The price of empowerment: the market (and price differences) for B-BBEE points
South Africa’s Broad-Based Black Economic Empowerment (B-BBEE) framework, designed to redress historical inequalities and promote economic inclusion, has created a “market” for B-BBEE points.
Businesses, striving for higher B-BBEE levels to gain a competitive edge (access to government contracts, preferential procurement), face a complex landscape of choices. Each element of the B-BBEE scorecards (described in the previous section) represents a different avenue for acquiring these points, and each comes with its own associated cost. Some of these costs are not immediately obvious, and businesses should take care to understand how their BEE costs compare per point across the different scorecards so that rational decisions can prevail.
This article delves into the relative cost of acquiring points across different scorecard elements, revealing how Ownership, while seemingly expensive, can offer significant long-term value, especially for EMEs and QSEs (because of scorecard savings). It also helps to understand at what price (per point or otherwise) Ownership becomes competitive with spend on other scorecard elements. As always, we use examples to illustrate the point. Please contact us to discuss the specific needs of your unique business.
The B-BBEE Scorecard: A Marketplace of Options
The Generic Scorecard, the primary assessment tool for larger businesses, comprises five core elements:
- Ownership: Measures the extent of Black ownership in the entity.
- Management Control: Measures the effective control of the entity by Black people at board and executive levels.
- Skills Development: Measures investment in developing the skills of Black employees and other Black individuals.
- Enterprise and Supplier Development (ESD): Measures procurement from B-BBEE compliant suppliers (Preferential Procurement) and initiatives to develop Black-owned businesses (Supplier Development and Enterprise Development).
- Socio-Economic Development (SED): Measures contributions to initiatives that promote access to the economy for Black people.
Each element carries a specific weighting, and businesses must strategically allocate resources to maximize their points. However, a crucial exemption exists for EMEs & QSEs:
- The 51% Black-Owned EME/QSE Exemption: Companies with annual revenue below R50M (EMEs & QSEs) that are at least 51% Black-owned automatically achieve a Level Two B-BBEE status (125% recognition) without needing to be measured against the scorecard. They are also free from verification fees. This is a game-changing advantage. (Note that 100% black-owned firms are automatically level 1; the range of 51% to 99% is level 2).
A simple methodology to illustrate the relative costs of each point:
- The “Market” Concept: We’ll frame the B-BBEE scorecard as creating a demand for BEE points. Businesses need points to achieve higher B-BBEE levels, which provide competitive advantages (e.g., access to government contracts, preferential procurement). Each element of the scorecard represents a different “supply” avenue for these points, each with its own associated cost and a myriad of suppliers to choose from.
- Cost per Point: The core idea is to calculate the rand cost of achieving a single point in each scorecard element. This will vary depending on the element and the company’s specific circumstances. We’ll express this as “R/point.”
- Focus on Relative Cost: We’re not aiming for absolute precision (which is impossible due to the many variables). Instead, we’ll focus on the relative cost-effectiveness of different elements, particularly comparing Ownership to the others.
- Simplified P&L: We’ll create simplified, realistic Profit & Loss (P&L) statements for two example companies:
- Company A: R20M annual revenue (a typical QSE). For company A, we look at two scenarios – 25,1% and 51% ownership.
- Company B: R200M annual revenue (a solid Generic Enterprise).
- Key Assumptions: We’ll make reasonable assumptions about:
- Gross Profit Margin
- Operating Expenses (and their breakdown, including payroll)
- Net Profit Before Tax (NPBT) and Net Profit After Tax (NPAT)
- Total Measured Procurement Spend (TMPS) and the resulting “Preferential Procurement Premium” (the subject of another article in this series)
- Employee numbers
- Dividend Payout Ratio
- Ownership Cost:
- For simplicity of comparison, for ownership we will treat the ‘cost’ as the share of dividends lost to the BEE shareholder each year, and will assume a constant dividend payout ratio. This allows for more direct comparison the annual spend on other scorecard elements, and is consistent with net-value and vendor-financed arrangements typical of the South African BEE ownership landscape.
- Element-Specific Cost Calculations:
- Skills Development: Cost of spending 6% of the leviable amount, divided by the 20 available points (plus bonus).
