Regulatory uncertainty in BEE landscape interferes with investment

Certainty is a requirement for attracting foreign direct investment, however, certainty in the economic and legislative space in South Africa is not always forth-coming. There has been, in recent years, a lack of certainty with regards to Broad-Based Black Economic Empowerment (BBBEE). This is the result of inter alia changes in the regulatory framework which saw BBBEE becoming more stringent and placing, perhaps most notably, a greater emphasis on ownership.

The present Generic BBBEE Codes of Good Practice came into force in May 2015. This set in motion a scramble to align sector-specific BBBEE codes and charters with the Generic Codes of Good Practice. Most sector-specific codes were able to get drafts to the Department of Trade and Industry so as to avoid being repealed. However, the Construction Sector Code and the Chartered Accountancy Code were repealed. Notwithstanding meeting the aforementioned deadlines, many amended codes are not yet in force and therefore the relevant previous code still applies. Accordingly, from an actual legislative perspective, there is still a way to go before there is uniformity and certainty across the entire BBBEE regulatory framework.

Apart from the actual legislative uncertainty, there is also increasing uncertainty on how to interpret and apply the various BBBEE codes and charters.  Two trends have emerged in this regard – one is that the BBBEE ownership targets, being required by State-owned enterprises (SOEs) when putting out tenders, are unpredictable; and the other is the interpretation of the various BBBEE codes and charters by the BBBEE Commission.

State-owned enterprises

In terms of the BBBEE Act, as amended, the Minister of Trade and Industry (minister), may exempt an SOE from a requirement contained in any of the applicable BBBEE code or allow some deviation. This may only be done if the minister has consulted with the relevant state or public entity and found that there are “objectively verifiable facts or circumstances applicable”, which necessitate the exemption or deviation. Further, such exemption or deviation must be published in the Government Gazette.

However, this does not appear to always be happening and the European Union Chamber of Commerce and Industry in Southern Africa recently expressed dismay that SOEs were putting out tenders calling for a 51% black ownership requirement to be met. This requirement is not in line with the various BBBEE codes and charters and is in some instances not being published in the Government Gazette. Accordingly, there are tenders being published where possible applicants are not aware of the upper BBBEE ownership thresholds required until such time as the tender is published. This means that it is increasingly difficult for potential applicants to get their BBBEE affairs in order before submitting a tender.

Another example of this was published in December last year in relation to a coal producer’s relationship with Eskom. The coal mining company supplies coal to Eskom and reported that Eskom was requiring it to be 51% BBBEE owned in order to maintain this supply relationship. There appeared to be no basis for this requirement, other than it constituted BBBEE rules which Eskom was putting in place.

The ownership requirements set out above are not stipulated in the relevant BBBEE codes and therefore demonstrate the kind of exemption or deviation which must only be permitted by the Minister in consultation with the SOE and verified with regard to objective facts and circumstances. Most importantly, such exemption or deviation must also be published in the Government Gazette.  The publication requirement ensures that, notwithstanding an exemption or deviation, entities responding to SoE tenders can do so with sureness in respect of the requirements being applied. This would therefore go a long way to providing sorely needed certainty in the BBBEE space.

The BBBEE Commission

The BBBEE Commission (commission) was introduced by the amendments to the BBBEE Act in 2014. The commission has wide investigatory powers in relation to BBBEE structures and allegations of fronting practices.  There is also a requirement to report BBBEE transactions over a certain threshold to the commission.

Once reported, the commission has a discretion to impose conditions on the transaction.  There is at present no certain notification threshold but the Department of Trade and Industry has published a threshold of R100 million for comment.

Transacting parties in the South African deal-making environment are unsure of whether the deals they are presently negotiating would be notifiable. Moreover, it is unclear what sort of conditions the Commission would impose and whether these would be so onerous that the deal would have to be unwound.

This, therefore is adding to speculation on how the commission will interpret and apply BBBEE regulation in the future and naturally further increases uncertainty about investment and doing business in the BBBEE space.

Clarity in relation to the above aspects of BBBEE are sorely needed as it is now virtually impossible to do business in South Africa without meaningfully engaging with BBBEE. However, such engagement needs to be grounded in a clear and certain regulatory system which is uniformly and definitively applied. Obtaining such clarity is therefore vital to ensure that the South African investment environment becomes more secure, which under current unstable global conditions, will be welcomed by South African investors.

Morné van der Merwe is co-managing partner and Janine Howard an associate, in the Corporate and M&A Practice in Baker McKenzie’s Johannesburg Office.

Brought to you by Moneyweb