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P 101433Z MAR 06
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TO RUEHC/SECSTATE WASHDC PRIORITY 2139
INFO RUEATRS/DEPT OF TREASURY WASHDC
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RUEHTN/AMCONSUL CAPE TOWN 2510
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UNCLAS SECTION 01 OF 03 PRETORIA 001021 
 
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 700: RESIDUAL 
CONTRIBUTION ELEMENT 
 
REF: (A) 05 PRETORIA 4854 
     (B) 05 PRETORIA 4855 
     (C) 05 PRETORIA 4856 
     (D) 06 PRETORIA 337 
     (E) 06 PRETORIA 575 
     (F) 06 PRETORIA 646 
     (G) 06 PRETORIA 700 
     (H) 06 PRETORIA 879 
 
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 700.  This code accounts for 10% of 
the BEE scorecard and sets forth the scoring criteria 
for firms striving to comply with BEE objectives as they 
relate to "residual contributions."  In each instance, 
the actual number of points awarded is calculated by 
multiplying the fraction of a compliance target (Code 
700 has two) 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 
code.  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 (Codes 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.zawww.thedti.gov.za. 
 
¶4. (U) This cable focuses on draft Code 700, which 
sets forth the scoring criteria for firms striving to 
comply with BEE objectives as they relate to 
"residual contributions."  The idea behind residual 
contributions is to encourage business to fund 
community development programs that furnish greater 
access for black people to the economy.  Residual 
contributions must benefit black people, particularly 
women, youth, and people with disabilities, and 
people in rural communities.  Reftels report on the 
other codes. 
 
PRETORIA 00001021  002 OF 003 
 
 
 
CODE 700 
-------- 
 
¶5. (U) Draft Code 700 establishes two compliance targets 
for "residual contributions" along with one bonus 
target.  Total points for achieving the two compliance 
targets under draft Code 700 account for 10% of the BEE 
scorecard.  In each instance, the actual number of 
points awarded is 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 Code 700 targets is not 
possible.  However, firms may score a bonus point.  For 
a complete understanding as to how this portion of the 
generic scorecard is factored into the rest of the 
scorecard, please refer to Ref A. 
 
¶6. (U) Under draft Code 700, a firm has two options to 
comply.  Under Option I, a firm can score five points if 
it spends 1.5% of its net profit after tax on a 
"corporate social investment" (as defined in Paragraph 
13).  All "corporate social investment" is considered 
"non recoverable" (as defined in Paragraph 11).  A firm 
can score another five points if it contributes 1.5% of 
its net profit after tax in the form of an "industry 
specific contribution" (as defined in Paragraph 14). 
Draft Code 700 does not state if "industry specific 
contributions" can be "recoverable" (as defined in 
Paragraph 12) or must be "non recoverable" (as defined 
in Paragraph 11).  Under Option II, a firm may score all 
10 points if it spends 3.0% of its net profit after tax 
on a "corporate social investment."  Under either 
option, a firm may score a bonus point if its 
contributions benefit black people living in rural 
communities in some way.  Firms would be measured 
annually and not be allowed to carry forward a bonus 
point from one year to the next.  In addition, firms may 
not mix Options I and Option II, e.g., score 7.5 points 
via "corporate social investment" and 2.5 points by 
making "industry specific contributions." 
 
¶7. (U) "Residual contributions" that help black persons 
to generate personal income can be recognized at a 
multiple of 1.5.  Any non-monetary contributions must be 
quantified in terms of cost, e.g., the cost of staff 
time spent.  Travel time is specifically excluded from 
the calculation.  Firms would only be allowed to claim 
their contributions under either Code 600 or Code 700, 
but not both. 
 
¶8. (U) The following table lists criteria, points, and 
targets for deriving a score for both options under 
draft Code 700: 
 
Criteria                             Points   Target 
--------                             -----    ------ 
                                              % of 
Option 1                                      profit 
-------- 
Corporate Social Investment            5       1.5% 
 
Industry specific Contributions        5       1.5% 
 
Bonus point                            1     Benefit 
                                            to rural 
                                            person(s) 
 
Option 2 
-------- 
Corporate Social Investment            10      3.0% 
 
Industry specific Contributions        0         0% 
 
Bonus point                            1     Benefit 
                                            to rural 
                                            person(s) 
 
CONCERNS 
 
PRETORIA 00001021  003 OF 003 
 
 
-------- 
 
¶9. (SBU) On February 8, members of the BEE Committee of 
the local American Chamber of Commerce met to discuss 
draft Code 700.  Some committee members were concerned 
that they might have to discontinue community programs 
that do not qualify under draft Code 700.  One member 
wanted greater clarity about the recognition of HIV/AIDS 
programs, housing schemes, and scholarship programs if 
such programs were targeted at a firm's own black 
employees.  Another member noted that some existing 
donations to environmental organizations and programs 
clearly benefited the broader nation, but might not 
qualify as benefiting mostly blacks.  Members pointed 
out that draft Code 700 did not state the number of 
people from rural communities that had to benefit from 
"residual contributions" to earn a bonus point.  Other 
members questioned the reasoning behind the use of 
"profit after tax" to calculate a firm's contribution, 
since it might encourage corporations to structure 
themselves to avoid taking a local profit.  Moreover, 
using "profit after tax" seemed to be inconsistent with 
the approach taken in other draft codes, which base 
calculations on earnings before interest, taxes, 
depreciation, and amortization (EBITDA). 
 
Pertinent Definitions 
--------------------- 
 
¶10. (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. 
 
¶11. (U) A "non-recoverable contribution" will include 
grants, donations, discounts and other similar 
quantifiable benefits which are not recoverable by a 
firm. 
 
¶12. (U) A "recoverable contribution" includes 
investments, loans, guarantees, or any monetary 
contribution that has to be repaid or returned to the 
firm. 
 
¶13. (U) "Corporate social investment" refers to a firm's 
contributions to society and community that are 
extraneous to its regular business activities.  It would 
include development programs, health and HIV/AIDS 
programs, educational programs, training, environmental 
programs, development of arts and culture, and sport 
development programs.  These programs must benefit black 
people and in particular, women, the youth, people with 
disabilities and people in rural communities. 
 
¶14. (U) "Industry specific contribution" is defined as 
contributions unique to the industry in which the firm 
operates.  A firm may use the Standard Industrial 
Classification Coding System from Statistics South 
Africa to group themselves into industries.