Corporate & Commercial Law, BEE Update, BEE is a Commercial Imperative, if not a Legal One

In an article published in the Business Day on 30 January 2013, Mr Lionel October, the director-general of the Department of Trade and Industry, is reported as stating that "No company is forced to implement the government’s black economic empowerment policy, which is a voluntary programme." 

The article states that this comment was in response to criticisms by opposition MPs about the proposed Broad-Based Black Economic Empowerment ("BEE") Amendment Bill ("the Amendment Bill").  Mr. October's response is, in our view, somewhat disingenuous when regard is had to what is being proposed.  

The Amendment Bill was published in December 2011 for public comment.  Among other things, it introduces a definition of "fronting", creates a criminal sanction for misrepresenting the BEE status of an enterprise or providing false information relevant to assessing the BEE status of the enterprise and provides for the immediate cancellation of any contract or authorisation awarded by government "on account of false information furnished by or on behalf of an enterprise in respect of its B-BBEE status".  The penalty for these offences is either a fine of up to 10% of annual turnover (in the case of an enterprise) or imprisonment of not more than 12 months.

The Amendment Bill also establishes a BEE Commission which is tasked with, among other things, overseeing, supervising and promoting adherence with the BEE Act "in the interest of the public" and receiving and investigating complaints in relation to BEE.  The Commission is afforded wide powers in this investigation process.  Whether these powers will become a tool for competing entities to use against each other is yet to be seen.

Draft amendments to the Codes of Good Practice were also published on 5 October 2012 ("the Amended Codes") for public comment.  The public response to the Amended Codes has been largely critical, due to the emphasis placed on black ownership.  Of the 3 priority elements, namely Ownership, Enterprise and Supplier Development and Skills Development, the Enterprise and Supplier Development element emphasises procurement from suppliers that are more than 50% black owned.

It is through the Enterprise and Supplier Development element (previously called Preferential Procurement), that BEE has become a necessity for corporate South Africa.  Although it is therefore correct that there is no legal obligation on any business to implement BEE policies, the consequence of not doing so is the loss of business from customers who interface with government, whether directly or indirectly through their customers.  This interaction need not be in the form of competing for government tenders, as any interaction with the Government at any level (whether in applying for licences, entering into public-private partnerships, obtaining grants, purchasing state assets, etc.) obliges the government to consider the BEE status of that entity.  The Amendment Bill increases the list of interactions in respect of which the government is obliged to consider the entity's BEE status and this percolates throughout the business community.

It is in our view extremely disappointing that the director-general of the Department of Trade and Industry has taken this position rather than addressing the criticisms levelled at the Amended Codes and the Amendment Bill.  Surely the emphasis should be on skills and socio-economic development.  Once skills are acquired, ownership will follow as a natural consequence.  The parable springs to mind of the difference between giving someone a fish, which allows him to feed himself for a day, and teaching him to fish, which enables him to feed himself for a lifetime.

Although the initial concept of BEE stressed transformation rather than ownership transfer, the Amended Codes and the Amendment Bill achieve the opposite.  No additional weighting has been given in the scorecard to the socio-economic development element and instead the weightings for ownership, senior management and procurement from black-owned suppliers have increased.  Indeed, the enhanced emphasis on majority black ownership in the Amended Codes may result in even more complex financing structures being created to facilitate such deals, which may unintentionally lead to greater fronting or perceived fronting practices.

It is hoped that these issues will be addressed by the Department of Trade and Industry in the future.

Erika Petersen-Holmes, Partner

Contact: 031 575 7410 and petersen@wylie.co.za