The term Black Economic Empowerment conjures up many positive and negative feelings for various reasons. South Africa’s government initiated Broad-Based Black Economic Empowerment (B-BBEE) in a bid to redress the inequalities of the past and empower the South African people. The programme has evolved significantly over the years and, while positive in many respects, has not been without failure or controversy.
While B-BBEE is envisaged to benefit those that suffered through the apartheid regime, it is not necessarily reaching those that it was intended for and who are most in need of help. The first part of the problem lies within the definition and classification of ‘Black’.
The BEE Amendment bill makes it clear that the term only applies to those citizens that were, or were entitled to be, South African citizens before 27 April 2004 and their descendents. If a person is Black and was in the country, or arrived later but does not fall into that very clear definition, such a person may be a South African citizen or have a valid work permit, but is not supposed to be recognised as Black or benefit from BEE. Neither are their children, unless the other parent is Black by definition.
Who really qualifies for BEE?
According to Stats SA’s Quarterly Labour Force Survey (2nd Quarter 2012), South Africa’s population between the ages of 15 and 64 years currently stands at around 33 million people. Of this, about 88.5% are Black, consisting of 74.7% African, 10.8% Coloured and 3% Indian people.
What Stats SA does not publish and probably does not count, are the sections of these population groups that are not included in the BEE definition of Black.
Minister of Home Affairs, Nkosazana Dlamini-Zuma, confirms that Home Affairs has no idea how many illegal immigrants are in South Africa, but it is estimated to be somewhere between five and ten million legal and illegal immigrants.
A recently published article entitled ‘Refugees overwhelming South Africa’, by parliamentary correspondent Denise Williams, states that South Africa has the highest number of ‘asylum’ seekers in the world, and that many more people enter South Africa illegally through our notoriously porous borders.
The main problem is therefore that the Black population contains a large percentage of people that are classified as Black by Stats SA and make up the demographics of the South African population, but they are supposed to be excluded from BEE.
As a result, there is a substantial category of the population that are ‘Non-BEE Black people’. If the estimates are even remotely accurate, this could be a larger group than the Coloured, White or Indian population groups.
Verification agencies can pick up from identity documents when a person is not born in South Africa and then insist on proof that the person is indeed BEE Black, but a major new challenge is arising. All of the children of the Non-BEE Black segment of the population that are born in South Africa, whether their parents are legally in South Africa or not, automatically become South Africans.
It has now been 18 years since 1994, these children are entering the job market and for all intents and purposes they are indistinguishable from the children of BEE Black people. What makes this somewhat absurd is that the children of a recently immigrated Nigerian or German couple will enjoy equal benefit from BEE as their South African counterparts.
Verification agencies will not be able to determine who is supposed to be classified as BEE Black to reap the benefits and who should not.
A case in point; when visiting a popular South African coffee shop, I asked my waiter how many people were employed at the restaurant. It transpired that all 50 employees were Black, but only two were South African. When I asked if they planned to ‘go back home’ the answer was ‘never’.
The new draft BEE Codes that were released in October 2012 envisage that companies will be measured on targets based on the demographic profile of the population. This demographic profile does not differentiate between BEE Black and Non-BEE Black. Verification agencies will have to accept Non-BEE people born in South Africa unless government sets up some government authority on race classification.
As South Africa remains a welcome utopia for many people suffering in other parts of Africa, more and more will flock to South Africa and take their place ahead of our own BEE Black population fighting for jobs and survival.
According to eHow.com and jobsearch.about.com, it is a well-accepted norm that many teenagers in the US get their first job in restaurants and fast food chains. This employment gives them a start in their careers and offers the opportunity for permanent employment.
If the coffee shop I visited is anything to go by, that opportunity has already been lost in the South African hospitality industry.
It’s Do Or Die In BEE Compliance
What this means when doing business in South Africa.
More and more, we see businesses and BEE verification firms coming under the spotlight for fraud and non-compliance. BEE ratings are viewed as a ‘hot commodity’ and many BEE services firms have popped up over the past few years to accommodate the demand.
Pressure mounts on businesses to reassess their skills development spend, youth contributions, ownership and management structures in-line with the BEE scorecard, and the Government has been particularly verbal in highlighting the need for BEE compliance.
AJ Jordaan, Sales Manager for leading BEE-aligned Skills Development training company, LFP Training says that its more than compliance – it’s a way of life for businesses today. “Over time, businesses have realised that while they are doing almost everything right, what would make or break a deal could very well be their BEE rating,”
“Businesses receive additional points for doing business with BEE-compliant companies. Enterprise & Supplier Development is key to a firm’s business strategy. With legislation changing on a regular basis, we always advise that clients do it right from the get-go,”
Related: How Do I Become B-BBEE Compliant?
A scorecard is not a target – it should be incorporated into a business’s vision and growth strategy; it is just as important as any other top-line business matter these days. “With the need for more and more guidance in the realm of BEE, more suppliers have popped up to provide strategic counsel and it’s easy to get caught up in the ‘hype’. Terminology, weightings, paperwork and implementation are daunting tasks, but with so many businesses still failing their BEE audits – even under advisory – how do we know who to trust?
“Referrals by word of mouth are always great. I also believe that businesses must ask for a company’s success rate and previous customer testimonials. More than anything, the consultant/ BEE supplier that a company chooses must understand how to truly implement BEE strategies to achieve exactly what it’s there for – to empower the previously disadvantaged and help bridge gaps in society” says AJ.
With all the hype, we forget about what its there for. “Trading in points is not the intention; the end goal is economic transformation and fair opportunities for all,” he continues. “If a company fails its BEE audit, it’s essentially failed to promote exactly what BEE is all about. Money has been wasted and no transformation has really occurred. Partnering with a credible and knowledgeable partner is therefore key.”
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.
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