Ownership Points – via Sale of Assets – EconoBEE Newsletter – 14 September 2010

EconoBEE - BEE Points = Business

Being ready for verification is about points – the more points you have the better your verification.

Ownership Points – via Sale of Assets

The sale of an asset is almost as common as the day to day running of a business. Companies often sell off divisions or brands.

The BEE Codes of Good Practice allows certain types of sale of assets to be regarded as “black ownership”. BEE Points for Ownership can therefore be earned, subject to certain rules.

The asset being sold must be an on-going business. A piece of machinery will not qualify, but the sale of a division or a subsidiary may qualify.

What qualifies:

  • It must result in the creation of sustainable businesses or business opportunities in the hands of black people; and
  • It must result in the transfer of specialised skills or productive capacity to black people.
  • A sale of asset, equity instrument and business must involve a separate associated enterprise which has:
    • No unreasonable limitations as to its clients or customers;  and
    • Clients, customers or suppliers other than the seller.
  • Any operation outsourcing arrangements between the seller and the associated enterprise must be negotiated at arms-length on a fair and reasonable basis.

Note: The codes say “Transfers of business rights by way of license, lease or other similar legal arrangements not conferring unrestricted ownership;  and Sales of franchises by franchisors to franchisees, but includes sales of franchisees to other franchisees or to new franchisees do not qualify for recognition.”

To clarify, a company may have a franchising model. If it helped black participants to invest in a franchise, this would not be regarded as a sale of assets, but could be enterprise development. However it if took an existing company owned store and sold it to a black operator who then operated it as a franchise it would count as a sale of assets.

Amount of Recognition:
The asset must be valued, and compared to the value of the entire business. This is the basis for recognition. If the asset is worth 10% of the whole business, then a company could be regarded as having sold 10% of its business. The new owner’s status is used to calculate the points. In this example, about 6 points could be earned.

There is on-going recognition: for the first three years, current data is used, thereafter the situation as at the third year is used forever.

This is an excellent way to earn points, even for multi-nationals that may have difficulty in selling shares. Even large multi-nationals tend to sell divisions as their business objectives change. If that division or brand or business is sold to black participants it would count.

One of the key principles is that there must be a transfer of specialized skills or productive capacity. This is another way that the codes are trying to help people get into business in a way not dissimilar to enterprise development. It proves our point that almost every activity in a business is related to transformation and empowerment, and can contribute towards an improved scorecard.

If you are interested in earning points through a sale of an asset please contact our consulting department for advice.

How to Structure your BEE Ownership Deal Properly

Johannesburg 15 September 2010

more info…

B-BBEE is an excellent policy

In my opinion Broad-based Black Economic Empowerment is the best economic growth policy that any country or economist has ever designed. We need to grow the economy and redress the wrongs of the past.

Like any growing economy we have a very poor sector – in our case the income differential is larger than most other countries. We have some very wealthy people, and some who are poverty stricken. We have people who want to go into business, but lack the knowledge, life skills and capital to start and run a business. We have a severe skills shortage. I have repeatedly said that we don’t have as much of an unemployment problem as an unemployable one. We have other economic, social and political issues to solve.

B-BBEE was designed to address all these issues.

Like it or not when one refers to the poverty stricken, squatters, we are in the main referring to black people. When we see a big income differential the lowest paid are black South Africans. The previous government, in the past specifically targeted black people, thereby exacerbating the situation. To call a policy broad-based black economic empowerment, when it specifically is aimed to address the problems I have highlighted in the previous paragraph is simply stating the truth.

The DA has a policy called broad-based economic empowerment that has similarities with B-BBEE. They choose to ignore the word “black”, probably to satisfy their voter base.

