Changes to BEE law: The many benefits for a 51% black owned company

Posted on:
10 Sep 2018
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Commercial
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“My start-up business has been growing rapidly and I’m considering bringing a partner on board to invest and help take the business to the next level. I’m keenly aware of the importance of transformation and have identified a potential BEE partner who is prepared to take up a 51% stake in my business. That said, a new partner is a big decision and I just want to make sure there is sufficient strategic benefit in doing so?”
 Adrian Frewen

Since the Amended Codes of Good Practice for BEE (“BEE Codes”) came into operation about three years ago, many larger companies have found it increasingly difficult to comply with the elevated targets set for them under the Procurement element of their BEE scorecard.

Such larger companies (Generic entities) must ensure that 40% of their total procurement expenditure is from 51% black owned suppliers. Accordingly, 51% black owned suppliers have become highly sought after and favoured by larger companies who are under tremendous pressure to maximise their points under the Procurement element. This has created opportunities for companies that are 51% black owned to be highly competitive and contend for supplier contracts, previously not open to them.

Recently proposed amendments to the BEE Codes propose to further enhance the opportunities for 51% black owned companies by establishing additional incentives for companies to procure from 51% black owned suppliers, thereby strengthening the strategic value for a company to be 51% black owned. The draft amendments published for comment on 15 June 2018 propose the following amendments:

• The target for procurement expenditure on 51% black owned suppliers is to be increased from 40% to 50% of the total measured procurement expenditure.
• The total scorecard points for procurement expenditure on 51% black owned suppliers are to be increased from 9 to 11 points, ensuring that this sub-category accounts for nearly half of the total points available under the Procurement element.
• The current separate sub-categories for EME’s and QSE’e under the Procurement element are to be merged into a single sub-category with a target of 25% of the total measured procurement expenditure for this combined category. Additionally, in a further nod towards 51% black owned suppliers, these amendments propose to allow suppliers that have 51% black ownership measured using the flow-through principle, to also be recognised for expenditure under this combined sub-category.
• It is further proposed that companies can multiply their expenditure on suppliers that are at least 51% black owned, measured using the flow-through principle, by a factor of 2, enhancing the attractiveness of procuring from such companies.

Aside from the above procurement benefits, any entity which is at least 51% black owned, measured using the flow-through principle, can also qualify as a beneficiary for Supplier Development or Enterprise Development contributions. Currently, only EME’s or QSE’s (companies with a turnover of less than R50 million) qualify as beneficiaries. The proposed amendments wish to extend this by allowing all 51% black owned companies, measured using the flow-through principle, to qualify as beneficiaries, irrespective of turnover, thereby also including Generic companies (more than R50 million annual turnover) as potential beneficiaries and positioning such companies to benefit from investment or support through supplier or enterprise development agreements concluded with business partners wishing to claim points under their Enterprise and Supplier Development elements.

Importantly, the proposed amendments will only apply to entities that are measured under BEE Codes. If your business falls under a specific sector charter such as the ICT or Construction Sector BEE Charter, these amendments will not automatically apply until these sector charters have been aligned with the proposed amendments.

What is clear from the above is that from a transformation and BEE Scorecard perspective there is a clear and definite advantage to being a 51% black owned company. There are specific requirements to qualify as such a company, and if you want to ensure that you qualify as a 51% black owned company using the flow-through principle to access the additional benefits described above, it would be advisable to consult with a BEE or commercial specialist before you proceed with your transaction to ensure that your transaction is structured correctly and your business is positioned favourably to make the most of the strategic opportunities afforded to 51% black owned companies.

 
 This article was first published in Phatshoane Henney Attorneys’  August 2018 Newsletter.
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