Amended B-BBEE Codes of Good Practice A strategy for Built Environment Professionals 30 July 2014

01 INTRODUCTION

02 BEE IN CONTEXT

BEE in context 924 021 entities registered for VAT

03 Legislation

Preferential Procurement Policy Framework Act (PPPFA) 7 December 2011

PPFA Points for BEE Level B-BBEE Level 80/20 90/10 Level 1 20 10 Level 2 18 9 Level 3 16 8 Level 4 12 5 Level 5 4 Level 6 6 3 Level 7 2 Level 8 1 Non-Compliant

BBBEE Amendment Act 24 January 2014

Section 10: Status of Sector Codes Every organ of state and public entity must apply relevant code of good practice in: issuing of licenses, concessions developing and implementing a preferential procurement policy; determining qualification criteria for the sale of state-owned enterprises; developing criteria for entering into PPPs awarding of incentives, grants, and investment schemes in support of broad-based black economic empowerment.  An enterprise operating in a sector with a S9(1) Code may only be measured in accordance with that code An enterprise must report annually on their compliance to the Sector Council.

Section 1: Fronting Practice means a transaction, arrangement or conduct that directly or indirectly undermines or frustrates the achievement of the objectives of this Act; includes black persons discouraged or inhibited from substantially participating in the core activities; economic benefits received as a result of the BEE status do not flow to black people in the ratio specified; legal relationship with a black person to achieve a certain BEE level without granting commensurate economic benefits expected; an agreement with another enterprise to achieve enhanced B-BBEE status in circumstances in which – significant limitations on identity of suppliers, service providers, clients or customers; maintenance of business operations that are improbable having regard to resources; terms and conditions not negotiated at arm’s length on a fair and reasonable basis;

Section 20: Offences and Penalties A person is guilty of an offence if that person knowingly misrepresents or attempts to misrepresent the B-BBEE status of an enterprise; provides false information to Verification professional / any organ of state. A BEE Verification professional or any procurement officer or other official of an organ of state or public entity who becomes aware of fronting and fails to report is guilty of an offence. Any person convicted of an offence is liable to a fine or imprisonment for a period not exceeding 10 years or both; in the case of an enterprise, to a fine of 10% of annual turnover. Any person and/or entity convicted of an offence shall be banned from transacting with any public entity, and shall be entered into the National Treasury register of tender defaulters.

04 NEW BEE CODES

Key principles Substance over form Compliance measured “at the Date of Measurement” Any misrepresentation OR attempt = fronting Any initiative to split, separate, divide to qualify as EME, QSE or Start-up = fronting

Application of the Codes 3.1.1 All Organs of State and Public Entities are measureable 3.1.2 All Measured Entities that undertake any economic activity with any organ of state or public entity are measureable

Priority elements Ownership Sub-minimum = 40% of Net Value points = 3.2 points Skills Development (SD) Sub-minimum = 40% of total weighting points = 8 points Enterprise and Supplier Development (ESD) Sub-minimum = 40% of EACH of categories = 16 points Generics must comply with all 3 priority elements QSE must comply with ownership + 1 priority element

Application of the new Codes Transitional period exists until 30 April 2015 All sector Codes must be aligned by this time An entity may elect to be measured on amended Codes of Good Practice or on existing Codes of Good Practice during the transitional period An entity operating under a Sector Code must apply that code until 30 April 2015 – thereafter the Generic Codes if the Sector Code has not been aligned

New Thresholds EME QSE Generic New Thresholds < R10m R10 – R50m BEP Thresholds < R1,5m R1,5 – R11,5m > R11,5m 100% Black Owned Level 1 Get rated 51% - 99% Black Owned Level 2 0% - 50% Black Owned Level 4 Evidence Affidavit Affidavit / Cert Certificate

New Scorecard Element Code series Current Weighting Proposed Weighting Ownership 100 20 25 Management Control 200 10 19 Employment Equity 15 Skills Development 300 20 + 5 Enterprise and Supplier Development 400 40 + 4 Enterprise Development Socio-Economic Development 500 5 TOTAL 118

BEE recognition levels B-BBEE Status Current Qualification New Qualification B-BBEE recognition level Level One ≥100 points 135% Level Two ≥85 but <100 points ≥95 but <100 points 125% Level Three ≥75 but <85 ≥90 but <95 110% Level Four ≥65 but <75 ≥80 but <90 100% Level Five ≥55 but <65 ≥75 but <80 80% Level Six ≥45 but <55 ≥70 but <75 60% Level Seven ≥40 but <45 ≥55 but <70 50% Level Eight ≥30 but <40 ≥40 but <55 10% Non-Compliant <30 <40 0%

OWNERSHIP

OWNERSHIP Weighting Points Compliance Target 2.1  Exercisable Voting rights in the hands of the following black people: 2.1.1 Black People 4 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 25% 2.2.2 Black Women 2.2.3 Economic Interest of the following black natural people (broad-based groupings) in the Enterprise: - black designated groups; - black Participants in Employee Ownership Schemes; - black beneficiaries of Broad based Ownership Schemes; or - black Participants in Co-operatives 3 3% New Entrants 2% 2.3 Realisation Points: 2.3.1 Net Value 8 TOTAL 25

What the research says about ESOPS In "The ESOP Performance Puzzle in Public Companies," published in 2006 issue of the Journal of Employee Ownership Law and Finance, Robert Stretcher, Steve Henry, and Joseph Kavanaugh.

