Letter from... South Africa

Bernardt van der Linde writes on black economic empowerment, or BEE

The year 2007 signifies 13 years since democracy dawned upon South Africa. The first time non-white citizens were allowed to cast their vote was on 27 April 1994. It was truly a redistribution of the political power; however, the more equal distribution of the economical power is taking much longer.

Black economic empowerment (BEE) is aimed at changing the ownership and the employment of black (African black, Coloured and Indian) people in South African companies. Until recently these initiatives were voluntary under what was considered to be a moral imperative for companies. This, however, changed probably due to a lack of sufficient progress in the redistribution of wealth.

Initially no clear guidelines were stated and white owned and dominated companies took their own initiative to involve black people. This, unfortunately, led to a situation where a few black individuals were enriched. These so-called 'usual suspects' - mostly past influential political leaders - were offered significant stakes of shareholding at discounted prices at the cost of the majority of (more deserving) previously disadvantaged individuals mostly living in dire financial hardship.

The latest effort to address the inequalities of the past is the Broad Based Black Economic Empowerment Act (BB-BEE Act). Although the Act was passed by Parliament in 2003, the practical implementation is guided by the codes of good governance that was only released in February 2007. These codes stipulate the particulars of how the Act should be applied and is applicable to all companies with a turnover of more than R5m (£450,000).

These new regulations encompass a more holistic approach to BEE not restricted to ownership, but include and expand transformation to broad-based ownership, management, employment equity, skills development, preferential procurement, enterprise development and socio-economic development.

In each category companies earn points based on prescribed compliance targets (see table). In the end, a company is categorised on different levels dependant on the points earned.

Why are the points and levels important? In the first place companies interested in government work need a minimum number of points to tender. Companies with higher points on their BEE scorecard will be preferred when bidding for government contracts.

That is, however, not where it stops. It will also apply to companies doing business with firms which, in turn, do business with government. Transacting with each other also earns points based on the BEE score of your supplier. For instance, if your supplier has less than 30-40 points only 10% of your monetary spend will count as 'BEE Rands (Currency Unit)' in the procurement category, compared to a 125% monetary spend where your supplier has between 85 and 100 points.

Currently, there are no details but more punitive measures are also expected for companies that choose not to adhere to the BB-BEE Act.

Companies' scorecards will have to be independently verified by certified BEE ratings agencies, similar to an annual audit.

Although the more structured approach is welcomed by the business community, this will increase the complexity (red tape) and cost of doing business in South Africa. This is unhelpful for a country in need of foreign direct investors.

Some of the other unintended consequences are that skilled white South Africans are emigrating because they feel discriminated against, specifically in terms of appointment to senior positions. In addition, there are currently not enough skilled and experienced black people for companies to meet BEE targets in respect of directors and senior management. Bidding wars for black talent not only lead to higher salary bills but high staff turnover in key strategic management positions that may affect the operations of the company negatively.

Lastly, three Italian mining companies are suing the South African Government for damages as a result of the expropriation of (certain) mining rights and the demand that 26% of mining companies should belong to BEE shareholders. If the case is lost by the Government, it might have to pay damages of up to e266m and prepare for similar cases to follow.

Bernardt van der Linde is a freelance writer and former PwC chartered accountant.