Part 2 of the Amended BBBEE Codes of Good Practice

Issued 10 October 2014 for public comment

At last some certainty…

“I am certain there is too much certainty in the world”

Michael Chriton speaking at Harvard - 18 April 2002

01INTRODUCTION

Lay of the land

On 10 October 2014 - the Dti released the second part of the Amended B-BBEE Codes of Good Practice which include:

– Qualifying Small Enterprise statements (Code 600)

– Guidelines for developing Sector Charters (Code 000: Statement 003)

– Specialised Enterprises (Code 000 : Statement 004)

– Sale of Assets (Code 100: Statement 102)

– Equity Equivalents for Multinationals (Code 100: Statement 103)

Lay of the land

In a media statement on 21 October 2014 the Dti announced:

− Target date for setting up BEE Commission and B-BBEE Verification Regulator is 31 March 2015

− President signed the Proclamation Notice on 2nd October 2014 – BEE Act comes into effect Friday 24 October 2014

− The Trumping Clause (Section 3) deferred for 12 months, will come into force in October 2015

− Possibly to give time for LFC (Liquid Fuel Charter) / Mining Charter to align to Generic B-BBEE Codes?

02QUALIFYING SMALL ENTERPRISE STATEMENTS : CODE 600

Lets run the numbers

QSE = 34118

Current target for procurement from BO = 12%

Current target for procurement from BWO = 8%

Are companies meeting these targets?

What are the implications?

878032

34118 11871

<R10m

R10-R50m

>R50m

New QSE scorecard

Element Code seriesOld QSE Code

WeightingNew QSE Code

Weighting

Ownership 100 25 25

Management Control 200 25 15

Employment Equity 25

Skills Development 300 25 25

Enterprise and Supplier Development 400 25 30

Enterprise Development 25

Socio-Economic Development 500 25 5

TOTAL 100 100

4 out of 7 Measure all

QSE : Code 600

Important points:

- Generic Code applies where QSE Code is silent

- No extension of the transition period

- Applicable from 1 May 2015

- No bonus points

- Generic Code is out of 118 points

- Must be measured on all elements

- Sub-minimums apply to the priority elements

- Select 2 out of 3 priority elements to apply the sub-minimum

OWNERSHIP

OWNERSHIP Weighting Points

Compliance Target

2.1 Exercisable Voting rights in the hands of the following black people:

2.1.1 Black People 5 25% + 1

2.1.1 Black Women 2 10%

2.2 Economic interest in the hands of the following black people:

2.2.1 Black People 5 25%

2.2.2 Black Women 2 10%

2.2.3 New entrants or Black designated groups 3 2%

2.3 Realisation Points:

2.3.1 Net Value 8 25%

TOTAL 25

Black women measured

New entrants / BBOS combined

12

Women measured separately means many black male owned QSE’s ownership points will DROP (max 18)

Designated Groups measured separately means many individually black owned QSE’s ownership points will DROP

Sub-minimum is 40% of Net Value Points = 3.2 points AND based on graduation factor calculation (over all 9 years)

Best way to score points is with an ESOP / BBOS- 10% ESOP earns 12,2 points

- Avoids 1 level penalty

Changes to Ownership…

13

With no Black Ownership and no Black Top Management, the most points possible is 68. This is a Level 7, but you drop a level. So Level 8

A company that got a level 1 for full points on EE, PP, ED and SED only will get 42 points. This is a Level 8, and drop a level to non-compliant.

For many high scoring QSE’s…

MANAGEMENT CONTROL

Management Control Generic Points Generic Targets

1.1.1 Executive management

1.1.1.1 Black representation at Executive Management 5 50%

1.1.1.2 Black Female representation at Executive Management 2 25%

1.1.2 Non-executive management

1.1.2.1 Black representation at non-executive Management 6 60%

1.1.2.2 Black Female representation at non-executive Management 2 30%

15

No points for black employees

Changes to Management Control

Black workers no longer measured separately means many QSE’s points for Management Control will DROP

Executive management = top management (all)

Non-executive management = senior, middle, junior management- Non-executive management is NOT non-executive directors

Sub-race groups do NOT apply

Must use current payroll data

SKILLS DEVELOPMENT

Skills DevelopmentWeighting

PointsCompliance

Targets

1.1.1.1 Skills Development Expenditure on Learning Programmes specified in the Learning Programme Matrix for black people as a percentage of Leviable Amount

20 3%

2.1.1.2 Skills Development Expenditure on Learning Programmes specified in the Learning Programme Matrix for black females as a percentage of Leviable Amount

5 1%

Total 25

Target up from 2% to 3%

Black female requirement part

of 1.1.1.1

Changes to Skills Development…

Target up from 2% of payroll to 3% of payroll

Train black ‘people’ not just black employees

Specific target for black women is easier to achieve (than ARG)

Sub minimum applies (40% of 25 points)

