Equity equivalent investments for B-BBEE – Guidelines – article 2 of 2

Reference Acts, documents and sites

BEE Act, as amended
BEE Codes of Good Practice, as amended
Sector Codes
http://www.thedtic.gov.za/financial-and-non-financial-support/b-bbee/equity-equivalent-programme/ and supporting documents such as the exemption form and checklist

In this second article of two, we look at the guidelines to follow when creating and submitting an Equity Equivalent Programme to the dtic.

Again, a recap of the objectives are:

EE Programmes are expected to contribute towards the achievement of the following objectives:

• Enterprise creation and development.
• Foreign direct investment.
• Accelerated empowerment of black rural women and youth.
• Sustainable growth and development.
• Human development with focus on education and skills development.
• Infrastructure investment with emphasis on developing the country’s research and development infrastructure.

Qualification Criteria for the Equity Equivalent

EE proposals must demonstrate commercial viability and long term sustainability (economically and operationally).
EE proposals must be aligned to the overall objectives of B-BBEE.
There must be a transfer of accredited business and/or technical skills
EE proposals must be measurable against the value of their operations locally with tangible measurable outputs.
EE proposals must demonstrate the benefit accruing to the South African economy beyond the core business activities of the Multi-national.

The Role and Responsibilities of EE Programme Candidates

To carry out EE programme in line with B-BBEE objectives.
To target sustainable projects that, are in line with government’s accelerated growth initiatives.
To submit all documents two weeks prior to the scheduled EE Committee meetings.
To provide a Valuation Report demonstrating the assumptions made and the viability of the valuation.
To submit EE proposals, which are measurable against the value of their local operations, with tangible measurable outputs.
To enter into a Memorandum of Agreement (MOA) with the dtic regarding the EE Programme prior to approval of the EE programme and prior to the awarding of points under the Ownership Scorecard.
To submit Monitoring and Evaluation Reports to the dtic, as per the above mentioned MOA and published Monitoring and Evaluation Guidelines

General criteria

  1. Quarterly and annual progress reports, which shall list individual project activities and indicate planned progress in terms of the Business Plan to the dtic’s designated representatives.
  2. Quarterly financial progress reports which indicate the amounts of Funds that have been expended as well as planned and actual expenditure in terms of the Business Plan to the dtic’s designate representatives.
  3. Annual Reviews on actual progress in terms of the Business Plan to the dtic’s designated representatives for the first two (2) years and then two (2) yearly for the remaining period.
  4. The Multi-national must permit, after the dtic has given five (5) days written notice there of, the dtic to carry out inspections or audits during offices hours regarding the implementation of the programme.
  5. A consolidated report at the end of each year to be submitted and a final consolidated report at the end of the measurement period.
  6. The quarterly progress reports should explicitly reflect the following details in separate columns: a. Original agreed measurable milestones, both financial and activity based milestones (e.g. number of qualified interns trained etc.).
    b. Actual performance to date against the milestones above in (point a) and comment/ explanations on any variances.
    c. Suggest any revised/ updated forecasts for the remainder of the measurement of given actual performance to date (compared to point a) and previously agreed budgeted milestones (point b).
    d. Suggest reasons/ motivation for revisions, and why future revisions are unlikely to occur.
  7. Detail as to how voting/ decision making is conducted for the EE Programme and who constitutes the board membership (if applicable).
  8. A list of the decision makers of the Fund.
  9. A list of the management of the Equity Equivalent Programme, their CVs and managerial experience in functioning as an administrator.
  10. A typical service level agreement between the Multi-national and service providers, if applicable.
  11. A detailed review on the progress, which shall list individual programme activities indicating actual progress in terms of the expected outcomes as per the Business Plan.
  12. Whilst it is a condition in the MOA for a Multi-national to provide quarterly and annual reports to the dtic, the various EE Programmes should have monthly monitoring processes and should have available abridged monthly summaries typical of good business practice that covers milestone measurement, administrative and financial process. This will assist if the dtic chooses to audit the projects unannounced, between quarters.

Financial Criteria

  1. Audited Annual Financial Statements for the project vehicle housing the Equity Equivalents (EE) Programme, to include Management Accounts (signed off by the Financial Director) if audited financial statements not available. These statements are to be made available no later than six (6) months after the financial year end.
  2. A detailed break-down of the flow of funds into and out of the Enterprise Development Fund for the period of measurement.
  3. Detailed operational costs incurred, including costs associated with salary, wages, management fees or any other remuneration or payment clearly distinguishing between payments made to: e. Multi-national direct personnel or other payments.
    f. Third party vendor/service provider supported by an arms length contract.
    g. The EE Programme’s own personnel supported by employment contracts underpinned by deliverables and performance criteria.
    h. Any interest rate charged to the project vehicle of the Equity Equivalent.
  4. Source and application of all flow of funds as suggested, separated out into the detailed operational categories and in terms of the three classifications above (point e and point g).

Basic procedure for the Approval of Equity Equivalent Participation

NOTE: Multi-national entity obtains in principle support for the Equity Equivalent Business Plan from the relevant line Ministry before the process actually begins. A letter of support from the dtic must be included.

  1. The Multi-national entity submits an application to the dti for exemption from sale of equity.
  2. The Multi-national must prove that such sale of equity is against their global practice.
  3. The dtic is to grant exemption from selling equity and participation in an Equity Equivalent Programme.
  4. The Multi-national is to submit EE proposal and Valuation Report to the dtic within 60 days from the date of receiving exemption.
  5. An evaluation of the EE proposal and Valuation Report by the Equity Equivalent Committee is undertaken.
  6. Granting of pre-approval by the dtic, within two weeks from date of evaluation is given.
  7. In the event of pre-approval of the EE proposal, finalisation of the MOA must be concluded prior to final approval and awarding of points.
  8. In the event that the proposal is rejected, the dtic is to notify the Multi-national in writing substantiating the reasons for rejection.
  9. The Equity Equivalent committee to make recommendations to the Minister for final approval.
  10. Ownership Scorecard points for EE to be awarded according to the 25% value of the South African operations as agreed, for the duration of the measurement period; or Ownership points for EE to be awarded on an annual basis if 4% of the annual Turnover has been utilised for the measurement period.

Application for Exemption

  1. There is a standard form which can be obtained from the dtic‘s B-BBEE Unit, detailing the documents required.
  2. To ensure the processing of the proposal for Equity Equivalents an application letter is required covering the following areas: a. That you are applying for exemption from selling equity and would like to participate in an Equity Equivalent Programme.
    b. State the reasons for being unable to sell equity in South Africa.
    c. Disclose all countries where equity was sold.
    d. Where equity was sold, provide motivation as to the circumstances that formed the decision to sell. (if local legislation applies specify the Act).
    e. Illustrate the size (value) of the South African operations against that of the Holding company and compare to any other operations where the Multi-national may have sold equity.
    f. Give an indication as to the type of EE programme under consideration.
    g. Provide an independent audit verifying the Multi-national’s assertion of having or not having sold equity in any of their global operations stating clearly countries where equity has been sold (if applicable).
  3. A list of the Multi-national’s business interests in other countries and the extent of these are required. These may need to be supported by the independent auditors and annual financial statements/reports.

Therafter the process flow becomes internal within the dtic during which they will review all the information submitted as compared to the listed criteria and provide the necessary feedback.

Please refer to http://www.thedtic.gov.za/financial-and-non-financial-support/b-bbee/equity-equivalent-programme/ for further detail too.

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