The best part of B-BBEE is the approach used as an economic policy: The designers/economists decided to identify those many aspects of the economy and society that need remedial action. They called those aspects “elements”, and identified 7 elements. Within those 7 elements they decided to work out an objective way of measuring how well the policy is working. They created the concept of a scorecard. Without an objective measurement, it is impossible to state clearly how this is affecting the economy. We cannot use subjective measurements – it has to be based on empirical evidence. A good analogy is a rugby and soccer match that has a winner when the winning team scores more goals or points. In rugby it is possible to score more tries and still lose the match. Spectators like to see tries scored, rather than penalties, but the team that wins, i.e is best is the one with the most points. The scorecard works on the same basis.

The scorecard concept of B-BBEE was a mark of genius.

Better was to come:

The scorecard alone does not explain why it is so good. The designers came up with an even better plan: In many other economies governments increase tax and use that money for economic growth, education and training, offer tax incentives to growing business and help the very poor with housing, water, health care etc. South Africa does this, but as an additional point, and instead of further raising taxes, which are not very high compared to Europe, the designers of B-BBEE decided to ask corporate South Africa to contribute. The incentive offered is more government business: The companies that score highest on their B-BBEE scorecard will stand a small chance of getting more government business than those who don’t. This incentive should encourage businesses to comply, i.e. earn as many points as possible on the scorecard and achieve the objective of the act. It was an unusual step to ask corporate South Africa (not force them) to contribute towards B-BBEE. It had to be done that way, because some of the problems of our society like racial intolerance can better be addressed at work, than yet another law.

You cannot force someone to like someone else – you have to make the conditions conducive. Governments still do use the stick approach, and the tax approach. Recently carbon tax was implemented to try to make South Africans more aware of the damage that fuel guzzling cars do to the environment. In the case of the B-BBEE scorecard, one of the very clever elements was preferential procurement which has the effect of increasing a company’s own B-BEE score if it procures (purchases) from other companies that themselves have a good B-BBEE scorecard. Corporate SA has made good strides in encouraging their own suppliers to become complaint – i.e. follow a scorecard that has some very good intentions.

I have previously stated that the theory behind the B-BBEE codes deserves a Nobel Prize for economics. I like the clever way that they have developed the combination of an objective measure of broad-based principles, the scorecard, the approach to rewarding corporate SA for doing what they should be doing anyway, the procurement approach to widening the net to include smaller businesses that are suppliers to the bigger businesses. They have thought it through very carefully by making compliance easier for smaller business, and even reward smaller business more than larger ones. I stand behind my call for the economists to be recognised for designing this excellent policy.

Earlier I mentioned that the whole policy is based on corporate SA standing a chance of getting more government business.

There is nothing wrong with the policy. What is terribly wrong, is government, whose procurement is central to the entire success of this excellent policy, has chosen not to follow B-BBEE. That is why we hear of the tenderpreneurs, and so much unhappiness is generated over the issuing of mining licenses, and deals. We hear of people, even government complaining that B-BBEE has not been implemented properly. That is true, but it should not detract from the good policy that it is. We should rather condemn those who choose not to follow it or implement it.

We put “our money where our mouth is”. We have now asked the Public Protector, whose job is to safeguard the constitution and the laws and ensure government follow all laws, to investigate why government is choosing not to follow the B-BBEE act, and to issue a directive that they do so.

Public Protector receives complaint about Governments implementation of B-BBEE

EconoBEE has submitted a complaint to the Public Protector over the refusal of many government departments and public entities to follow the Broad-Based Black Economic Empowerment Act.

The act states that all government entities must take into account B-BBEE status in awarding tenders, issuing licenses, concessions amongst others. Most government departments and entities have steadfastly refused to follow this law. In particular, most government entities do not do this when issuing tenders or licenses, especially mining licenses. The act is clear: Section 10 of the B-BBEE Act states that government entities “..must take into account, and as far as is reasonably possible, apply any relevant code of good practice..” when an organization applies for licenses, tenders etc.