Points earned by 10% ESOP or BBOS Category and Ownership Indicator Weighting Points Compliance Target 10% ESOP Points 2.1  Exercisable Voting rights in the hands of black people: Black People 4 25% + 1 10% 1.6 Black Women 2 5% 1.0 2.2 Economic Interest in the hands of the following black people: 25% Economic Interest of the following black natural people (broad-based groupings) in the Enterprise: - black designated groups; - black Participants in ESOP; black beneficiaries of BBOS; or - black Participants in Co-operatives 3 3% 3.0 2% 2.0 2.3 Realisation Points: 2.3.1 Net Value 8 3.2 Total 25 13.4

MANAGEMENT CONTROL

Management Control MANAGEMENT CONTROL = MANAGEMENT CONTROL + EMPLOYMENT EQUITY Aligned to the EE Act (targets, reporting and definitions) Must use current payroll data Must apply sub-race group demographics for SM, MM, JM (not to Board / Executives or Disabled) The description of each of the measurement categories is aligned with the EE Act Adjusted recognition for gender collapsed into specific targets for women

Management Control Generic Points Generic Targets 2.1 Board Participation 2.1.1 Exercisable voting rights of black board members 2 50% 2.1.2 Exercisable voting rights of black female board members 1 25% 2.1.3 Exercisable voting rights of black executive directors 2.1.4 Exercisable voting rights of black female executive directors 2.2 Executive Management 2.2.1 Black Executive Management 60% 2.2.2 Black Female Executive Management 30%

BEP’s measured on a single management target of 60% Managemet Control Generic Points Generic Targets 2.3 Senior Management 2.3.1 Black employees in Senior Management 2 60% 2.3.2 Black female employees in Senior Management 1 30% 2.4 Middle Management 2.4.1 Black employees in Middle Management 75% 2.4.2 Black female employees in Middle Management 38% 2.5 Junior Management 2.4.1 Black employees in Junior Management 88% 2.4.2 Black female employees in Junior Management 44% 2.6 Employees with disabilities 2.6.1 Black disabled employees as a percentage of all employees 2% Total 19

Other changes in Management Control Definitions for Senior Top and Other Top removed Executive management defined: CEO, COO, CFO Other Executive management defined: HR, Transformation and others If an entity does not distinguish between Executive Management and Senior Management, then: Measure Executive and Senior out of 6 points Apply the Executive Management target (Avoid the sub-race group classification?)

SKILLS DEVELOPMENT

General Principles Contribute to country’s economic and social development goals by developing skills that enrich decent work and sustainable livelihoods Promote development of industrial skills base in critical sectors (production and value adding manufacturing that are labour intensive) Support ‘Professional, Vocational, Technical and Academic Learning’ programmes through work integrated learning (apprenticeships, learnerships, internships, PP) Strengthen skills and human resource base to support employment creation

Skills Development requirements WSP, ATR and Pivotal Report which are SETA approved Implementation of Priority Skills Programme Claim external training spend on unemployed Trainee tracking tool for ‘absorption’ Skills spend & Learnerships use demographic representation of black people (not for disabled or absorption) For scoring purposes the targets should be further broken down into the race sub groups as defined in the EE Act. Threshold requirement: The measured entity must achieve a sub-minimum of 40% of the target

BEP’s SD target spend = 1,5% + 0,3% = 1,8% Skills Development Weighting Points Compliance Targets 2.1.1 Skills Development Expenditure on any program specified in the Learning Programme Matrix for black people as a percentage of Leviable Amount 2.1.1.1  Skills Development Expenditure on Learning Programmes specified in the Learning Programme Matrix for black people as a percentage of Leviable Amount 8 6% 2.1.1.2 Skills Development Expenditure on Learning Programmes specified in the Learning Programme Matrix for black people with disabilities as a percentage of Leviable Amount 4 0.3% 2.1.2 Learnerships, Apprenticeships and Internships: 2.1.2.1  Number of black people participating in Learnerships, Apprenticeships and Internships as a percentage of total employees 2.5% 2.1.2.2  Number of unemployed black people participating in Learnerships, Apprenticeships and Internships as a percentage of total employees Total 20 BONUS POINTS 2.1.3  Number of learners absorbed by the Measured Entity and industry at the end of the learnership program 5 100% BEP’s target = 1,5%

Other changes Category F + G treated as informal = limited to 15% of total spend Accommodation, travel, catering, administration = limited to 15% of total spend Mandatory sectoral training does not count: Health and safety, First Aid? Fire? Training outside SA must meet SAQA recognition to count Measured entity no longer gets: 1.25 enhancement of ABET Salaries or Wages of employees still count if Learnership, Internship or Apprenticeship (B,C or D)