Sub race group does NOT apply

Must comply with SD legislation- WSP, ATR, PR which are SETA approved

- Implement priority skills programmes

Best strategy…

2 : 1 ratio (male : female) learnership programmes

Opportunity to train unemployed people

No PLWD requirements

Claim salary / stipend + learnership cost

Claim tax deduction of R60,000 pp

Claim Youth Wage Subsidy up to R24,000 pp

Minimal (zero) net cost of implementation for full points

ENTERPRISE AND SUPPLIERDEVELOPMENT

1.1.1 Preferential ProcurementWeighting

PointsCompliance

Targets

1.1.1.1 BEE Procurement Spend from all Empowering Suppliers based on the BEE recognition levels

15 60%

1.1.1.2 BEE Procurement Spend with Empowering Suppliers that are at least 51% black owned

5 15%

1.1.2 Supplier Development

1.1.2.1 Annual value of all Supplier Development Contributions as a percentage of the target

5 1% of NPAT

1.1.3 Enterprise Development

1.1.3.1 Annual value of all Enterprise Development Contributions and Sector Specific Programmes as a percentage of the target

5 1% of NPAT

30

Target up from 50% to 60%

Points down 10

New requirement

Changes to ESD…

Only count procurement from Empowering Suppliers- No concession for QSE’s

Total procurement only earns 20 points – scores will DROP- More pressure to find and procure from 51% BO entities

2% of NPAT only earns 10 points – scores will DROP

Sub minimum applies (40% of each sub-element)

Where a company makes a loss in the current year: - NPAT target is clearly the last year that the company profit % exceeded ¼

of industry norm

SOCIO ECONOMIC DEVELOPMENT

Weighting Points

Compliance Targets

Annual value of all Socio-Economic Development Contributions and Qualifying Socio-economic Development Contributions made by the Measured Entity as a percentage of the target

5 1% of NPAT

TOTAL 5

Target same but points down 20

Changes to manage…

1% of NPAT only earns 5 points – scores will DROP

Cost of compliance has gone up significantly for QSE’s -on average the cost of compliance for QSE’s has

MORE THAN DOUBLED

Level 4 is achievable

Ownership (26% ESOP / BBOS) = 25.0

Management Control

Executive (1 x BW exec) = 4.5

Non executive (1/3 easy) = 3.0

Skills Development (tax funded) = 25.0

ESD

All ED ½ Procurement = 20.0

SED = 5.0

= 82.5

LEVEL 4

Comments…

03CODE 000: STATEMENT 003

Amended guidelines for developing and gazetting of transformation charters and sector codes and transformation plans

Introduce a NEW compliance requirement called the “Sector Transformation Plan”

What is a Sector Transformation Plan (STP)?

Policy guidelines to achieve transformation by individual entities in their sectors (where there is no Sector Code or Charter)

Government shall identify sectors or industries where there is a need to develop a STP.

Government shall ensure identification of key stakeholders and appointment of a representative Sector Transformation Forum.

The main responsibilities of the Sector Transformation Forum are to support government to develop Sector Transformation Plans and to monitor their implementation thereof.

Sector Transformation Plans

Every organ of state and public entity must apply any relevant Sector Transformation Plans in-• determining qualification criteria for the issuing of licences, concessions;

or

• other authorisations in respect of economic activity in terms of any law;

• developing and implementing a preferential procurement policy;

• determining qualification criteria for the sale of state-owned enterprises;

• developing criteria for entering into partnerships with the private sector;

• and determining criteria for the awarding of incentives, grants and investment schemes in support of broad-based black economic empowerment.

Sector Transformation Plans

4.8 The private sector entities shall use STP’s as guidelines for transformation of their sectors . For the purpose of measurement of their B-BBEE status private sector entities shall use the Generic Codes of Good Practice.

4.9 Despite section 4.8 private sector entities are encouraged on an annual basis to report on progress made on implementation of STP’s.

4.10 Furthermore it shall be compulsory for an entity that conductsbusiness with government where there is a STP in place to comply with therequirements of the plan.

Sector Transformation Plans

Must have common commercial characteristics, clearly define scope;

Must address all elements, same definitions, calculation methodologies;

- May deviate from targets, weightings and thresholds;

- May introduce a new additional element if justifiable;

Must set targets over and above the minimum targets set out in the generic codes;

No transitional period shall be provided for the implementation of a sector code.

Must be supported by line ministry and Dti

There must be compliance with S12

S12 – Sector Charter

Line ministry + Sector body must be involved– Apply in writing to Minister of Dti

– Provide evidence of compliance to S12

S9 – Sector Code

Must have common commercial characteristics, clearly define scope;

Must address all elements, same definitions, calculation methodologies;

- May deviate from targets, weightings and thresholds;

- May introduce a new additional element if justifiable;

Must set targets over and above the minimum targets set out in the generic codes;

Clear demonstration that line ministry was part of drafting of the sector code / letter of support must be sent to Dti;

No transitional period shall be provided for the implementation of a sector code.

