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Cablegate: South Africa: Bee Codes of Good Practice

DE RUEHSA #4854/01 3461412
P 121412Z DEC 05





E.O. 12958: N/A

1. (U) Summary. On November 1, the Department of Trade
and Industry released the final version of the first two
Codes of Good Practice for Broad-based Black Economic
Empowerment (BEE) along with the "Framework for
Measurement." The codes, once promulgated, will set
forth the criteria and methodology for scoring compliance
with BEE objectives. The Framework identifies seven
criteria to be measured by means of a generic scorecard
with specific targets and rules for compliance. Firms
will be assigned BEE status based on their overall
scorecard performance, which will determine the BEE
procurement recognition its will be entitled to. To
establish a BEE status, all firms must have their BEE
compliance audited by an accredited verification agency
annually. End Summary.

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Codes of Good Practice and Framework for Measurement
--------------------------------------------- -------

2. (U) On November 1 2005, the South African Department
of Trade and Industry (DTI) released the final version of
its "Framework for Measurement of Broad Based Black
Economic Empowerment" (the Framework) along with the
first two Codes of Good Practice. The Framework sets
forth a generic scorecard along with a number of
measurement principles. Code 100 details how firms
should comply with targets for BEE equity (septel). Code
200 details how firms should comply with targets for BEE
management and control (septel). The subject of this
cable is the Framework, the centerpiece of which is the
generic scorecard. All BEE Codes of Good Practice,
including the Framework, may be found at the following
Internet website: 2005.htm

3. (U) Since the government released drafts of the
Framework and the first two codes for comment in December
of 2004, the South African business community has eagerly
awaited the final version. During the comment period
that was extended to March 7 2005, DTI received more than
350 submissions from both large and small firms, as well
as individuals. In June of 2005, the Minister of Trade
and Industry met with selected stakeholders to consider
modifications to the second draft. The Cabinet approved
the final draft on October 31 2005. DTI released it on
November 1.

4. (U) A draft of the remaining seven codes is scheduled
to be released in December of 2005 or early 2006. Codes
300 - 700 and 1000 will deal with employment equity,
skills development, enterprise development, preferential
procurement, and small and medium sized enterprises.
Code 800 will incorporate industry sector codes (based on
industry charters) as they are approved by the Minister
of Trade and Industry. Draft guidelines on BEE equity
for multinationals, which form a subpart of Code 100,
will be released for public comment along with the
others. Only after all the codes are in final will the
Minister of Trade and Industry promulgate them together
in the Government Gazette according to Section 9(1) of
the BEE Act 53 of 2003 ("the Act). Thereafter, the codes
will carry the force of law. All organs of state and
public entities must take into consideration the level of
BEE contribution of all firms seeking to qualify and/or
compete for government business, licenses and
concessions, public-private partnerships, and/or the
purchase of state-owned assets. The Act states that the
Minister shall review the Codes of Good Practice after 10
years, but does not indicate to what end.

Generic Scorecard

5. (U) The Framework identifies BEE criteria to be
measured by means of a generic scorecard. Each of seven
criterion contain specific targets and rules for BEE
compliance to be detailed in specific codes, only two of
which at this time are in final form (Code 100 on BEE
ownership and Code 200 on BEE management). The criteria
include BEE ownership, BEE management, BEE employment,
BEE skills development, BEE procurement, BEE enterprise
development, and a residual element that takes into

PRETORIA 00004854 002 OF 003

account sector specific elements and the extent to which
a firm contributes to BEE social development. The
weights assigned to each of seven criterion sum to 100
points. The specific weight and operative code for each
criterion is as follows:

Criteria Weight Operative Code
-------- ------ --------------
Ownership 20 points Code 100
Management Control 10 points Code 200
Employment Equity 10 points Code 300
Skills Development 20 points Code 400
Preferential Procurement 20 points Code 500
Enterprise Development 10 points Code 600
Residual 10 points Code 700

6. (U) All firms will be assigned a BEE status based on
their overall performance on the scorecard. The highest
status is "Level One Contributor," for those firms that
score 100 points or more (Note: There are a few bonus
points available). The lowest possible status is "Non
Complaint Contributor," for those firms that score fewer
than 30 points. A firm's status determines how much BEE
weight the firm and its customers can claim when
tendering for government business, applying for licenses
and concessions, entering into public-private
partnerships, or purchasing state-owned assets. The
chart below sets forth the BEE procurement recognition
level afforded to transactions with Level 1 to Level 8

