new ideas and collaborations.
‘Project National’ is an unparalleled incubator concept in South Africa that brings a wide array of business advantages and B-BBEE ROI opportunities to corporates that can decide to make either momentary or non-monetary B-BBEE contributions as part of their B-BBEE spend.
How your B-BBEE compliance spend turns into investment spend with ‘Project National’
Create a consistent supply chain
Involvement in ‘Project National’, can end your struggle with inconsistent and unreliable supply chains. ‘Project National’ provides you with suppliers who can supply on demand, in the right quantity, to the right quality and at the right price. More control and insight into your supply chain creates better competitiveness for your business.
Extend your sales reach into new markets
‘Project National’ entrepreneurs provide you with an extended and widened sales reach into various markets and distribution chains through the development of entrepreneurs acting as resellers of your product.
Diversify your product range
Buying and financing assets can be a difficult task and it is often not possible for companies to diversify their range. ‘Project National’s’ black-owned start-up enterprises are more likely to obtain funding for assets and equipment and can therefore be a great asset to you when becoming a supplier to your company, allowing you to diversify your product range by outsourcing production of new components.
Allow for lower imports
It can be hard to compete with Chinese imports on price and quantity. While the demand for low quantities and tailor-made products is high, it is hardly profitable for many big corporates. ‘Project National’ entrepreneurs leave the doors open for you as they are smaller and organisational overheads are lower, making it profitable to manufacture lower quantities.
Be part of The Investment House’s unique Incubator Concept and see your ROI on your B-BBEE spend flowing.
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