Broad-Based Black Economic Empowerment (B-BBEE)has become an integral part of doing business in South Africa. As such, it is important for you tohave a thorough understanding ofwhat it means, in termsof howit is measured,and the implications ithas for you and your business. This article unpacks the concept of B-BBEE and looks at how a business's B-BBEE status is measured using B-BBEE scorecards.
What Is B-BBEE?
The main aim of the Broad-Based Black Economic Empowerment Act (no. 53 of 2003, later amended as the Broad-Based Black Economic Empowerment Amendment Act, no. 46of 2013)is to ensure the advancement of economic transformation and the enhancement of the economic participation of blackSouth Africans, where "black" is inclusive of Africans, coloureds, and Indians. B-BBEE, as a concept, can therefore be understood as the result of this act and the presence (or level) of economic empowerment and participation (of racial minorities) in an enterprise. In practise, this often translates to the number of "black people" who are gainfully employed by or are legitimate shareholders in an enterprise.
How Do You Measure B-BBEE?
The B-BBEE Codes of Good Practice (gazettedin February 2007) stipulate that the B-BBEE compliance level ofall enterprises operating within South Africa should be measured using an identified framework. This framework willdepend on the classification of the enterprise. There are threebroad classification according to which an organisation may be categorised:
Exempted Micro-Enterprise (EME): This refers to any enterprise that earns an annual turnover of R 10 000 000 or less. Start-up enterprises (in their first year following their formation or incorporation) also qualify as EMEs.
Qualifying Small Enterprise (QSE): This refers to any enterprise with an annual turnover of between R 10 000 000 and R 50 000 000.
Generic Enterprise: This refers to any enterprise with an annual turnover of more than R 50 000 000.
Once you have determined into whichclassification yourenterprise fits, its B-BBEEcompliance can then be measured based on the applicable scorecard with which it is associated.
Measurement Of Enterprises
As mentioned above, an enterprise's B-BBEEcompliance is determined by the score or rating it achieves when measured using its applicable scorecard. These scorecards are included and discussed below, according to their associated classification.
Exempted Micro-Enterprise
Of the three classifications, the B-BBEE compliance of EMEs is not measured using a scorecard becauseEMEs are considered, by default,as "Level Four Contributors", with a B-BBEE recognition level of 100%. There are, however, exceptions to this general rule:
If an EME is 100% black owned, it qualifies as a "Level One Contributor", with a B-BBEE recognition level of 135%.
If an EME is at least 51% black owned, it qualifies as a "Level Two Contributor", with a B-BBEE recognition level of 125%.
Over and above this, EMEs are required to obtain and submit a sworn affidavit annually confirming an annual total revenue, allocated budget, or gross receipts of R10 million or less, as well as the level of the percentage of black beneficiaries of the enterprise.
Generic Enterprise
AGeneric Enterprise's B-BBEE complianceis measured using the Generic Scorecard. The Generic Scorecard is based onfive elements each of which has an assigned weighting (iwhich correlates withthe importance of that specific element) and a set target. Thefive elements are:
Equity Ownership
Management Control
Skills development
Enterprise and Supplier Development
Socio-Economic Development
The elements and their associated weightings can be seen in the Generic Scorecard table below.The compliance levels of all enterprises classified as Generic Enterprises are measured using said scorecard.
Element
Weighting
Ownership
25 points
Management Control
15 points
Skills Development
20 points
Enterprise and Supplier Development
40 points
Socio-Economic Development
5 points
Total
105 points
As a Generic Enterprise, there exist three opportunities to receive bonus scores (points), depending on the element in question and its underlying criteria (or indicators). The three elements with bonus weightings are Management Control (with 4 bonus points), Skills Development (with 5 bonus points), and Enterprise and SupplierDevelopment (with 4 bonus points). These elementshave been identified aspriority elements. Theytherefore have a minimum requirement (threshold) of 40%.It is mandatory for Generic Enterprises to achieve a minimum target of 40% for each of the three priority elements.
At this stage it is worth noting that there exists a sub-classification of Generic Enterprises, namely Specialised Enterprises. Specialised enterprises include Section 21 companies, companies limited by guarantee, non-profit organisations, higher education institutions,public entities and enterprises exclusively owned byorgans of State, and publicbenefit schemes or organisations. Thecompliance levels of the abovementioned enterprises are therefore measured using the Specialised Enterprise Scorecard seen below.