- Enterprise and Supplier Development (ESD):
- Preferential Procurement: This is the hardest to quantify in terms of direct cost. We’ll argue that achieving high levels of B-BBEE procurement often involves some cost (e.g., potentially higher prices from B-BBEE suppliers, administrative costs of finding and managing B-BBEE suppliers). We’ll make a simplifying assumption about this cost as a percentage of TMPS. We will not divide this into a ‘per point’ cost.
- Supplier Development: Cost of spending 2% of NPAT, divided by the available points.
- Enterprise Development: Cost of spending 1% of NPAT, divided by the available points.
- Socio-Economic Development (SED): Cost of spending 1% of NPAT, divided by the 5 available points.
- Management Control: We will discuss this qualitatively. While it doesn’t have a direct monetary cost like spending, it has significant implications for control and decision-making, which can be considered an opportunity cost.
Three Company Scenarios:
We’ll analyze three scenarios, using simplified, but realistic, P&L statements:
- Company A: R20 million annual revenue, following the standard scorecard, and already 25.1% Black-owned (a larger QSE).
- Company A2: Identical to Company A, but with 51% Black ownership (QSE exemption).
- Company B: R200 million annual revenue (Generic Enterprise).
Crucially, we treat Ownership as an annual cost, representing the dividends foregone by the original shareholders each year. This reflects the reality of many BEE deals.
(A) Company A: R20M Revenue (Standard Scorecard, 25.1% Black-Owned)
| Item | Amount (R) | Notes |
|---|---|---|
| Revenue | 20,000,000 | |
| Cost of Goods Sold (COGS) | 12,000,000 | 60% Gross Profit Margin |
| Gross Profit | 8,000,000 | |
| Operating Expenses | 6,000,000 | |
| – Payroll | 3,000,000 | 50% of OpEx (This is also the approximate Leviable Amount) |
| – Other | 3,000,000 | |
| Net Profit Before Tax (NPBT) | 2,000,000 | |
| Tax (28%) | 560,000 | |
| Net Profit After Tax (NPAT) | 1,440,000 | |
| Dividend Payout Ratio | 50% | |
| Annual Dividends | 720,000 | |
| – Dividends to Black Shareholders (25.1%) | 180,720 | This is the annual cost of existing 25.1% Ownership. |
| Total Measured Procurement Spend (TMPS) | 10,000,000 | Assumed to be 50% of revenue. |
| Number of Employees | 50 | |
| Verification Costs | 20,000 |
(A2) Company A2: R20M Revenue (51% Black-Owned QSE)
| Item | Amount (R) | Notes |
|---|---|---|
| Revenue | 20,000,000 | Identical to Company A |
| Cost of Goods Sold (COGS) | 12,000,000 | Identical to Company A |
| Gross Profit | 8,000,000 | Identical to Company A |
| Operating Expenses | 6,000,000 | Identical to Company A |
| – Payroll | 3,000,000 | Identical to Company A |
| – Other | 3,000,000 | Identical to Company A |
| Net Profit Before Tax (NPBT) | 2,000,000 | Identical to Company A |
| Tax (28%) | 560,000 | Identical to Company A |
| Net Profit After Tax (NPAT) | 1,440,000 | Identical to Company A |
| Dividend Payout Ratio | 50% | Identical to Company A |
| Annual Dividends | 720,000 | Identical to Company A |
| – Dividends to Black Shareholders (51%) | 367,200 | This is the annual cost of Ownership for Company A2. |
| TMPS | 10,000,000 | Identical to Company A |
| Number of Employees | 50 | |
| Verification Costs | 0 |
(B) Company B: R200M Revenue (Generic Enterprise)
| Item | Amount (R) | Notes |
|---|---|---|
| Revenue | 200,000,000 | |
| Cost of Goods Sold (COGS) | 120,000,000 | 60% Gross Profit Margin |
| Gross Profit | 80,000,000 | |
| Operating Expenses | 60,000,000 | |
| – Payroll | 30,000,000 | 50% of OpEx (This is also the approximate Leviable Amount) |
| – Other | 30,000,000 | |
| Net Profit Before Tax (NPBT) | 20,000,000 | |
| Tax (28%) | 5,600,000 | |
| Net Profit After Tax (NPAT) | 14,400,000 | |
| Dividend Payout Ratio | 50% | |
| Annual Dividends | 7,200,000 | |
| – Dividends to Black Shareholders (25.1%) | 1,807,200 | Annual cost of 25.1% Ownership. |
