VZCZCXRO1930
PP RUEHDU RUEHJO
DE RUEHSA #4855/01 3461434
ZNR UUUUU ZZH
P 121434Z DEC 05
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC PRIORITY 0444
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEHJO/AMCONSUL JOHANNESBURG 3577
RUEHDU/AMCONSUL DURBAN 7268
RUEHTN/AMCONSUL CAPE TOWN 2141
UNCLAS SECTION 01 OF 04 PRETORIA 004855
SIPDIS
DEPT FOR AF/S; AF/EPS; EB/TPP/MTA
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND
DEPT PASS USTR FOR PCOLEMAN, FLISER AND WJACKSON
TREASURY FOR BCUSHMAN
SIPDIS
E.O. 12958: N/A
TAGS: EINV ETRD EFIN ECON USTR SF
SUBJECT: SOUTH AFRICA: BEE CODES OF GOOD PRACTICE
CODE 100: OWNERSHIP
REF: PRETORIA 4854
1. (U) Summary. On November 1, the Department of Trade
and Industry (DTI) released the final version of the
Broad-based Black Economic Empowerment (BEE) Code on
Ownership, i.e., Code 100. One of ten codes, Code 100
sets forth the criteria and methodology for scoring
compliance with BEE objectives in the ownership of an
entity. This portion of the BEE Generic Scorecard
accounts for 20% of a firm's total score. In each
instance, the actual number of points awarded is
calculated by multiplying the fraction of a BEE target
(there are seven) achieved by the number of possible
points allotted for each target. No excess scoring for
exceeding any BEE target is possible. However, up to
three percentage points may be earned for meeting a bonus
target. End Summary
2. (U) This is the second in a series of cables reporting
on the final criteria and methodology for scoring BEE
contribution as embodied in the government's BEE Codes of
Good Practice. After nine months of consultations, the
Department of Trade and Industry released its final
version of the Broad-based Black Economic Empowerment
(BEE) Code on Ownership (Code 100) on November 1. The
stated goal of Code 100 is to provide incentives for
black ownership in the South African economy. The code
contains a number of complex formulas to be used in the
calculation of a black ownership score. All BEE Codes of
Good Practice, including this one, may be found at the
following Internet website:
http://www.dti.gov.za/bee/CODESOFGOODPRACTICE 2005.htm
The Ownership Score
-------------------
3. (U) The portion of the BEE generic scorecard covered
by Code 100 accounts for 20% of a firm's total score.
Firms may earn a bonus of three percentage points for
ownership by new black entrants or broad based black
ownership schemes (such as pension and mutual funds, or
employee options). For a complete understanding as to
how this portion of the generic scorecard factors into
the rest of the scorecard, please refer to Ref A.
4. (U) The ownership score (Code 100) focuses on the
following three components:
-- Control of the firm by black people through
exercisable voting rights;
-- The entitlement of black people to economic interest
in the form of dividends, capital gains, and other
shareholder rights;
-- Net equity held by black shareholders, calculated by
deducting the cost of any debt financing of a share
purchase from the total value of shares held.
5. (U) Firms may earn up to 14 points if black people
control at least 25% of the voting rights, economic
interest, and net equity of a firm. Firms may earn
another 4 points if black women hold 10% of the voting
rights, economic interest, and net equity of a firm.
Firms may earn an additional 4 points for having new
black owners or broad based black ownership (such as may
be provided through pension and mutual funds, or employee
options), of which three will be bonus points. Black
ownership in pension and mutual funds may be determined
by the percentage of black ownership multiplied by the
value of the fund, or by a proportional formula. Black
ownership of employee options may be determined by the
value of the options owned by blacks, or by the
exercisable voting rights afforded to blacks. Therefore,
although ownership counts for 20 points on the generic
scorecard, a firm could score a 23 points if it qualified
for the bonus. The following table represents the
criteria, points, and targets for deriving a score for
ownership:
Criteria Points Target
-------- ------ ------
PRETORIA 00004855 002 OF 004
Exercisable Voting Rights:
Black People 3 25% + 1 vote
Black Women 2 10%
Economic Interest:
Black People 4 25%
Black Women 2 10%
Black Designated Groups 1 2.5%
Realization:
Net Equity Ownership 7 10% year 1
20% year 2
40% year 3
60% year 5
80% year 7
100% year 9
Ownership Fulfillment 1 Only for a
score of
7 points on
Net Equity
Ownership
Bonus: 3
Economic Interest:
New black entrants or 15%
BEE ownership schemes and
Black People 25%
Scoring
-------
6. (U) In each case (except Ownership Fulfillment), the
actual number of points awarded is calculated by
multiplying the fraction of the compliance target
achieved by the number of possible points in each
category. For example, if 12.5% of the exercisable
voting rights are controlled by blacks, then 12.5% is
divided by the compliance target of 25%. Instead of
scoring the maximum three points, the firm would score
only 1.5 points for that category. Anything over 25%
would still only result in a maximum of 3 points. For
example, if 50% of the exercisable voting rights were
controlled by blacks, the entity would still only score 3
points instead of 6 points.
