SOUTH AFRICA: DRAFT BEE CODE 600: ENTERPRISE

UNCLAS SECTION 01 OF 03 PRETORIA 000879

SIPDIS

DEPT FOR AF/S; AF/EPS; EB/TPP/MTA
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND
DEPT PASS USTR FOR FLISER
TREASURY FOR BCUSHMAN

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EINV ETRD EFIN ECON USTR SF
SUBJECT: SOUTH AFRICA: DRAFT BEE CODE 600: ENTERPRISE
DEVELOPMENT

REF: (A) PRETORIA 05 4854
(B) PRETORIA 05 4855
(C) PRETORIA 05 4856
(D) PRETORIA 06 337
(E) PRETORIA 06 575
(F) PRETORIA 06 646
(G) PRETORIA 06 700

Sensitive But Unclassified; Protect Accordingly. Not
For Internet Distribution.


1. (U) Summary. The South African Department of Trade
and Industry (DTI) released for public comment drafts of
Broad-based Black Economic Empowerment (BEE) Codes of
Good Practice belonging to the second and final phase on
December 20, 2005. The Minister of Trade and Industry
plans to promulgate both the first (which have been
finalized) and the second phases of the BEE Codes of
Good Practice before the end of 2006. Included in the
second phase is Code 600. This code accounts for 10% of
the BEE scorecard and sets forth the scoring criteria
for firms striving to comply with BEE objectives as they
relate to enterprise development. In each instance, the
actual number of points awarded is calculated by
multiplying the fraction of a compliance target (Code
600 has two) achieved by the number of possible points
allotted for each target. In a recent meeting of their
BEE Committee, members of the local American Chamber of
Commerce voiced a number of concerns about this draft
code. Comments on all BEE Codes of Good Practice
belonging to the second phase must be submitted to DTI
by March 31, 2006. End Summary.


2. (U) On December 20 2005, the South African
Department of Trade and Industry (DTI) released for
public comment drafts of BEE Codes of Good Practice
belonging to the second and final phase. Comments on
these draft codes must be submitted to DTI by March
31, 2006. While the BEE Codes of Good Practice
belonging to the first phase have been finalized
(Refs A, B, and C),the Minister of Trade and
Industry will not promulgate them until the codes
belonging to the second phase have also been
finalized. DTI wants this to occur before the end of

2006.


3. (U) Codes belonging to the second phase deal with
employment equity (Code 300),skills development
(Code 400),preferential procurement (Code 500),
enterprise development (Code 600),residual
contributions (Code 700),and small and medium sized
enterprises (code 1000 - 1700). Also included in the
second phase are subsections to Codes 000 (the BEE
Framework for Measurement) and 100 (BEE Equity). The
two subsections for Code 000 deal with
misrepresenting BEE status (Statement 001) as well as
and verification issues relating to complex
structures (Statement 002). The four subsections for
Code 100 deal with guidelines for the recognition of
BEE ownership by BEE targeted warehouse funds
(Statement 102),multinational companies (Statement
103),public entities and organs of the state
(Statement 104),and companies limited by guarantee
and Section 21 (i.e. nonprofit) companies (Statement
105). All may be sourced from DTI's website:
www.thedti.gov.za.


4. (U) This cable focuses on Code 600, which sets forth
the scoring criteria for firms striving to comply with
BEE objectives as they relate to enterprise development.
Septel and reftels report on the other codes.

CODE 600
--------------


5. (U) Draft Code 600 establishes two compliance targets
for BEE enterprise development along with one bonus
target. The idea behind BEE enterprise development is
to expand the financial and/or operational capacity of
BEE firms. Such firms fall into three categories: micro

PRETORIA 00000879 002 OF 003


enterprises, black owned firms, and firms that score
more than 74 points on the BEE scorecard.


6. (U) Total points for achieving the two compliance
targets under draft Code 600 account for 10% of the BEE
scorecard. In each instance, the actual number of
points awarded is calculated by multiplying the fraction
of a compliance target achieved by the number of
possible points allotted for each target. Excess
scoring for exceeding any Code 600 targets is not
possible. However, firms may score a bonus point. For
a complete understanding as to how this portion of the
generic scorecard is factored into the rest of the
scorecard, please refer to Ref A.


