Calculate your score before you sign the deal.
An ownership deal can result in anywhere between 0 points and 23 points for generics and up to 28 for QSEs. The structuring of the deal makes all the difference. For example if the deal is only with black males, you stand to lose at least 4 points. If the deal is with business people who have previously done deals worth more than R20 million then you will lose another 2 points.
An extreme example is the latest ArcelorMittal deal. They called it a broad-based black economic empowerment deal and there has been widespread condemnation of the deal because of the perception that it only benefits a select few people.
We decided to analyze it in detail from a B-BBEE viewpoint and our conclusion was that it was a truly pointless (pun intended) deal. Our calculations show that ArcelorMittal “selling” 26% of their new business would only earn them 4.95 points – out of 23.
In ArcelorMittal’s case they lost points on almost every indicator. Their deal is to allow them to re-purchase the shares after 4 years if “the dti allows them to recognize the ratings they have earned”. Their advisors seem to be as confused about the codes as they are: There is no “once empowered always empowered” clause in the codes that allows them to retain the same rating and still re-purchase their shares. The true clause is “continued recognition of ownership after loss or sale of shares" and it works on a completely different principle. In any event, the deal does not even advance economic interest to the new shareholders, which is a key clause in earning points. Effectively their new black, about to be very wealthy partners are doing nothing more than warehousing or holding their shares for anywhere between 4 and 20 years, and being paid to hold those shares, without carrying any risk. They are not even paying for the shares, but then the shares are never theirs – they must resell the shares sometime in the future.
The point we have to emphasize is this is not a B-BBEE scheme. It is some form of a business deal, but is contrary to the codes, which is why they can at best earn 4.95 points. We have made the argument that the deal deserves 0 points due to it not being true to the codes.
The ArcelorMittal deal has taken the good cause of true empowerment and proper transformation back 10 years. When anyone analyzes this deal, we beg of them: Do not judge true empowerment on how ArcelorMittal have effectively sabotaged the codes and hurt transformation.
The good news is the press have picked up on this aberration: BEE analysts pick holes in Arcelor deal and view interview about this deal on E TV Business News.
|ArcelorMittal – a B-BBEE Pointless Deal
The ArcelorMittal deal was done in order to comply with the B-BBEE codes. If that was their intention they have done a very bad job.
Based on their published SENS announcement we have calculated the points they could earn this year, and made various estimates where we felt it appropriate.
Ownership is made up of 23 points.
Voting rights of black people in the organization: Target 25% plus 1 vote: 3 points
The participants hold 26% of the shares, though some of the participants are not black as defined (the Gupta family). If the Gupta family owns 10% of the BEE SPV consortium that is a 21% shareholder then effective ownership would be 23.9% and not 26%. However the modified flow through principle applies, ensuring that targets are reached and 3 points earned.
Points earned: 3
Voting rights of black women in the organization: Target 10% plus 1 vote: 2 points
The BEE SPV has stated that 25% of its shareholding will be black women, and using the flow through principle black women will own 5.25% of the business.
The ESOP is reserved for employees and holds 5% of the business. If black women account for half, there would be 2.5% black women ownership, though based on the ArcelorMittal business it is reasonable to estimate that 80% of its black employees are male.
Therefore we estimate that there is 6.5% black women ownership, and 1.3 points will be earned
Points earned: 1.3
Economic interest of black people in the enterprise: Target 25%: 4 points
The participants will only earn 5% of ordinary dividends and 0% of extraordinary dividends for at least 5 years. Economic interest, using the modified flow through principle will be less than 5% of 26%=1.3 % out of a target of 25%. We would estimate 0.21 points will be earned for economic interest, though the key principle of substance over form suggests that zero economic interest will be earned.
Points earned: 0.21
Economic interest of black women in the enterprise: Target 10%: 2 points
Based on 6.5% black women ownership who receive less than 5% of dividends, economic interest will be less than 0.325% and 0.06 points earned.
Points earned: 0.06
Economic interest of black natural people in the organization: Target 2.5%: 1 point
This would include employee share ownership schemes, and it is likely that some of the participants in the BEE SPV fall within this category. We estimate that 6% of the shareholders fall into this category but they only earn 5% of the economic interest and 0.1 point earned.