Score maximum BEE points Skills Development SETA accredited learnerships, internships for abled and disabled learners to ensure maximum points for each sub-element. SCORE 20+5 points Enterprise Development Skills provider is black owned supplier providing for ESD contributions. Spending 2% of NPAT secures maximum points. SCORE 10 points Employment Equity Training of PWD learners at 2% of total number of employees secures maximum points. SCORE 2 points

Maximum Tax benefits S 11(a) deduction S12H learnership rebate All spend is fully deductible for normal tax. Tax saving = 28% S12H learnership rebate Disabled learners qualify for R100,000 tax rebate per learner per annum Abled learners qualify for R60,000 tax rebate per learner per annum Tax saving = R28,000 (disabled) R16,800 (abled) Youth wage subsidy Up to 50% of learner stipends are deductible as a special subsidy. For learners paid R2,000 per month this results in a R1,000 per month tax subsidy on your PAYE Tax saving = 50% of stipend Maximum Tax benefits

Minimum net cost of learnerships Learnership cost Course = R30,000 Sourcing = R1,500 RA = R4,500 Stipend = R24,000 Total = R60,000 Per learner per annum (RA = reasonable accommodation for disabled learners) Tax saving S11(a) = R16,800 S12H = R28,000 YWS = R12,000 Total = R56,800 Net cost PWD = R3,200 SETA grants Claim 20% of the mandatory grant back from the SETA Qualify to claim discretionary grant back from the SETA

Tax deductible learnerships Abled Disabled Learnership cost 30,000 Sourcing 1,000 1,500 PLWD accommodation - 4,500 Stipend (R2,000pm x 12) 24,000 Cost per learner 56,000 60,000 S11(a) Deduction 15680 16800 S12 H Rebate 28000 Youth wage subsidy 12000 Mandatory SETA Grant 2000 Net cost per learner 9,520 1,200 Average Net Cost per Learnership 5,360

Maximum points for minimum cost Example Co. with 200 employees 5% of workforce = 10 Net cost per learnership R5360 Total net cost R53,600 Points earned 27 Net cost per point R1,985

ENTERPRISE & SUPPLIER DEVELOPMENT

2.1 Preferential Procurement Weighting Points Compliance Targets 2.1.1 BEE Procurement Spend from all Empowering Suppliers based on the BEE recognition levels 5 80% 2.1.2 BEE Procurement Spend from Empowering Suppliers QSE’s based on the applicable BEE recognition levels 3 15% 2.1.3 BEE Procurement Spend from Empowering Suppliers EME’s based on the applicable BEE recognition levels 4 2.1.4 BEE Procurement Spend with Empowering Suppliers that are at least 51% black owned 9 40% 2.1.5 BEE Procurement Spend with Empowering Suppliers that are at least 30% black women owned 12% Total 25 BONUS POINTS BEE Procurement Spend with Designated Groups that are > 51% black Owned 2

BEP’s ED target spend = 0,75% of leviable amount 2.2 Supplier Development Weighting Points Compliance Targets 2.2.1 Annual value of all Supplier Development Contributions as a percentage of the target 10 2% of NPAT 2.3 Enterprise Development 2.3.1 Annual value of all Enterprise Development Contributions and Sector Specific Programmes as a percentage of the target 5 1% of NPAT 2.4 Bonus Points One or more ED beneficiaries graduate to SD 1 Creating one or more jobs as a result of ED and SD

Empowering Supplier A B-BBEE compliant entity which is a good citizen, and who complies with all regulatory requirements of the country and meets 3 of the following criteria: At least 25% of Cost of Sales excluding labour and depreciation must be procured from local producers or suppliers, service industry labour costs capped at 15% Job creation 50% of jobs created are for black people provided the number of black employees since the immediate prior verified B-BBEE measurement is maintained.

Empowering Supplier At least 25% transformation of raw material/beneficiation which includes local manufacturing, production and/or assembly and/or packaging Skills transfer – 12 days per annum of productivity deployed in assisting black owned EME and QSE beneficiaries EME’s and Start up Enterprises are automatically given Empowered Supplier status QSE’s are required to meet 1 critieria.

Enhanced recognition Criteria Enhancement 3 year contract with supplier x spend by 1.2 Black owned QSE or EME that is not an SD beneficiary but has a 3 year contract First time supplier

Socio-economic development

Socio-Economic Development Criteria Weighting Points Compliance Target Annual (not average) value of all Socio-Economic Development Contributions by the Measured Entity as a percentage of the target 5 1% of NPAT BEP’s SED target spend = 0,25% of leviable amount

Socio Economic Development Beneficiaries must be 75% black Access to the economy Priorities in this element are to redress the issues of education, poverty, unemployment, health for those communities who remain disadvantaged

05 Total BEE strategy

Level 4 is achievable LEVEL 4 Ownership (10% ESOP / BBOS) = 13 Management Control Board (1 x BW non-exec) = 2 Management (2/3 easy) = 5 Skills Development (tax funded) = 25 ESD All ED ½ Procurement, Bonus point = 31 SED = 5 = 81 LEVEL 4