A short introduction to B-BBEE scorecards
Broad-Based Black Economic Empowerment (B-BBEE) has become an integral part of doing business in South Africa. As such, it is important for you to have a thorough understanding of what it means, in terms of how it is measured, and the implications it has for you and your business. This article unpacks the concept of B-BBEE and looks at how a business's B-BBEE status is measured using B-BBEE scorecards.
What Is B-BBEE?
The main aim of the Broad-Based Black Economic Empowerment Act (no. 53 of 2003, later amended as the Broad-Based Black Economic Empowerment Amendment Act, no. 46 of 2013) is to ensure the advancement of economic transformation and the enhancement of the economic participation of black South Africans, where "black" is inclusive of Africans, coloureds, and Indians. B-BBEE, as a concept, can therefore be understood as the result of this act and the presence (or level) of economic empowerment and participation (of racial minorities) in an enterprise. In practise, this often translates to the number of "black people" who are gainfully employed by or are legitimate shareholders in an enterprise.
How Do You Measure B-BBEE?
The B-BBEE Codes of Good Practice (gazetted in February 2007) stipulate that the B-BBEE compliance level of all enterprises operating within South Africa should be measured using an identified framework. This framework will depend on the classification of the enterprise. There are three broad classification according to which an organisation may be categorised:
Exempted Micro-Enterprise (EME): This refers to any enterprise that earns an annual turnover of R 10 000 000 or less. Start-up enterprises (in their first year following their formation or incorporation) also qualify as EMEs.
Qualifying Small Enterprise (QSE): This refers to any enterprise with an annual turnover of between R 10 000 000 and R 50 000 000.
Generic Enterprise: This refers to any enterprise with an annual turnover of more than R 50 000 000.
Once you have determined into which classification your enterprise fits, its B-BBEE compliance can then be measured based on the applicable scorecard with which it is associated.
Measurement Of Enterprises
As mentioned above, an enterprise's B-BBEE compliance is determined by the score or rating it achieves when measured using its applicable scorecard. These scorecards are included and discussed below, according to their associated classification.
Exempted Micro-Enterprise
Of the three classifications, the B-BBEE compliance of EMEs is not measured using a scorecard because EMEs are considered, by default, as "Level Four Contributors", with a B-BBEE recognition level of 100%. There are, however, exceptions to this general rule:
If an EME is 100% black owned, it qualifies as a "Level One Contributor", with a B-BBEE recognition level of 135%.
If an EME is at least 51% black owned, it qualifies as a "Level Two Contributor", with a B-BBEE recognition level of 125%.
Over and above this, EMEs are required to obtain and submit a sworn affidavit annually confirming an annual total revenue, allocated budget, or gross receipts of R10 million or less, as well as the level of the percentage of black beneficiaries of the enterprise.
Generic Enterprise
A Generic Enterprise's B-BBEE compliance is measured using the Generic Scorecard. The Generic Scorecard is based on five elements each of which has an assigned weighting (iwhich correlates with the importance of that specific element) and a set target. The five elements are:
Equity Ownership
Management Control
Skills development
Enterprise and Supplier Development
Socio-Economic Development
The elements and their associated weightings can be seen in the Generic Scorecard table below. The compliance levels of all enterprises classified as Generic Enterprises are measured using said scorecard.
Element
Weighting
Ownership
25 points
Management Control
15 points
Skills Development
20 points
Enterprise and Supplier Development
40 points
Socio-Economic Development
5 points
Total
105 points
As a Generic Enterprise, there exist three opportunities to receive bonus scores (points), depending on the element in question and its underlying criteria (or indicators). The three elements with bonus weightings are Management Control (with 4 bonus points), Skills Development (with 5 bonus points), and Enterprise and Supplier Development (with 4 bonus points). These elements have been identified as priority elements. They therefore have a minimum requirement (threshold) of 40%. It is mandatory for Generic Enterprises to achieve a minimum target of 40% for each of the three priority elements.
At this stage it is worth noting that there exists a sub-classification of Generic Enterprises, namely Specialised Enterprises. Specialised enterprises include Section 21 companies, companies limited by guarantee, non-profit organisations, higher education institutions, public entities and enterprises exclusively owned by organs of State, and public benefit schemes or organisations. The compliance levels of the abovementioned enterprises are therefore measured using the Specialised Enterprise Scorecard seen below.