7. (U) As set forth in draft Code 600, a firm can score
six points if it spends 2% of its earnings before income
tax, depreciation, and amortization (EBITDA) on a "non-
recoverable contribution" towards the development of a
"beneficiary entity" (as defined in Paragraphs 14 and
16). A firm can score four points if it contributes 3%
of its EBITDA as a "recoverable contribution" (as
defined in Paragraph 13) towards the development of a
"beneficiary entity". A firm may score a bonus point if
it creates at least one job per year by contributing to
BEE enterprise development. Firms would be measured
annually and not allowed to carry forward a bonus point
from one year to the next.


8. (U) The following contributions towards enterprise
development would qualify for recognition at a multiple
of 1.5:

-- contributions that create employment opportunities in
rural communities or areas the government identifies
as belong to rural development and urban renewal
programs;

-- contributions that assist and accelerate the
development of firms which manufacture, produce, or
sell goods and/or services not previously produced in
South Africa.

Similarly, the following contributions towards
enterprise development would qualify for recognition at
a multiple of 1.25:

-- monetary and non-monetary contributions that assist
and accelerate the development of micro enterprises;

-- monetary contributions to the funding of warehousing
funds.


9. (U) The following table lists criteria, points, and.
targets for deriving an enterprise development score:

Criteria Points Target
-------------- -------------- --------------
% of
EBITDA

Non-Recoverable Contribution 6 2%

Recoverable Contribution 4 3%

Bonus point 1 1 Job

CONCERNS
--------------


10. (SBU) On February 8, members of the BEE Committee at
the local American Chamber of Commerce met to discuss
draft Code 600. Members felt that the targets of 2% for
non-recoverable contributions and 3% for recoverable
contributions were onerous. They wanted clarity on
whether they could claim points for enterprise
development and purchasing from BEE suppliers who had
benefited from enterprise development. Members
suggested that the cost of time spent on enterprise
development be calculated as a fixed cost, as it might

PRETORIA 00000879 003 OF 003


be inappropriate to disclose individual salaries. In a
subsequent BEE Committee meeting on February 15, DTI
Director for BEE Jeffrey Ndumo clarified that a firm
would score a bonus point even if it created just one
job. Members thought this needed to be clearly stated
within the text of the code.

Pertinent Definitions
--------------


11. (U) Code 000 defines "black" as black, coloured,"
and Indian South Africa citizens (or those who could
have applied for South African citizenship, if
permitted) who suffered or whose descendants suffered
discrimination under the apartheid regime.


12. (U) "EBITDA" or earnings before income tax,
depreciation, and amortization should be interpreted in
accordance with South African Generally Accepted
Accounting Practice.


13. (U) A "recoverable contribution" includes
investments, loans, guarantees, or any monetary
contribution that has to be repaid or returned to the
firm.


14. (U) A "non-recoverable contribution" includes
grants, donations, discounts, and other similar
quantifiable benefits which are not recoverable by the
firm.

15.(U) "Small enterprise" is defined as employing fewer
than 50 employees and, depending on the sector in which
it operates, an annual turnover of less than R25
million.


16. (U) A "beneficiary entity" includes the following
type of firms:

-- Any micro enterprise, defined as having a turnover
Of less than R300 000.

-- A firm in which in excess of 50% is owned by black
people and which is a Level One to Level Six
contributor to BEE. For a clear understanding as to
how a firm's "BEE Status" is determined, please refer
to Ref A.

-- A firm which is a level One to Three BEE contributor
to BEE, regardless of the black ownership status of
the firm.

-- A small enterprise in which in excess of 50% is owned
by black people and which is a Level One to Level Six
contributors to BEE.

-- A small enterprise which is a Level One to Level
Three BEE contributor to BEE regardless of the black
ownership status of the small enterprise


17. (U) "Enterprise development contributions" may be
recoverable or non-recoverable (as defined in Paragraphs
13 and 14) initiated and implemented in favor of a
"beneficiary entity" (as defined in Paragraph 16) by a
measured firm to assist in the development and the
expansion of the financial and/or operational capacity
of the beneficiary entity.

TEITELBAUM