Comments…

04SPECIALISED ENTERPRISES : STATEMENT 004

Specialised Enterprises

Applies to …

Public entities, NPO, PBO, S21, Universities

Every organ of state (to which 004 applies) MUST APPLY the Codes

- this is a duplication of the wording in the BEE Act

- removes any doubt !

S21, NPO, PBO – cannot be measured on ownership but …

- can contribute to the ownership score of an investment!

B-BBEE Recognition

EME QSE Generic

75% + Black beneficiaries Level 1 Level 1 Get rated

51% - 74% Black beneficiaries Level 2 Level 2 Get rated

0% - 50% Black beneficiaries Level 4 Level 4 Get rated

Evidence Affidavit Affidavit Certificate

Specialised Enterprises Scorecard

Element Code series QSE Generic

Management Control 200 25 20

Skills Development 300 30 25

Enterprise and Supplier Development 400 30 50

Socio-Economic Development 500 15 5

Total 100 100 (+9 BP)

Specialised Enterprises

Generic - Management Control, Skills Development, ESD, SED same targets (slightly

different weighting points)QSE - Management Control, Skills Development, ESD, SED same targets (slightly

different weighting points)

Supplier Development = target is 2% of NPAT or 0,2% of Annual Revenue / Gross receipts / Allocated budget / Discretional spend

Enterprise Development and Socio-economic Development targets = 1% of NPAT or 0,1% of Annual Revenue / Gross receipts / Allocated budget / Discretional spend

Comments…

05SALE OF ASSETS: STATEMENT 002

Sale of assets, equity instruments, business

No big surprises compared with old Codes …

Clarification as to the terms and the formula

Formula = Value of asset sold / value of seller x BO% in the asset

Sale of assets

What qualifies?

Claim ‘black’ ownership points for the sale of an:

Asset

Business

Equity instrument

Sale of assets

What is excluded?

May not claim for ED on the same transaction

Sale of assets

What is required?

Sell to a separate and sustainable black business

Result in transfer of skills or capacity

Have no unreasonable limitations as to clients / customers / suppliers

Outsourcing must be at arms length

Sale of assets

What does not qualify?

Transfer of business rights (lease, license or similar legal arrangement) where unrestricted ownership is not transferred

Sale of franchise by franchisor to franchisee (but includes inter franchisee sales)

What do you need to know

1. Value of the transaction

2. Value of equity instruments held by black people in AE (Associated Enterprise)

3. Carrying value of debt held by black people in AE (Associated Enterprise)

Calculation

A = B / C x D

A = equivalency percentage

B = value of the qualifying transaction

C = value of the seller

D = indicator % of AE

Example

Company S (Seller) –agrees to sell an investment it holds to Company A (Associated Enterprise)

Value of Co. S = R100,000,000

Value of investment = R10,000,000

Co. A is 100% black owned and has been set up as a new company to buy the investment from Co. S

Co. A successfully borrows R10m from its shareholders to finance the purchase of the investment from Co. S

Calculate the ownership score for Co. S

A = B / C X D

B = R10,000,000

C = R100,000,000

D = 100%

A = 10m/100m x 100% = 10%

Comments…

06EQUITY EQUIVALENTS FOR MULTINATIONALS CODE 100: STATEMENT 103

Big changes

from Old Codes

Equity Equivalents - requirements

Applies to Multinationals (only the value of SA operations)

Dti may approve certain Equity Equivalent Programmes (EEIP)

- Should be Sector Specific

- May involve IPAP, NGP, NSDS, NDP

EEIP must promote

- ESD, R&D and critical and core skills

Only apply to Multinationals with a GLOBAL POLICY of no minorities

Equity Equivalents – partial contributions

Allow PARTIAL CONTRIBUTIONS to EEIP

Must be a minimum of 40% of the target for Ownership (40% x 25%) = 10%

EEIP Ownership Points Certificate

- Valid for “investment period” then must top-up

- Up to 10 years for contributions > R100m

- Up to 7 years for contributions > R75m < R100m

- Up to 5 years for contributions > R50m < R75m

- Up to 3 years for contributions < R50m

What does this mean? How long can ‘Ownership’ be claimed?

Equity Equivalents - administration

Administration of EEIP can be outsourced: - To 51% BO entity which is B-BBEE compliant- Admin fee must not exceed 15% - Must have experience- Must have completed B-BBEE MDP- Must procure from Level 4 or better

Administration can be insourced- Must have experience- Must have completed B-BBEE MDP- Admin fee must not exceed 15% - Must procure from Level 4 or better- Must be signed off by EEIP manager and CEO

SA multinationals

Sale of equity in non-SA companies can get B-BBEE recognition in SA

1. Sold to black people

2. Exclude business value from non-SA operations

3. Measure value of equity against the value of SA operations

Comments…