EconoBEE Newsletter – April 2007

Finance Minister calls for BEE review

The finance minister, Trevor Manuel has been quoted quite often recently as saying that BEE needs a review. His comments, most recently in a Financial Times interview, relate to black tokenism and ownership issues.

His comments will strike a chord with many people who find reason to complain about BEE not really empowering black people in general. All that most people see, and now also presumably the minister, is a small group of black people becoming very rich, and the benefits not flowing through to the mass population.

They are not wrong that this is happening. They are wrong when they lay the blame at B-BBEE.

I have enormous respect for the finance minister, but after his outburst I seriously question his knowledge of BEE, in particular the BEE codes of good practice. There is nothing wrong with the codes – what is wrong is the implementation, or more accurately the interpretation of those codes, by mainly government organisations. The minister’s own department – national treasury has still to reconcile the PPPF act with the BEE act. At the moment if you want to do business with government, including the minister’s own departments you HAVE to follow a policy that is IRRELEVANT to BEE. The PPPFA is the overriding act with its pre-occupation with management and ownership. If you follow the BEE codes of good practice, and submit that scorecard to government, or NGOs, or government owned companies, such as ESKOM or TRANSNET you WILL lose out on the business.

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Two Reasons for Implementing BBBEE

There are two reasons for implementing BEE in your company:
1) Ethical/moral: This relates to uplifting and assisting the rest of our population. The arguments for this are social and political, which I will not get into now. I know many people whom I fondly call the “antibees” (anti-BEE – get it?) profoundly disagree with this reason.

2) Business – it will assist you in doing business and making a profit: The antibees, and anyone else should realise that making a profit is the bee all and end all of beeing in a business (sorry for the bad puns). I was consulting to a client recently, and discussing their procurement. One company accounts for 20% of all procurement, and they are that company’s largest customer. The client had asked their supplier for a scorecard, but he has not, and is not willing to supply it. We did the calculation based on them receiving no score and then re-did it on the basis that the supplier was a level 4 (it is a QSE and can easily achieve level 4). 

This would earn my client an extra 3 or 4 points. What we need to do is explain to the supplier how important it is to his biggest customer to obtain a scorecard, never mind how easy it really is to get a reasonably good or satisfactory score. You’d think that a company whose entire livelihood depends on one customer would make an effort to satisfy that customer!

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Substance over form – a principle for B-BBEE

Cathy Bryant Attorneys Inc

On 9 February 2007 the long-awaited Codes of Good Practice (“The Codes”) were promulgated and established a blueprint for the implementation of broad based black economic empowerment (“B-BBEE”) as set out in the Broad-Based Black Economic Empowerment Act 53 of 2003 (“the B-BBEE” Act”). Almost two months earlier the Department of Trade and Industry (“DTI”) had issued a press release giving a summary of the contents of The Codes. In it, the DTI referred to the application of the principle of substance over form in the implementation of BEE.

The principle of substance over form is often referred to in relation to tax cases and applied where parties enter into transactions, the sole purpose of which is to avoid the incidence of tax. In South African law the principle is less of substance over form and more readily expressed in the idea of a simulated transaction. Where an agreement entered into between two or more parties cannot stand on the terms recorded therein and the parties do not in fact intend to give effect to the transaction as it is recorded in the agreement, the transaction is considered to be simulated.

The effect of a finding by our courts that a transaction is simulated is to look through the form of the transaction and give effect to the substance or true intention of the parties. Where it is successfully relied upon in tax cases, the result is the application of the relevant taxing statute.

Unlike the area of tax law, the application of the principle of a simulated transaction is untested in the arena of B-BBEE. The principle is not contained in any statute, but was developed by our courts with reference to the many foreign jurisdictions that embrace the concept. Attempts to apply it to transactions entered into to give effect to B-BBEE will, of necessity, have reference to the established case law on the issue.

The question to be asked when seeking to apply the principle to B-BBEE is: is the transaction entered into merely to simulate the parties’ compliance with B-BBEE and thus enable the measured entity concerned to claim the higher score on the procurement recognition scorecard? The answer to the question would mean a subjective enquiry into the intention of the parties in entering into the agreement and assessment of the objective facts of the surrounding circumstances of the matter.

The result of a finding of simulation must surely be a dissolution of the transaction and a placing of the parties back in the position they were in prior to the conclusion of the transaction. Since the purpose of the transaction was purely to commit fraud, it will not be given effect to, it being ultra vires. 

A number of issues are raised following a finding of simulation: did one of the parties to the agreement misrepresent to the other party the purpose of the transaction and thus induce the other party to enter into the agreement? If so, what is the other party’s right of recourse?

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Small Businesses will find BEE Implementation Simpler

The BEE Codes allows all companies with a turnover of below R5 million per annum to rate themselves as BEE Compliant. This gives these smaller companies a great opportunity to become compliant and also get a higher BEE Scorecard than most of their competitors. This could turn into more business for most of these companies as on the Generic Scorecard (larger companies scorecard) they are incentivised to buy from smaller companies.

The smaller companies or EME’s (Exempt Micro Enterprise) have the added advantage in that they automatically score between 65 and 75 points on the scorecard and if they decide to try improve on their BEE Scorecard by optionally producing a scorecard they cant fall below 65 points.

The documentation EME’s need to produce has also been vastly simplified. They need a document (Exemption Statement) acknowledging that their turnover is below R5 million per annum. This can be signed by their accountant/auditor.

The slightly larger small companies or QSE’s (Qualifying Small Enterprise) have turnovers between R5 million and R35 million. They have limited compliance and only need to use any 4 out of the seven elements of black empowerment. Companies of this size need to produce a BEE Scorecard but can still earn a high number of points. Often a QSE making some effort will earn above 50 points on their BEE Scorecard.

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