Here's the BEE hymn book

Itumeleng Mahabane - Financial Mail

 

Late last year, government released its code of practice on black economic empowerment, the closest thing to legislation on BEE.

The code spells out government policies and definitions of empowerment and is primarily a guide to the BEE profile expected of any company that does business with government. It is also in effect the framework that guides private-sector best practice. Its chief impact will be creating certainty and harmonising the definitions and measurements of BEE.

The code reiterates what broad-based BEE is and may create a more rational debate about enrichment versus broad-based empowerment.

It defines equity transactions as narrow BEE and the balanced scorecard package as broad-based BEE. Equity transactions, whether or not they include disabled people or large villages, are not broad-based empowerment.

This prevents deal makers taking short cuts by bringing in passive, broad groups of shareholders who do not benefit clearly from the deals.

The advantage is that groups looking to conclude empowerment deals do not have to worry about whether the consortia buying into them are broad-based. It also means companies wanting to deal with government cannot just stick equity deals together. They must improve the skills and opportunities of their black workers .

The code attempts to widen the circle of deal makers by awarding bonus points to companies that include black people who have not previously participated in a deal worth more than R20m. That encourages business to find new people without government overtly barring the so-called "usual suspects".

The code defines broad-based empowerment as a "balanced approach that includes contributions and measures that address ownership, management, employment equity, skills development, preferential procurement, enterprise development and other residual elements of the broad-based BEE scorecard".

It appears from the code that government recognises that direct ownership may be limited to individuals involved in active business.

Though the code points to the scorecard as broad-based BEE, the most substantive issues are definitions and measurement tools of empowerment equity deals. The key reason is the complex funding and ownership structures adopted to get around black investors' lack of money.

The ownership code is potentially explosive as many of the BEE transactions carried out have deferred voting and sometimes economic rights. The code makes it clear that points are awarded to unrestricted voting or economic interest. An example of an empowerment transaction that would not meet the criteria is Bidvest's. The code does not recognise options and other deferred-interest schemes. Bidvest CEO Brian Joffe was away when the FM tried to contact him but it is apparently waiting for its empowerment advisers to report on the implications of the code.

Potentially more controversial is the subject of recognition of equity finance through debt. Debt-financed equity means BEE parties receive no economic interest until the debt has been repaid.

Groups like Mineworkers' Investment Co, which paid for its interest in Primedia with its own cash, have argued that applying the same value to paid-up equity as unfunded equity prejudices them. MIC executive director Kenshan Pillay could not comment because he had not had a chance to read the code.

One of the key issues dealt with is the question of indirect ownership. According to the code , government does not recognise indirect shareholdings such as pension schemes or passive trusts.

However, companies can exclude the holdings of pension funds and state institutions from their total equity when calculating the percentage of empowerment ownership.

Finally, the code makes provision for and gives guidance to the establishment of recognised rating BEE agencies, which companies can use to produce their scorecards.

 

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