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FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC PRIORITY 1683
INFO RUEHBU/AMEMBASSY BUENOS AIRES 0197
RUEHTN/AMCONSUL CAPE TOWN 2398
RUEHDU/AMCONSUL DURBAN 7482
RUEHJO/AMCONSUL JOHANNESBURG 3912
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 03 PRETORIA 000700 
 
SIPDIS 
 
DEPT FOR AF/S; AF/EPS; EB/TPP/MTA 
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND 
DEPT PASS USTR FOR FLISER 
TREASURY FOR BCUSHMAN 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EINV ETRD EFIN ECON USTR SF
SUBJECT: SOUTH AFRICA: DRAFT BEE CODE 500: PREFERENTIAL 
PROCUREMENT 
 
REF: (A) PRETORIA 4854 
     (B) PRETORIA 4855 
     (C) PRETORIA 4856 
     (D) PRETORIA  337 
     (E) PRETORIA  575 
     (F) PRETORIA  646 
 
Sensitive But Unclassified; Protect Accordingly.  Not 
For Internet Distribution. 
 
¶1. (U) Summary.  The South African Department of Trade 
and Industry (DTI) released for public comment drafts of 
Broad-based Black Economic Empowerment (BEE) Codes of 
Good Practice belonging to the second and final phase on 
December 20, 2005.  The Minister of Trade and Industry 
plans to promulgate both the first (which have been 
finalized) and the second phases of the BEE Codes of 
Good Practice before the end of 2006.  Included in the 
second phase is Code 500.  This code accounts for 20% of 
the BEE scorecard and sets forth the scoring criteria 
for firms striving to comply with BEE objectives as they 
relate to preferential procurement.  In each instance, 
the actual number of points awarded is calculated by 
multiplying the fraction of a compliance target (Code 
500 has three) achieved by the number of possible points 
allotted for each target.  In a recent meeting of their 
BEE Committee, members of the local American Chamber of 
Commerce voiced a number of concerns about this draft 
statement.  Comments on all BEE codes of good practice 
belonging to the second phase must be submitted to DTI 
by March 31 2006.  End Summary. 
 
¶2. (U) On December 20 2005, the South African 
Department of Trade and Industry (DTI) released for 
public comment drafts of BEE Codes of Good Practice 
belonging to the second and final phase.  Comments on 
these draft codes must be submitted to DTI by March 
31 2006.  While the BEE Codes of Good Practice 
belonging to the first phase have been finalized 
(Refs A, B, and C), the Minister of Trade and 
Industry will not promulgate them until the codes 
belonging to the second phase have also been 
finalized.  DTI wants this to occur before the end of 
¶2006. 
 
¶3. (U) Codes belonging to the second phase deal with 
employment equity (Code 300), skills development 
(Code 400), preferential procurement (Code 500), 
enterprise development (Code 600), residual 
contributions (Code 700), and small and medium sized 
enterprises (code 1000 - 1700).  Also included in the 
second phase are subsections to Codes 000 (the BEE 
Framework for Measurement) and 100 (BEE Equity).  The 
two subsections for Code 000 deal with 
misrepresenting BEE status (Statement 001) as well as 
and verification issues relating to complex 
structures (Statement 002).  The four subsections for 
Code 100 deal with guidelines for the recognition of 
BEE ownership by BEE targeted warehouse funds 
(Statement 102), multinational companies (Statement 
103), public entities and organs of the state 
(Statement 104), and companies limited by guarantee 
and Section 21 (i.e. nonprofit) companies (Statement 
105).  All may be sourced from DTI's website: 
www.thedti.gov.za. 
 
¶4. (U) This cable focuses on draft Code 500, which sets 
forth the scoring criteria for firms striving to comply 
with BEE objectives as they relate to preferential 
procurement, or purchasing and supply.  Septels and 
reftels report on the other codes. 
 
CODE 500 
-------- 
 
¶5. (U) Draft Code 500 establishes three compliance 
targets pertaining to purchasing and supply for firms. 
Total points account for 20% of the BEE scorecard.  For 
each target, the actual number of points awarded is 
 
PRETORIA 00000700  002 OF 003 
 
 
calculated by multiplying the fraction of a compliance 
target achieved by the number of possible points 
allotted for each target.  Excess scoring for exceeding 
any of the preferential procurement targets is not 
possible.  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. 
 
¶6. (U) As set forth in draft Code 500, a firm can score 
fifteen points if 70% of its total purchases qualify as 
a "BEE procurement spend" (see paragraphs 7 and 8).  A 
firm can score four points if 15% of its total purchases 
qualify as a "BEE procurement spend" from small 
suppliers.  A firm can score one point if 5% of its 
total purchases qualify as a "BEE Procurement Spend" 
from micro enterprise suppliers. 
 