This clearly implies that every tender and license form should also ask for the B-BBEE certificate of the applicant. At the same time, government entities must disclose how they will apply that B-BBEE status. The hope is that from now on broad-based criteria will begin to be used by government in assessing tenders and licenses. Government is also bound by the PPPFA (Preferential procurement framework act) which governs how tenders are issued. Traditionally government has recognized that the PPPFA and the B-BBEE acts need to be aligned and have promised this for the past 6 years. What some people in government probably do not realize is that the B-BBEE act is in force and section 10 needs to be followed just as much as any other act. Government does not even follow “narrow based black economic empowerment” an outdated concept as defined in the codes.

There is no reason to wait for the alignment of the two acts, which has been discussed since 2004. The B-BBEE act requires government to take action, and they have not done so. Ironically the office of the Public Protector itself is in breach of the law in its own procurement processes by not taking into account, and as far as reasonably possible, applying the codes. Most government entities simply ignore the codes.

This is the reason for asking the Public Protector to get involved and order that the process be started. We would hope that once this is done, the many complaints about “tenderpreneurs” and awarding of licenses based on unfair practices and fronting will be reduced and the good cause of broad-based black economic empowerment will benefit.

Second Complaint

A second complaint was also submitted to the Public Protector. A clause in the B-BBEE Codes of Good Practice under the section “Application of the Codes” states that public enterprises and specified government entities must produce their own B-BBEE scorecard. The clause states that those entities are “measurable” under the act, giving them no discretion to comply or not. So far, a few public enterprises have produced a scorecard. Those that have include City Power, ESKOM, SAA, Telkom and SABC. Most have not. The list of those not complying include SANAS (the very agency that accredits B-BBEE verification agencies), the BEE Council, CIPRO, National Empowerment Fund, as well as every government department. The law requires them to be measured, so we have asked the Public Protector to insist that these organizations follow the good example set by tens of thousands of private enterprise organisations and produce their own valid B-BBEE certificate, as required by section 3 of the Codes.

We hope that this will encourage more compliance amongst the rest of industry and they will see government leading the way, and implementing broad-based BEE the way it should be. It will also help these government departments to understand the trials and tribulations that private enterprise faces in becoming compliant.

Procurement and Enterprise Development Conference

We are pleased to announce our third annual BEE Procurement and Enterprise Development Conference this November in Johannesburg, Cape Town and Durban. During the conference we will assist companies maximise their BEE Points on these very important elements by offering tips, ideas and knowledge. Our delegates will leave with a complete understanding of what they need to do, how to do it and use the best possible methods.

In addition all delegates will receive a complementary license of BEEProcured a procurement evaluation tool which contains a scorecard database of more than 12 000 individual scorecards. Delegates who book early will also receive a complementary license of EconoBEE V3 a Scorecard Self Assessment tool.

How to be “verification Ready”?
Use our pre-prepared “Verification Ready” documents and templates in your business – contact us for more.

While there is demand for a BBBEE Scorecard someone will be taking advantage, shouldn’t that someone be you…

Want us to manage your BEE Process – simple 10 steps to BEE Compliance.

Not sure how to get a BEE Scorecard, click here to see a demonstration of how best to produce your own BEE scorecard.

Turnover below R5 million – find out how to get your BEE Exemption.

Is BEE procurement a pain? Sort it out quick and easy – click here.

EconoBEE Newsletter
14 September 2010

In this issue

  • Ownership Points – via Sale of Assets
  • B-BBEE is an excellent policy
  • Public Protector receives complaint about Governments implementation of B-BBEE
  • BEE Procurement and Enterprise Development

In other news

About EconoBEE

EconoBEE is an expert BEE consultancy. EconoBEE help companys Become BEE Compliant, prepare for verification, earn maximum BEE Points and ensure that they achieve the BEE Level they need to get more business.

Our services include BEE Management Systems, Training, EME Pack, Completely Managed Services; consulting and advisory and Procurement Solutions.

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BEE Points = Happy Customers = Sustainable Business

That’s it for the time being.
Gavin and the EconoBEE Team

Executive summary of B-BBEE

Turnover below R5 million per annum – automatic BEE status

Turnover above R5 million per annum – you need a BEE Scorecard. Our workshops, scorecard tools, procurement manager or advanced managed services will be best for you.

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