| – Dividends to Black Shareholders (51%) | 3,672,000 | Annual cost of 51% Ownership. |
| TMPS | 100,000,000 | Assumed to be 50% of revenue. |
| Number of Employees | 250 | |
| Verification Costs | 50,000 |
The Annual Cost Breakdown (Rand per B-BBEE Point):
| Element | Company A (R/point) | Company A2 (R/point) | Company B (R/point) | Notes |
|---|---|---|---|---|
| Ownership (25.1%) | 7,228.80 | – | 72,288 | Annual cost (foregone dividends). Company A already incurs this cost. |
| Ownership (51%) | 14,688 | 14,688 | 146,880 | Annual cost (foregone dividends). Company A2 only incurs this cost, but gets automatic Level Two and avoids all other scorecard and verification expenses. |
| Skills Development (ex bonus) | 9,000 | R0 | 90,000 | Recurring annual cost (6% of leviable amount / 20 points). |
| Skills Development (inc bonus) | 7,200 | R0 | 72,000 | Recurring annual cost (6% of leviable amount / 25 points). |
| Supplier Development | 2,880 | R0 | 28,800 | Recurring annual cost (2% of NPAT / 10 points, plus 5 bonus points). |
| Enterprise Development | 2,880 | R0 | 28,800 | Recurring annual cost (1% of NPAT / 5 points). |
| Socio-Economic Development | 2,880 | R0 | 28,800 | Recurring annual cost (1% of NPAT / 5 points). |
| Preferential Procurement | – | R0 | – | Difficult to quantify per point, but a significant cost. Company A2 avoids the likely premium. Company B benefits from a higher procurement recognition multiplier due to 51% ownership. |
| Verification Costs | (20,000) | R0 | (50,000) |
Analysis and Key Findings:
- Company A (25.1% Black-Owned): Company A already incurs an annual Ownership cost of R180,720 (foregone dividends). To improve its B-BBEE level, it must spend on Skills Development, ESD, SED, and likely incur a Preferential Procurement premium, plus verification costs.
- Company A2: The 51% Ownership Advantage: For Company A2, the annual cost of B-BBEE compliance is solely the R367,200 in foregone dividends (R14,688 per point). This is less than the combined annual costs Company A would incur for Skills Development (R180,000), ESD (R43,200), SED (R14,400), estimated Preferential Procurement premium (R100,000), and Verification (R20,000) – a total of R357,600 in addition to its existing Ownership cost. Company A2 achieves a higher B-BBEE level (Level Two) at a lower overall annual cost than Company A, even with Company A’s existing 25.1% Black ownership.
- Company B: 51% Ownership for Maximum Impact: Even for the larger Company B, the annual cost per point of 51% Ownership (R146,880) is less than the cost per point of skills development, and not significantly more than the combined per-point cost of ESD and SED. 51% ownership maximizes Ownership points and significantly boosts Preferential Procurement score (due to being a 51% Black-owned supplier), providing a major competitive advantage.
- Skills Development: Consistently Expensive: Skills Development remains a significant recurring cost.
- Preferential Procurement: A major advantage of 51% ownership is the impact on preferential procurement.
- Ownership as an Ongoing Investment: Treating Ownership as an annual cost (foregone dividends) highlights its nature as an ongoing investment.
Conclusion: The Compelling Case for 51% Black Ownership
The “market for B-BBEE points,” viewed through the lens of annual costs, reveals the strategic advantage of 51% Black ownership. For EMEs and QSEs, it’s a clear path to Level Two status, often at a lower overall cost than complying with the full scorecard, even for companies with existing Black ownership. For Generic Enterprises, 51% ownership delivers maximum Ownership points and major Preferential Procurement advantages, making the overall cost per point competitive with other elements. The true price of empowerment is about strategic, long-term investment, and 51% Black ownership can be both a powerful driver of transformation and a sound financial decision.
Please contact us for a confidential discussion around your unique needs/situation.