BEE Procurement
BEE Status Qualification Recognition
---------- ------------- ---------------
Level 1 Contributor 100+ points 135%
Level 2 Contributor 85-99 points 125%
Level 3 Contributor 75-84 points 110%
Level 4 Contributor 65-74 points 100%
Level 5 Contributor 55-64 points 80%
Level 6 Contributor 45-54 points 60%
Level 7 Contributor 40-44 points 50%
Level 8 Contributor 30-39 points 10%
Non Compliant 0-29 points 0%

7. (U) For example, if a firm purchases goods or services
from a Level One Contributor, it may multiply the value
of its purchase by 135% to arrive a figure representing
the BEE value of that transaction. It then adds this
figure to the BEE value of all of its other purchases
from all other suppliers to calculate one the
preferential procurement component of the generic score
card. In this way, preferential procurement is factored
throughout the supply chain, from first tier suppliers to
government as the ultimate customer. The practical
effect is that all firms will have to take BEE into
account in all of their transactions with other firms if
they want to stay competitive for most nongovernment
business, too. The objective is to create immediate
access to the mainstream economy for increasing numbers
of "previously disadvantaged individuals."


8. (U) All firms must have their level of BEE
contribution assigned through an annual audit by an
accredited verification agency, e.g., a qualified big
four accounting firm or other capable auditing group.
Compliance will be assessed as of a snapshot on the date
of measurement. A firm must be able to furnish evidence
to support all claims. Should a firm misrepresent
itself, its entire scorecard may be disqualified.
Verification agencies must report misrepresentations or
circumventions of the BEE Act to the Minister of Trade
and Industry. Verification certificates will be valid
for one year. A 12-month transitional period from the
promulgation date of the codes has been allotted to allow
time for the accreditation of a sufficient number of
verification agencies.

9. (U) Government has appointed the South African
National Accreditation System (SANAS) as the
accreditation body for verification agencies. Any

PRETORIA 00004854 003 OF 003

enterprise, organ of state, or public entity may apply
for such accreditation. To qualify, an agency must
itself maintain superior BEE status, be a member of an
industry body, have sufficiently qualified personnel,
comply with verification standards, maintain sufficient
internal controls; and have appropriate levels of
professional indemnity and insurance. The details of how
accreditation will work are still being formulated.

10. (U) During the 12-month transitional period following
the promulgation of all BEE Codes and while accreditation
of verification agencies is taking place, the Framework
provides two alternatives for firms to assess the level
of their BEE contribution. One is to assess BEE
contribution via the generic scorecard as set forth in
the Framework. The other is to assess BEE contribution
based solely upon on BEE ownership and BEE management.
This alternative allows a firm to use an audit for which
it has already prepared and/or paid. To calculate its
total BEE score, the firm will multiply the sum of its
scores on BEE ownership and BEE management by 1.92.
Taking this route means that a firm can score no higher
than 57.6, i.e., a "Level Five Contributor" (see
Paragraph 6). In this way, the prospect of scoring more
than 57.6 encourages firms to switch to the generic
scorecard even during the transitional period.

The Status of Industry Charters

11. (U) The Framework clearly explains that until the
Minister of Trade and Industry has accepted an individual
industry charter and promulgated it as a "Sector Code"
under the Act, the charter is a voluntary arrangement
that does not carry the force of law. Therefore, it
cannot be used to calculate the level of a firm's BEE
contribution. DTI intends to review all industry
charters to assure that they conform to the principles
set forth in the Framework and Codes of Good Practice.
The process will give each industry the chance to argue
for exceptions based on the special characteristics of
its particular sector. The Minister will decide whether
to promulgate the charters as individual Sector Codes,
each of which will become legally binding under Code 800.
Firms always have the option of using the generic
scorecard in place of a Sector Code.

12. (U) One industry charter, the mining charter, already
carries the force of law because it is specifically
referred to in the Mineral and Petroleum Development Act
of 2003. For this reason, the mining industry does not
have to align itself with the Framework or the Codes of
Good Practice at this juncture.


13. (U) Black is defined as black (i.e., African),
"coloured," and Indian South Africa citizens (or those
who could have applied for South African citizenship, if
permitted) who suffered discrimination under the
apartheid regime, and their descendents.


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