Friday, October 07, 2005

Any company wanting to do business in South Africa must be aware of the term "black economic empowerment" ("BEE") and must wonder how it applies to their business. The very first question must be "What do I need to do about BEE if I’m a foreign-owned company?"

As usual, the answer is: "it depends". Mostly it depends on the sector of the economy that your business falls into.

By way of background, BEE forms a central part of the South African Government’s economic transformation strategy and has been generally defined to be an integrated and coherent socio-economic process that will directly contribute to the economic transformation of South Africa and bring about significant increases in the numbers of black people or black South Africans (being a generic term meaning persons previously classified as Africans, Coloureds and Indians) that manage, own and control the country’s economy, as well as a measure to significantly decrease income inequality.

In South Africa, BEE is regulated by a number of laws, Codes of Good Practice and industry charters. The most important law is the Broad-Based Black Economic Empowerment Act, 2003 ("the Act"), which provides a framework for BEE to be implemented in South Africa. Under the Act, the South African Government has published a Code of Good Practice ("the Code"), which gives comprehensive recommendations as to how businesses should ensure that they meet the empowerment strategy of the country. In addition, a number of industries have negotiated and signed their own "charters", which are industry-wide agreements as to how participants in those industries will ensure their empowerment and which have come about as a result of wide spread consultative procedures with industry stakeholders.

So far the oil, mining, maritime and financial services industries have signed charters, with the information and telecommunications sector ("ICT") being on the verge of doing so. The following industries are in the initial stages of formulating charters: Liquor; Healthcare; Gambling and Gaming; Forestry; Building and Construction; Agricultural; Advertising; Property; Tourism; and the Transport, Freight and Logistics industries. The retail sector has not made any advances in this regard. The Code and the Charters encourage companies to take steps to ensure the transfer of economic power to black South Africans and each contains a scorecard against which a company can measure its progress.

Five major areas have been identified for attention in the Code and Charters and have been carried through to the various scorecards: equity ownership; management and control; employment equity; procurement; and enterprise development. An additional "residual" category allows an industry to identify non-economic areas where it can assist in the social and other upliftment of black South Africans. As an example, in the residual category the mining industry charter has identified adult literacy and migrant housing as areas of concern to its participants.

Of the economic areas, equity ownership is the one area which causes the most concern to non-South African businesses. The Code applies to all companies doing business in South Africa whether they are locally or foreign owned. Certain of the industry charters, however, recognise that it is not always possible for a foreign owned company to have a local shareholder. This is especially the case in the financial services sector, where the introduction of a local shareholder must be weighed against prudential requirements and systemic stability, as well as the fact that many international banks conduct business in South Africa through branches, which cannot have local shareholders, rather than subsidiaries. The ICT Charter, which has not yet been finalised, has sparked lengthy debate on the exemption of foreign-owned companies from the equity ownership requirement in return for increased investment in the other four key areas. So far, the ICT Charter has not exempted foreign companies from its application.

It is interesting to note, however, that despite the fact that it is not required of them, many foreign companies have nevertheless entered into transactions in terms of which they have sold equity to black South African partners. Among the recent BEE deals are Unisys, an American-owned ICT company which announced a BEE transaction on 24 August 2005. Another interesting industry is the oil industry, where all of the petrol retailers bar one are foreign owned. This did not prevent all industry participants from entering into BEE transactions where 25% of their equity was transferred to black South African partners.

In the financial services industry Deutsche Bank, announced a BEE transaction on 3 February 2005 whereby it agreed to sell 25% of its South African incorporated operations to a BEE company which will acquire a 15% stake in Deutsche Bank South Africa. The remaining 10% will be held by an employee share trust, the beneficiaries of which are all black South African staff currently working for Deutsche Bank South Africa, comprising 39% of the total staff complement, as well as future black South African staff.

It can be argued that there is a business case for certain international companies to enter into BEE equity transactions and in that way stand a greater chance of being awarded South African Government tenders or having their services or products procured by other companies by virtue of their good BEE scorecards. On the other hand, it seems possible to conclude that doing a BEE equity transaction is a matter of good corporate citizenship for a foreign-owned company as well as a matter of complying with the South African government’s BEE strategy.