Navigating the Labyrinth: the complexities of B-B BEE ownership
Broad-Based Black Economic Empowerment (B-BBEE) Ownership in South Africa is a critical, yet often bewildering, component of doing business. It’s not a one-size-fits-all proposition. The optimal approach depends on a complex interplay of factors: the nature of the company (local or multinational), its size, the sector it operates in, and the strategic choices it makes regarding other scorecard elements. This article unravels this complexity, providing a roadmap for navigating the B-BBEE Ownership labyrinth.
The Foundational Choices: Entity Type and Ownership Structure
The first fork in the road is the entity type:
- Local Companies: These have the widest range of options, including direct ownership by black people, Broad-based schemes (including Trusts and ESOPs), Sales of Assets, Private Equity, Options and Warrants, and hybrids thereof.
- Multinational Companies (MNCs): MNCs have all the same options as local companies, but the codes also recognise that some MNCs have global rules that prevent them selling any equity in the South African business. In this case, the codes provide an alternative: the Equity Equivalent Investment Programme (EEIP). Instead of selling equity, MNCs can either contribute a percentage of their South African revenue or invest an amount equivalent to 25% of the value of their local operation into black businesses. The EEIP works well but it requires approval and supervision by the DTIC (Department of Trade, Industry and Competition), which can take years to achieve.
- Tusker has developed a structure that uses the Private Equity rules to effectively achieve the same outcome as the EEIP but at lower total cost in a far faster and simpler manner. It’s also suitable for both local and foreign companies. Please contact us to learn more.
The Size Factor: EMEs, QSEs, and Generic Enterprises
The size of the business, based on annual revenue, significantly impacts the B-BBEE requirements and available options:
- Exempted Micro-Enterprises (EMEs): (Revenue <= R10 million). EMEs are automatically granted a B-BBEE level based on their Black ownership:
- < 51% Black-owned: Level Four (100% recognition)
- >= 51% Black-owned: Level Two (125% recognition)
- 100% Black-owned: Level One (135% recognition)
EMEs only need a sworn affidavit confirming their revenue and ownership. This is a significant simplification.
- Qualifying Small Enterprises (QSEs): (Revenue between R10 million and R50 million). QSEs have a crucial advantage:
- >= 51% Black-owned (using the Flow Through Principle): Automatic Level Two status (125% recognition), without needing to be measured against the scorecard. This is a game-changer, making 51% ownership highly attractive because it avoids the costs of the other scorecard elements and no annual verification is required.
- < 51% Black-owned: Must comply with the QSE scorecard, which includes all five elements (Ownership, Management Control, Skills Development, Enterprise and Supplier Development, and Socio-Economic Development). Ownership is a compulsory element and either Skills Development or Enterprise and Supplier Development needs to be selected.
- Generic Enterprises: (Revenue > R50 million). These companies must comply with the full Generic Scorecard, with Ownership being one of the three priority elements (along with Skills Development and Enterprise & Supplier Development). Failure to meet the 40% sub-minimum on Net Value (within Ownership) results in a one-level penalty.
Sector-Specific Nuances: Sector Charters
While the Generic Codes provide the overarching framework, some sectors have their own Sector Codes, negotiated between the government and industry stakeholders. These Sector Codes may have different targets, weightings, or specific requirements for Ownership. We cover the ownership requirements of each industry charter further into this ownership guide.
It’s critical for businesses to determine if a Sector Code applies to them and to comply with its specific requirements. If a Sector Code exists, it supersedes the Generic Codes.
The Interplay with Other Scorecard Elements: A Balancing Act
The decision on Ownership cannot be made in isolation. It must be considered in the context of the other scorecard elements:
- Priority Elements: As mentioned, Ownership (specifically Net Value) is a priority element for Generic Enterprises. This means that achieving a decent score here is crucial to avoid the level drop penalty.
- Skills Development and ESD: These are also priority elements. A company must strategically allocate resources to achieve the 40% sub-minimums in these areas as well.
- Cost-Benefit Analysis: Each element has an associated cost (e.g., Skills Development spending, ESD contributions, foregone dividends in the case of Ownership). Businesses need to perform a cost-benefit analysis to determine the most efficient way to achieve their desired B-BBEE level.
- 51% Ownership and Preferential Procurement: Achieving 51% Black ownership, even for Generic Enterprises, provides a significant advantage in Preferential Procurement. As a 51% Black-owned supplier, other businesses can count 125% of their spend with that company towards their Preferential Procurement targets, making the 51% Black-owned company a highly attractive supplier.
The Ownership Matrix: A Summary
| Factor | Options/Considerations |
|---|---|
| Entity Type | Local Company: Direct ownership, B-BOS, Trusts, Private Equity. |
| Multinational: Equity Equivalent Investment Programme (EEIP) as an alternative to equity sale. Or use Tuskers’ private equity solution to achieve the same. | |
| Business Size | EME: Automatic levels based on Black ownership (affidavit only). |
| QSE: Automatic Level Two with >= 51% Black ownership. Otherwise, QSE scorecard (Ownership compulsory). | |
| Generic Enterprise: Full Generic Scorecard, Ownership is a priority element (Net Value sub-minimum). | |
| Sector | Generic Codes apply unless a Sector Code exists. Sector Codes have specific targets and may supersede the Generic Codes. |
| Other Elements | Ownership is a priority element (for Generics). Must balance cost and benefit of Ownership against Skills Development, ESD, and other elements. 51% Black ownership provides significant Preferential Procurement advantages. |
| Ownership Structure | Direct, Broad Based Ownership Schemes (B-BOS), Trusts, Private Equity, Sale of Assets, Options and Warrants, Hybrids of the above. |
| Financing | Self-funded, vendor-financed, third-party financed, combinations. |
Conclusion: Strategic Navigation Required
B-BBEE Ownership is not a simple box-ticking exercise. It requires careful planning, strategic decision-making, and a deep understanding of the Codes, Sector Codes (if applicable), and the interplay between different scorecard elements. The optimal approach will vary significantly depending on the specific circumstances of each business. Seeking expert advice from B-BBEE consultants is highly recommended to navigate this complex landscape and develop a sustainable, impactful, and compliant Ownership strategy.
For a confidential discussion around the unique needs of your business, please contact us.