A is for Apple, BEE is for Business. Part 3: The Solution

In the past two e-zines, John Maxwell has outlined the BEE question and the BEE problem. Now, in this final contribution, he focuses on one of the possible solutions to BEE. He is involved with an innovative Trust that is changing how BEE is done, and taking it to where it was intended to be: grass roots upliftment of South African society. TomorrowToday does not necessarily endorse John’s trust, but we fully support innovation and community development. Read and enjoy!

In our previous two newsletters on the roll-out of Broad-based Black Economic Empowerment, we identified some compelling reasons for supporting the Government’s programme, as well as some real problems in its current method of implementation. In particular, we recognised the difficulties experienced by small companies in becoming BEE compliant, especially in regards to attracting and working with suitable black partners.

An extract from a report published in August highlights the dilemma faced by small companies:

“In theory, BBBEE will lead to job creation, global competitiveness and economic growth. In practice, however, it is proving to be a difficult challenge for one of the country’s most important sectors – small and medium enterprises. Most of these companies are only exposed to BBBEE through corporate questionnaires and the media. Their limited understanding of BBBEE is compounded by strict (and often misguided) company procurement policies that focus on aspects such as of ownership and control, and with which smaller businesses find it almost impossible to comply.� (“Small Capital: A practical guide for business owners� Issue 5; July 2006)

Recently we learned of an initiative which offers a uniquely different solution to this problem. Part of its uniqueness lies in the fact that this is a true broad-based BEE initiative, and partly because it is prompting SARS to review certain aspects of tax regulations governing private companies.

The initiative is known as the “Nkomazi Community Trust�, and it has been positioned specifically to partner small- to medium-size private companies in South Africa. It offers its business partners legitimate and authentic broad-based black economic empowerment, while creating an endowment fund that benefits one of the most vulnerable and disadvantaged communities in South Africa – the orphaned children of Nkomazi district in Mpumalanga.

The way it works is quite simple. The registered beneficiaries of this Trust comprise more than 4000 orphans and 300 Care-workers living in that area, and its funds are used to provide for their educational, safety, physical and social needs. To this end, the Trust is partnered by a well-established home-based care project named Thembalethu, a registered public benefit organisation which has been working within that community since 1999, and manages a range of care intervention programmes and job creation initiatives. The funds generated by the Trust are used to support certain programmes that benefit these orphans and careworkers – such as building homes – while helping develop businesses and job creation opportunities within the community – such as brick-making.

The Trust is a legal entity properly constituted under South African law, and is in the process of being registered as a Non-Profit Organisation with the South African Revenue Services. Its financial records are administered in compliance with the South African Generally Accepted Accounting Practices, audited annually, and open to public inspection. It is governed by eight trustees in total – four drawn from the community, two from participating companies, and one each from the NGO and administering company. The daily operational and marketing functions of the Trust are managed by a qualified independent Administrator.

However, what makes this Trust different from others is that it has been structured deliberately and specifically to be a broad-based black economic empowerment ownership scheme that satisfies all the requirements of the BEE Codes in terms of its own black ownership, management control, enterprise development and residual elements. In other words, it is a fully black-owned business that is empowered to confer BEE credentials on its business partners.

In addition, the relationship between the Trust and its business partners has been structured deliberately and specifically to maximise the number of BEE points acquired by participants from the three external elements of the BEE scorecard, namely Ownership, Enterprise Development and Residual. Through its partnership with the Trust, a small company being measured against the Qualifying Small Enterprise (QSE) scorecard will acquire Level 4 (100%) BEE procurement recognition status. Such an achievement is unmatched by any other black empowerment scheme.

Further, the principal concern of most small business owners has been accommodated in the contractual agreement between the trust and its business partner by building in a painless means of withdrawing from the scheme in the event relationship difficulties arise between the two parties.

The Trust offers small businesses two levels of participation – full participation that includes the transfer of ownership through share equity and voting rights, and limited participation, which involves only a monthly payment towards enterprise development and corporate social responsibility. Limited participation in this scheme will be attractive to those companies who already have a black partner on board and require more BEE points from other areas of the scorecard, or where the owner does not wish to give up ownership in his company.