Points earned: 0.01
Ownership Fulfillment: 1 point
Ownership fulfillment has not taken place so zero points are earned.
Points earned: 0
Net Value: 7 points
Net value is based on economic interest and the repayment schedule. Payment would have been made in full, but economic interest is only 1.3% out of a target of 25%.
Points earned: 0.36
Involvement in the ownership of the enterprise of black new entrants: Target 10%: Points 2
The ESOP is likely to be black new entrants, and part of the consortium is likely to be new entrants. Out of the 26% ownership we could expect 8% to be black new entrants. However points are earned only based on economic interest. Economic interest of the entire consortium is only 1.3%, so the share of black new entrants is about 0.04% out of 10%
Points earned: 0.01
Involvement in the ownership of the enterprise of ESOPs: Target 10%: Points 1
This is also based on economic interest, and less than 0.01 points will be earned.
Points earned: 0
Grand Total: 4.95 points out of 23
Not many points….
|Structure your BEE Ownership Deal
Johannesburg 15 September 2010
|27th January 2010 and Fronting
1st February 2010 was a landmark day in the history of B-BBEE in South Africa. It was from that date onwards that only certificates issued by accredited verification agencies, or those in possession of a valid pre-assessment letter, would be valid.
Prior to that date other certificates, even if issued by a non-accredited agency or a self rating or BEE consultant, would be acceptable.
It is therefore quite interesting to see how many certificates were produced by consultants in the final three days before the deadline. We have seen more certificates dated 27th,28th,29th January than any other date! (30th January was a Saturday explaining why the 27th and 28th January were such popular dates). When I see a certificate dated 27th or 28th January, I examine it in a little more detail. This is not to say it should be rejected, but I am sceptical over the volume of certificates produced over that time. I look especially for certificates that do not use decimals in their calculations, or those where all the points have been earned for any one element. The mix of how points were earned is another indicator of fronting. For example if a company has earned all 23 points on ownership, but gets less than 2 points for management control, there is sufficient reason to want to double check the data. The codes do say that the measured entity must hold suitable evidence or documentation to prove their score. If they do not have the proof, then the entire scorecard must be rejected.
We do have a letter from the dti confirming that certificates produced prior to 1st February 2010 remain valid. If your verification agency does not accept certificates produced by non-accredited agencies prior to 1st February 2010, email us and request a copy of that letter.
Fronting is misrepresentation of one’s BEE position and is considered fraud. We have come across an interesting situation recently. In this case, they did not choose the 27th January date for their BEE Certificate, but used 30th November 2010 as the date on their certificate! Back-dating a scorecard is one thing, but forward-dating it is a recipe for getting caught out! A bit more research showed that they used the identical certificate last year with a date of 30th November 2009. The certificate purported to be from EMEX (a very reputable verification agency), and was obviously forged. Investigations are continuing, and it is currently impossible to state who is at fault here, but there is no doubt that this certificate is not valid, and does not give the true BEE situation of the company.
Again the good news is the press have picked up on this: Shield Caught with fake BEE Scorecard.
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|Women Are Twice As Important As Men
A controversial statement indeed - but when one considers the undeniably focal role women play in the home and their increasingly influential function in the workplace many people, both men and women, would agree that women are certainly twice as important as men. In fairness, this statement was not meant to be a truth in the general sense, but is explicitly accurate in terms of Broad-Based Black Economic Empowerment.
Keith Levenstein, CEO of leading BBBEE consultancy EconoBEE, has vast experience with the BBBEE scorecard and often advises clients as to the pivotal role South African black women can have in obtaining a high level of BEE compliance. "The BBBEE scorecard and its related legislation is a work of economic genius. The fact that black females score double the points of their male counterparts through a clause called the Adjusted Recognition for Gender principal on the scorecard is a deliberate attempt to assist the most vulnerable of South Africa's population through long-term empowerment," says Levenstein.
While there is demand for a BBBEE Scorecard someone will be taking advantage, shouldn’t that someone be you...
17 August 2010
In this issue
- ArcelorMittal – a B-BBEE Pointless Deal
- 27th January 2010 and Fronting
- Women Are Twice As Important As Men
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.
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