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