7. (U) Code 100 also outlines a number of measurement
principles that provide options to firms in measuring
black ownership. These are presented below.
The Flow-Through Principle
--------------------------
8. (U) Using the Flow-Through Principle, a firm may
calculate black ownership interest through several tiers
of an ownership chain simply by multiplying the
percentages of black ownership at each tier. For
example, if 50% of Firm A is black owned and Firm A owns
50% of Firm B, then the resulting level of black
ownership in Firm B would be 25%. Ownership chains may
involve many more than two tiers, but the calculation is
essentially the same.
The Modified Flow-Through Principle
-----------------------------------
9. (U) The Modified Flow-Through Principle functions in
the same manner as the Flow-Through Principle, except
that participating firms are entitled to choose which
black majority owned company they will treat as if 100%
black owned. This encourages black majority ownership in
firms and yields a more favorable result for the measured
firm. For example, if 51% of Firm A is black owned and
Firm A owns 50% of Firm B, then the resulting level of
black ownership in Firm B would be 50% because Firm A
would be treated as if it were 100% black owned. Again,
ownership chains may involve many more than two tiers,
but the calculation is essentially the same.
The Control Principle
---------------------
10. (U) The Control Principle allows a measured firm to
PRETORIA 00004855 003 OF 004
treat each black majority controlled company along an
ownership chain as if it were 100% black owned for
calculation purposes using the Flow-Through Principle.
Black majority control is defined as blacks holding more
than 50% of the exercisable voting rights of an
enterprise. This can yield a much more favorable result
than the Modified Flow-Through Principle. For example,
if Firm A is black controlled, and Firm A controls 51% of
Firm B, then the resulting level of black ownership in
Firm B would be 100% because Firm B would be treated as
if it were 100% black owned. Again, ownership chains may
involve many more than two tiers, but the calculation is
essentially the same.
The Exclusion Principle
-----------------------
11. (U) The Exclusion Principle allows for any ownership
by an organ of state or a state enterprise to be excluded
from the ownership calculation. This means that a firm
with a government entity as a shareholder will not be
rewarded -- nor penalized -- for government ownership.
Sale of Assets
--------------
12. (U) Sub-Code 101 provides an alternative avenue for a
firm to measure its contribution towards black ownership
through the sale or creation of a sustainable business or
assets to/for blacks. The ownership value of such a BEE
enterprise to a measured firm is calculated by dividing
the present value of the BEE enterprise by the present
value of the firm on the date of measurement. For
example, if the BEE enterprise represents 10% of a firm's
assets, the firm can recognize the equivalent of 10%
black ownership. If the BEE enterprise grows faster than
the firm, it will be able to recognize an increasing
level of black ownership in successive years. In this
way, a measured firm is encouraged to ensure the
sustainability of the BEE enterprises it spawns, and to
develop and expand these enterprises over time. However,
the benefit does not flow through to subsidiaries, nor
can it be again counted under the enterprise development
segment of the generic scorecard.
Preference Shares and Debt
--------------------------
13. (U) Preference shares that behave like debt and debt
components of hybrid equity instruments are to be treated
like debt in the calculation of black ownership.
Definitions
-----------
14. (U) Black is defined as black (i.e., African),
"coloured," and Indian South Africa citizens (or those
who could have applied for South African citizenship, if
permitted) who suffered discrimination under the
apartheid regime, and their descendents.
15. (U) An Exercisable Voting Right is a voting right
that is not subject to any limitation.
16. (U) Economic Interest is represented by the
entitlement to a return on ownership, such as a dividend.
17. (U) Net Equity Ownership is the value of the part of
the business that black shareholders own, less any
outstanding financial obligations that financed the
purchase of shares, as a percentage of the current value
of the company. The recognition of Net Equity Ownership
is according to a complex formula proscribed in Code 100
that assumes a gradual increase in net equity over a
period of nine years.
18. (U) Ownership Fulfillment refers to any conditions
that might prevent black shareholders from achieving full
net equity ownership. The Ownership fulfillment point
will not be awarded unless a measured firm has attained a
score of 7 points on Net Equity Ownership in accordance
with a formula proscribed in Code 100.
PRETORIA 00004855 004.2 OF 004
TEITELBAUM