ElementWeightingManagement control20 pointsSkills development25 pointsEnterprise and Supplier Development50 pointsSocio-Economic Development5 pointsTotal100 points
Qualifying Small Enterprise
The B-BBEE compliance levels of all Qualifying Small Enterprises are alsomeasured using theGenericScorecard. However, while Generic Enterprises qualify for bonus scores, QSEs do not. QSEs are required to comply with all five elements of the scorecard. However, unlike Generic Enterprises, it is only mandatory for QSEs to achieve a minimum target of 40% for two of the three priority elements - one of which being Ownership and the other being a choice between Enterprise and Supplier Developmentor Skills Development.
The Generic Scorecard as it applies to QSEs is included below.
Element
Weighting
Ownership25 points
Management control
15 points
Skills Development
25 points
Enterprise and SupplierDevelopment
30 points
Socio-Economic Development
5 points
Total
100 points
Although the compliance levels of all QSEs is measured according to the scorecard above, certain exceptions do exist:
If a QSE is 100% black owned, it qualifies as a "Level One Contributor", with a B-BBEE recognition level of 135%.
If a QSE is at least 51% black owned, it qualifies as a "Level Two Contributor", with a B-BBEE recognition level of 125%.
Similarly toEMEs,QSEsarerequired to obtain and submit a sworn affidavit annually confirming an annual total revenue, allocated budget, or gross receipts of R50 million or less, as well as the level of the percentage of black beneficiaries of the enterprise.
Measurement Method Of B-BBEE Compliance
Regardless of which scorecard is used the method of measurement of B-BBEE remains consistent. The formula is as follows:
The% of target achieved /The compliance target %per elementX The maximum weighting for that element
The compliance target per element (in the formula above) refers to the target set for enterprises for to achieve with regards to individual indicators associated with each element in the relevant scorecard. To find out more about the compliance targets per indicator per element, refer to the B-BBEE Codes of Good Practice. To better understand how the above calculation is used in practice, consider the following example.
Example:
TheManagement controlelementof theGeneric Scorecard is made up ofnumerous indicators, one of which being "Exercisable voting rights of Black members as a percentage of all Board members".Thisindicator is weighted at 2, with a correspondingcompliance target of 50%. Sayan enterprise achieved 40% of the set target for the indicator in question. What would the weighting be?
40% (target achieved) / 50% (compliance target) x2(maximum weighting for "Exercisable voting rights of Black members as a percentage of all Board members" indicator)
= 80% x 2
=1.6 points
Therefore the enterprise achieved1.6out of2 possible points for the "Exercisable voting rights of Black members as a percentage of all Board members" indicator.The same then has to be done for all the remaining indicators of the Management Control element, as well as for theother elements. After calculating each element and adding all the elements' weightings achieved, you will be left with a score out of 105. This is known as the B-BBEE score qualification. This score will ultimately determine the enterprise's B-BBEE status. Refer to the table below for the range of statuses organisations may achieve.
B-BBEE Recognition LevelsB-BBEE StatusQualificationB-BBEE Recognition LevelLevel One Contributor≥ 100 points135%Level Two Contributor≥ 95 points but < 100 points
125%
Level Three Contributor≥ 90 points but < 95 points110%
Level Four Contributor
≥ 80 points but < 90 points100%Level Five Contributor≥ 75 points but < 80 points80%Level Six Contributor≥ 70 points but < 75 points60%Level Seven Contributor≥ 55 points but < 70 points50%Level Eight Contributor≥ 40 points but < 55 points10%Non-Compliant Contributor< 40 points0%
All enterprise classifications are measuredaccording tothe above table, which is based on the point system within the Generic Scorecard. For example, if a QSE-classified enterpriseachieves a score of 50,it will fall within the "≥ 40 pointsbut < 55 points"parameter, making it aLevel Eight Contributorwith a 10% B-BBEE recognition level. A second example is that, if an EME-classified enterprise provides no B-BBEE score, it will bydefaultbe a level four contributorwith a B-BBEE recognition level of 100%, as was discussed earlier in the article. This default status may change depending on the percentage ofblack ownership inthe enterprise.
A note on verification agencies
There are currently72 accredited verification agencies across South Africathat can facilitate the process of measuring and verifying an enterprise. Once an enterprise has been verified the verification agency will issue a B-BBEE certificate to the measured enterprise, topics which are covered in the article on B-BBEE certificates and verification agencies.