¶7. (U) "BEE procurement spend" is calculated by 
multiplying the total value of a firm's purchases from 
a supplier by that supplier's "BEE procurement 
recognition level."  Every firm's "BEE procurement 
recognition level" depends upon its overall BEE 
scorecard performance.  For a clear understanding as to 
how a firm's BEE status and "BEE procurement 
recognition level" are determined, please refer to Ref 
¶A.  As established by the BEE Framework (Code 000), the 
chart below sets forth "BEE procurement recognition 
levels" for firms with scoring between 0 and 100 points 
on the BEE scorecard. 
 
                                        BEE Procurement 
BEE Status            Qualification       Recognition 
-------------------   --------------    -------------- 
Level 1 Contributor      100+ points         135% 
Level 2 Contributor     85-99 points         125% 
Level 3 Contributor     75-84 points         110% 
Level 4 Contributor     65-74 points         100% 
Level 5 Contributor     55-64 points          80% 
Level 6 Contributor     45-54 points          60% 
Level 7 Contributor     40-44 points          50% 
Level 8 Contributor     30-39 points          10% 
Non Compliant            0-29 points           0% 
 
¶8. (U) For example, if a firm purchases goods or 
services from a Level 3 Contributor, it would multiply 
the value of its purchase by 110% to arrive a figure, 
referred to as its "BEE procurement spend."  Because 
preferential procurement will be factored throughout the 
supply chain, from first tier suppliers to government, 
the practical effect is that, to stay competitive, all 
firms will have to take BEE into account in their 
transactions for both government and non-government 
business.  In this way, the government ensures that its 
BEE policies pervade the entire value chain to create 
immediate access to the mainstream economy for 
increasing numbers of "previously disadvantaged 
individuals". 
 
¶9. (U) Draft Code 500 allows a firm purchasing goods and 
services directly from a supplier that benefited from 
BEE enterprise development (as set forth by Code 600, 
septel) to recognize these purchase at a multiple of 1.2 
when calculating "BEE procurement spend."  Draft Code 
500 also allows for the exclusion of up to 25% of total 
purchases for imports that are not locally available. 
 
¶10. (U) The following table lists criteria, points, and 
targets for deriving a preferential procurement score: 
 
Criteria                             Points   Target 
--------                             -----    ------ 
                                               % of 
                                            procurement 
 
BEE procurement spend from suppliers   15       70% 
  based on the BEE procurement 
  recognition levels 
 
BEE procurement spend from small        4       15% 
 
PRETORIA 00000700  003 OF 003 
 
 
  enterprises based on the BEE 
  procurement recognition levels 
 
BEE procurement spend from micro        1        5% 
  enterprises based on the BEE 
  procurement recognition levels 
 
CONCERNS 
-------- 
 
¶11. (SBU) On February 8, members of the BEE Committee of 
the local American Chamber of Commerce met to discuss 
draft Code 500.  Members noted that the target of 70% 
for purchasing BEE goods was onerous at best.  At worst, 
it was a trade barrier.  While the draft code allowed 
for the exclusion from the calculation of "BEE 
procurement spend" imports of up to 25% of purchasing 
and supply, this was not enough and could be interpreted 
as discrimination against imports.  Further, the draft 
code mandates that if local products were available, 
then firms must source these products locally.  In a 
subsequent meeting at AmCham on February 15, DTI 
Director for BEE Jeffrey Ndumo clarified that, indeed, 
lower foreign prices, long standing customer 
relationships, product quality, or brand preferences 
were not acceptable reasons as to why a company should 
import a product that was locally available.  "That was 
our intent," he said "that companies should buy South 
African." He further explained, "If the local price is 
too high, then companies should work with local 
companies to help them bring their prices down," he 
explained.  Members commented that this would greatly 
affect multinationals, most of which relied on corporate 
headquarters to manage purchasing.  A large automobile 
manufacturer explained that his headquarters purchased 
almost all parts for assembly from original equipment 
manufacturers overseas, and that these purchases were 
coordinated at a global level.  Everyone agreed that 
purchasing from local sources and from smaller firms 
would likely lead to higher costs and diminished 
competitiveness.  If anything, local firms would not be 
able to match the production runs of their international 
competitors and, therefore, unit costs would be higher. 
On February 15 when this point was raised, Ndumowas 
unfazed. 
 
Pertinent Definitions 
--------------------- 
 
¶12. (U) Code 000 defines "black" as black, coloured," 
and Indian South Africa citizens (or those who could 
have applied for South African citizenship, if 
permitted) who suffered or whose descendants suffered 
discrimination under the apartheid regime. 
 
13.(U) "Micro Enterprise" is defined as having an annual 
turnover of less than R300 thousand. 
 
14.(U)"Small enterprise" is defined as having less than 
50 employees and depending on the sector in which it 
operates, an annual turnover of less than R25 million. 
 
¶15. (U) "BEE procurement spend" and "BEE procurement 
recognition level" are defined and illustrated in 
Paragraphs 7 and 8.