ElementWeightingManagement control20 pointsSkills development25 pointsEnterprise and Supplier Development50 pointsSocio-Economic Development5 pointsTotal100 points
Qualifying Small Enterprise
The B-BBEE compliance levels of all Qualifying Small Enterprises are also measured using the Generic Scorecard. However, while Generic Enterprises qualify for bonus scores, QSEs do not. QSEs are required to comply with all five elements of the scorecard. However, unlike Generic Enterprises, it is only mandatory for QSEs to achieve a minimum target of 40% for two of the three priority elements - one of which being Ownership and the other being a choice between Enterprise and Supplier Development or Skills Development.
The Generic Scorecard as it applies to QSEs is included below.
Element
Weighting
Ownership25 points
Management control
15 points
Skills Development
25 points
Enterprise and Supplier Development
30 points
Socio-Economic Development
5 points
Total
100 points
Although the compliance levels of all QSEs is measured according to the scorecard above, certain exceptions do exist:
If a QSE is 100% black owned, it qualifies as a "Level One Contributor", with a B-BBEE recognition level of 135%.
If a QSE is at least 51% black owned, it qualifies as a "Level Two Contributor", with a B-BBEE recognition level of 125%.
Similarly to EMEs, QSEs are required to obtain and submit a sworn affidavit annually confirming an annual total revenue, allocated budget, or gross receipts of R50 million or less, as well as the level of the percentage of black beneficiaries of the enterprise.
Measurement Method Of B-BBEE Compliance
Regardless of which scorecard is used the method of measurement of B-BBEE remains consistent. The formula is as follows:
The % of target achieved / The compliance target % per element X The maximum weighting for that element
The compliance target per element (in the formula above) refers to the target set for enterprises for to achieve with regards to individual indicators associated with each element in the relevant scorecard. To find out more about the compliance targets per indicator per element, refer to the B-BBEE Codes of Good Practice. To better understand how the above calculation is used in practice, consider the following example.
Example:
The Management control element of the Generic Scorecard is made up of numerous indicators, one of which being "Exercisable voting rights of Black members as a percentage of all Board members". This indicator is weighted at 2, with a corresponding compliance target of 50%. Say an enterprise achieved 40% of the set target for the indicator in question. What would the weighting be?
40% (target achieved) / 50% (compliance target) x 2 (maximum weighting for "Exercisable voting rights of Black members as a percentage of all Board members" indicator)
= 80% x 2
= 1.6 points
Therefore the enterprise achieved 1.6 out of 2 possible points for the "Exercisable voting rights of Black members as a percentage of all Board members" indicator. The same then has to be done for all the remaining indicators of the Management Control element, as well as for the other elements. After calculating each element and adding all the elements' weightings achieved, you will be left with a score out of 105. This is known as the B-BBEE score qualification. This score will ultimately determine the enterprise's B-BBEE status. Refer to the table below for the range of statuses organisations may achieve.
B-BBEE Recognition LevelsB-BBEE StatusQualificationB-BBEE Recognition LevelLevel One Contributor≥ 100 points135%Level Two Contributor≥ 95 points but < 100 points
125%
Level Three Contributor≥ 90 points but < 95 points110%
Level Four Contributor
≥ 80 points but < 90 points100%Level Five Contributor≥ 75 points but < 80 points80%Level Six Contributor≥ 70 points but < 75 points60%Level Seven Contributor≥ 55 points but < 70 points50%Level Eight Contributor≥ 40 points but < 55 points10%Non-Compliant Contributor< 40 points0%
All enterprise classifications are measured according to the above table, which is based on the point system within the Generic Scorecard. For example, if a QSE-classified enterprise achieves a score of 50, it will fall within the "≥ 40 points but < 55 points" parameter, making it a Level Eight Contributor with a 10% B-BBEE recognition level. A second example is that, if an EME-classified enterprise provides no B-BBEE score, it will by default be a level four contributor with a B-BBEE recognition level of 100%, as was discussed earlier in the article. This default status may change depending on the percentage of black ownership in the enterprise.
A note on verification agencies
There are currently 72 accredited verification agencies across South Africa that can facilitate the process of measuring and verifying an enterprise. Once an enterprise has been verified the verification agency will issue a B-BBEE certificate to the measured enterprise, topics which are covered in the article on B-BBEE certificates and verification agencies.