What is BEE and Why was it Put in Place?

Every nation on Earth has parts of its history that cause consternation when discussed, and every nation has sought to discover ways in which these issues can be dealt with. Some countries discuss reparations, others build statues in remembrances of past injustices or revolutionary heroes, and others just try to avoid talking about those sorts of things. South Africa tried (amongst other things) a system known as BEE. What is BEE and Why was it Put in Place?

Following the end of Apartheid in South Africa, the government determined that left to its own devices, the South African economy would not naturally remedy the disparities felt amongst its previously disadvantaged groups. With this in mind, an initiative of Black Economic Empowerment was created with the aim of economic transformation that would undo the inequity caused by the past. Over the years, amendments have been made, but the fundamental goals of the movement remain the same.

There is some confusion between the terms BEE and its more recent counterpart B-BBEE with many groups using the terms interchangeably. In reality, there is little difference between the two terms with the latter simply being a kind of revision of the first. 

• Black Economic Empowerment (BEE) – This was the first iteration of the government’s plan to transform the South African economy to address historical grievances and promote black participation in various sectors. This idea was criticized as lacking any meaningful legislative strategy.
• Broad-Based Black Economic Empowerment (B-BBEE) – This is the revised plan for economic change in the country and seeks to make up for the shortcomings of the previous framework. It highlights various strategies and policies that the government believes will effectively steer economic transformation in the right direction.

Regardless of the terminology used, the goals are the same. BEE and B-BBEE are both initiatives aimed at the promotion of black economic empowerment in an attempt to redress past grievances. According to the B-BBEE Act of 2003, this is accomplished through various means including, but not limited to –

• Enabling meaningful participation of black people in the economy.
• Achieving a substantial change in the racial make-up of ownership, management structures, skilled occupations and new enterprises.
• Increasing the extent to which black women own and manage enterprises.
• Increase rural and local communities’ access to economic activities, land, infrastructure, etc.
• Promote investment programmes that lead to the aforementioned outcomes

*It should be noted that, for the purposes of these plans, the term ‘black’ refers to Africans, Coloureds and Indians.

Is BEE Compliance Compulsory?

For the most part, BEE is not a compulsory requirement* for businesses in South Africa, that said, there are multiple benefits available for compliant companies and various disadvantages for those who push back.

The BEE Codes of Good Practice provide a system of measurement that determines your level of compliance with BEE standards after considering factors such as ownership percentages, management control, etc.

BEE compliance is incentivized by offering entities with a high compliance rating certain benefits such as –

• Tax incentives.
• The ability to apply for certain licenses.
• The ability to bid for government tenders with priority given to those with higher ratings.
• The ability to buy state-owned assets.
• The ability to enter into public-private partnerships.

The most notable incentive is found in the relationship between compliance levels and procurement recognition. Simply put, the more you comply, the higher your procurement rates should be.

*All state or state-owned entities must be BEE compliant and any private entity wanting to do business with state organs must also be BEE compliant with a high BEE rating usually meaning more business. Additionally, some industries make BEE compliance a requirement for certain licencing rights, for example, to hold mining rights you are required to have a minimum level of 30% black ownership.

What is an Exempted Micro Enterprise (EME)?

EME’s are businesses with an annual turnover of less than R10 million. They are exempt from BEE measurements and are automatically given a compliance rating of 100% although this can increase to 135% if there is black ownership.

What is Window Dressing in BEE?

Window Dressing is one type of Fronting that may take place within the context of BEE. Fronting refers to any process that directly, or indirectly, frustrates or undermines the goals and purposes of the BEE act and related policies.

Simply put, fronting involves different actions that attempt to make an entity appear more BEE compliant than it actually is. Commonly, this is done via the misrepresentation of a company’s BEE status during reporting.

Window Dressing is normally evident in situations in which black people are noted as having managerial positions when, in reality, they have little to no real power or decision-making roles. This can be attempted in many ways, for example, when –

• A black person with a menial job is reported as holding a senior position within the company.
• A black person is given a seemingly high-ranking position at a company but at a heavily reduced salary with no real tasks or work to be done.
• Black people in high-ranking positions are often sidelined and have little influence or say in the direction of the company.

Obviously, the various benefits a company can receive from being BEE compliant can oftentimes tempt groups and individuals into trying to circumvent the system and reap the rewards without actually changing the makeup of their business. It should be noted, however, that this kind of practice can result in some pretty hefty legal repercussions.

What is the Penalty for Fronting? – What is BEE and Why was it Put in Place?

Depending on the nature of the crime, fronting and different forms of misrepresentation can result in heavy fines and up to 10 years imprisonment. If the guilty party is a company or group, they may be fined up to 10% of their annual turnover.

Additionally, organs of the state and public entities may cancel contracts that were granted based on incorrect information while a prohibition on doing business with such groups may be enacted for up to 10 years.

Do you Have to Report Fronting? – What is BEE and Why was it Put in Place?

A legal duty to report fronting only applies to certain individuals within organs of the state and public entities and not to individuals outside these spheres. That said, reporting is encouraged and reports can be made to the B-BBEE Commission.

In Conclusion – What is BEE and Why was it Put in Place?

Following the end of Apartheid, the Black Economic Empowerment (BEE) Act was established to encourage meaningful black participation in the workforce with an emphasis on black people achieving high-ranking roles within the economic sector and increasing black ownership and management of companies.

BEE was seen as necessary to address the injustices of the past while fostering economic change that focuses on the racial make-up of the economy and managerial workforce. Unfortunately, the initial BEE proposals were not much more than a loose collection of ideas for black economic empowerment with little legislative framework attached. As such, negligible levels of real world change followed the original Act.

In later years, the Broad-Based Black Economic Empowerment (B-BBEE) Act was created to replace BEE as a more widely-encompassing set of policies that would hopefully have more of an impact on the country’s economic composition. It should be noted, that the term ‘black’ as mentioned in the B-BBEE Act includes various previously-disadvantaged groups such as Indians and Coloureds and does not only refer to black people.

For the most part, B-BBEE acts as a type of incentive for private companies and individuals who wish to do business with the state or with state-owned enterprises. Those who follow the assigned criteria can achieve a level of BEE compliance which will create tax incentives, give the ability to buy state-owned assets and allow the company to apply for tenders, as well as other benefits.

In some sectors, such as mining, this compliance is more necessary than others as certain licences are only available to BEE-compliant groups.

Additionally, organs of the state and public enterprises are required to be BEE compliant and will require similar standards from businesses that wish to do business with them.

Fronting in the process in which individuals or enterprises attempt to cover up their demographic information to appear more BEE compliant than they actually are. Window Dressing is a common form of this fronting in which black people are reported as having high-ranking managerial roles when, in actuality, they are given far more menial tasks or are sidelined when important decisions are being made. Penalties related to these offences include fines and up to 10 years imprisonment.

Disclaimer LAW101: All of our posts are for research purposes only. Law 101 aims to assist its readers with useful information on the laws of our country that can guide you to make decisions in line with the South African Governmental Laws currently in place. Although our posts cite the constitution in many instances, they are intended to assist readers who are looking to expand their knowledge of the law. Should you require specific legal advice we advise you to get in touch with a qualified legal expert.

Found this article interesting? Leave us your thoughts below.