Full participation in the scheme requires a partnering company to give up a portion of its share equity to the Trust at a nominal value. The Trust is not an investor, and pays the minimum amount necessary for these shares to ensure that this sale is properly and fully transacted. In terms of black ownership compliance targets, 25% of a company’s shareholding, plus 1 vote, must be in the hands of black-owned entities; and if the portion of shares being transferred into the Trust is less than this amount, the business receives a proportionate number of BEE points towards black Ownership.

Those companies who feel confident in persuading black partners to put their money into the business will not be attracted to the idea of giving away a chunk of shares. However, those who are having difficulty in finding a black investor, or experiencing problems in funding a share transfer through the bank as a result of the high risk nature of the deal, will be forced to give away shares to acquire black ownership. The advantage of giving these to the Nkomazi Community Trust is that the partner retains an option to reacquire its shares sometime in the future, at a price determined by the growth in nett asset value of the business during the period it enjoyed its BEE credentials.

With its shares, the business partner will also pay dividends and profits to the Trust as and when these are distributed. There is however no guarantee that the Trust will ever benefit financially from the shares it owns, as these may never become commercially saleable, nor might dividends or profits ever be paid out. In fact few private companies list publicly or grow to a meaningful size, and most will gear the business to reduce their tax liability to the minimum.

To ensure that the beneficiaries of the Trust do receive some measure of income from this arrangement, each participating company is contractually bound to make a monthly contribution to the Trust. This contribution is governed by formulae contained in the BEE Codes, and is determined by the size of the company. However the minimum amount payable by a small company to the Trust is R3500 per month and double this amount for a medium-size company. This monthly payment is recognised as non-recoverable contributions under the “Enterprise Development� and “Residual� elements of the BEE Scorecard, and as such accumulates additional BEE points for the participating company. Those electing not give up ownership may limit their participation to this monthly contribution only

There is one complication at the moment – existing tax regulations deem every payment made by a private company to its shareholder as “a dividendâ€?, which attracts Special Tax on Companies (STC) of 12.5% on top of this monthly amount. This presents SARS with a bit of a moral dilemma, should they be charging tax on funds intended for orphans? It is this that SARS is currently considering, and the Trust is hopeful that the necessary changes are made in recognition of the spirit and intention of these contributions. Should this happen, not only will STC be removed from the monthly contribution, but the Trust may also be in the position to provide Section 18A tax exemption certificates for the full amount – a win-win situation for both company and beneficiaries.

The bottom line is that full participation in the Nkomazi Community Trust scheme by a qualifying small company being measured against the “QSE� Scorecard, will bring it 69 BEE points, which translates into a Level 4 BEE contribution status and 100% BEE procurement recognition level. Limited participation in the scheme will bring this company 40 BEE points, with Level 7 BEE contribution status and 50% BEE procurement recognition level.

For a medium-size company being measured against the “Generic� BEE Scorecard, full participation in the Nkomazi Community Trust scheme will bring it 45 BEE points, which translates into a Level 6 BEE contribution status and 60% BEE procurement recognition level. Limited participation in the scheme will bring this company 22 BEE points, which on their own are insufficient to register it on the BEE scorecard.

Becoming a partner in this scheme is achieved by means of a relatively simple contract between the Trust and participating company, and a copy of the shareholders agreement. However, a company that has been constituted as a Close Corporation (“CC�) will need to change its status to that of a private company, as legal complications make it difficult for the Trust to partner with anyone but registered companies. Once the deal has been struck, the partnering company will be in the position to call in a verification agency to approve its BEE status. However, in the absence of formally approved and legal accredited verification agencies, this process should be delayed until the Department of Trade & Industry has put the structure in place. Until then, a formal statement on BEE compliance from one’s auditors has as much legal status as any other document.

In conclusion, it is clear that business partners in this unique scheme enjoy the economic advantages and benefits of BEE compliance while making a genuine contribution to the transformation of a historically marginalised community. Instead of yet another BEE scheme that benefits a few individuals, this is a real empowerment initiative that will change lives and bring hope to the future of orphaned and vulnerable children in this country.

 

If you wish to learn more about the Nkomazi Community Trust, or would like to receive a formal presentation on how your business can benefit from this BEE initiative, please contact the Trust Administrator, John Maxwell, by emailing

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