The Code of Good Practice on Black Economic Empowerment 1 1

STRUCTURE OF THE CODE OF GOOD PRACTICE AN IMPLEMENTATION FRAMEWORK FOR BROAD-BASED BLACK ECONOMIC EMPOWERMENT STRUCTURE OF THE CODE OF GOOD PRACTICE CODE 000: IMPLEMENTATION FRAMEWORK CODE 100: EQUITY OWNERSHIP CODE 200: MANAGEMENT 2 1

Progress on the B-BBEE Process Current Achievements: BBBEE Act provides an enabling framework The BBBEE Strategy stipulates the BEE intents and principles of Government Massive increase in BEE across all sectors of the economy BEE is recognized as a business imperative and deals are more broad-based than previously BEE Charters in strategic sectors (Mining, FSC, ICT, Tourism, Liquor, Agriculture, Transport, Health) 3

Concerns and Risks around the B-BBEE Process Lack of full understanding and appreciation of the principles of broad-based BEE Inconsistent application of BEE Extensive debates could result in delays – biggest risk is slow or no progress on BEE Disparity in Charter Definitions and Targets Lack of Implementation Guidelines can result in ‘Fronting’ or ‘Sham’ transactions promoted 4

Implementation Framework Code of Good Practice as the BEE Implementation Framework Broad-based BEE Act No. 53 of 2003 Legislative Enabling Framework Broad-based BEE Strategy Strategic Framework Codes of Good Practice Implementation Framework and Guidelines Generic or Sector-specific BEE Scorecards Interpret BEE Definitions Set BEE Indicators, Weightings and Targets Guidelines to draw up BEE charters Guidelines to maintain Institutional Framework (BEE Council /Accreditation Agencies) 5

Agenda AN IMPLEMENTATION FRAMEWORK FOR BROAD-BASED BLACK ECONOMIC EMPOWERMENT STRUCTURE OF THE CODE OF GOOD PRACTICE CODE 000: IMPLEMENTATION FRAMEWORK CODE 100: EQUITY OWNERSHIP CODE 200: MANAGEMENT 6

Code of Good Practice (Structure) Each Code explains all issues pertaining to a key BEE element and can consist of one or more statements A Statement include a related set of principles that guides the implementation of one BEE issue Code of Good Practice Phase 1 Code 000: Framework Statement 000: Conceptual Framework Statement 010: Charter Guidelines Code 100: Ownership Statement 020: BEE Council Code 200: Management Statement 030: Broad-based BEE Implementation Code 300: Employment Equity Statement 040: Glossary Phase 2 Code 400: Skills Development Statement 050: BEE Rating agencies accreditation Code 500: Affirmative Procurement Code 600: Enterprise Development Statement 100: Ownership Code 700: CSI and Industry Specific 7 Code 800: BEE Practice Notes Statement 200: Management

Structure of the Code of Good Practice The Benefits of the Adopted Structure: Logical Flow of the Structure: The Code is structured according to the logical flow of BEE scorecard. Flexibility of the Structure: It enables the Minister and DTI to expand, amend or remove individual statement as and when required, without having to re-issue the entire Code of Good Practice. Best Practice: The structure is similar to those used by the Generally Accepted Accounting Practice internationally. 8

Agenda AN IMPLEMENTATION FRAMEWORK FOR BROAD-BASED BLACK ECONOMIC EMPOWERMENT STRUCTURE OF THE CODE OF GOOD PRACTICE CODE 000: IMPLEMENTATION FRAMEWORK CODE 100: EQUITY OWNERSHIP CODE 200: MANAGEMENT 9

Code 000 – Implementation Framework Objective of this Code: This code comprises of statements that: Establish the conceptual framework Summarizes the indicators, weightings and targets for each element of the Scorecard BEE elements Provide application guideline for the generic BEE Scorecard Establish different institutional framework to facilitate the implementation of the Strategy and the Code of Good Practice. 10

Code 000 – Implementation Framework Statement(s) currently contained in this Code: Statement 000: Conceptual Framework Statement 010: Sector Transformation Charters Statement 020: BEE Advisory Council Statement 030: Implementation of Broad-based BEE Statement 040: Glossary Statement 050: Accreditation Agencies 11

Statement 000 – Conceptual Framework Key Principles Description Implication Substance over Form Broad-based BEE must be measured and reported according to economic reality rather than legal form Penalize the use and reporting of ‘fronting’ or ‘sham’ BEE structures and entities. Prevent BEE from becoming a box-ticking exercise and lose its socio-economic substance. Broad-based BEE Scorecard BEE is an integrated socio-economic process which aims at empowering all black people BEE is measured based on seven core elements: ownership, management, employment equity, skills development, affirmative procurement, enterprise development and residual 12

Old scorecard vs New scorecard No targets included Targets included No points allocated for women Points allocated for women Preferential procurement based on black ownership Preferential procurement based on BEE contribution No bonus points for over-performance Bonus points given for over-performance Indicators limited More options for indicators 13

Statement 010 – Sector Transformation Charter Outline the process to be followed in formulating a sector charter Establish the status of sector transformation charter Identify principles to be applied to harmonise the different charters Outline the process of constituting Charter Councils and prescribe the powers of these Councils 14

Statement 010 – Sector Transformation Charter Key Principles Description Implication Qualification Criteria Only sectors interacting directly with the government, as determined by government are encouraged to develop sector charters. Ensure that charters are only developed in key economic sectors. Preclude entities from avoiding the application of the generic scorecard through sector charters. Guideline for setting targets, weightings and indicators The charters cannot deviate from the definitions and principles of the Code. Prevent sectors from circumventing the BEE principles of the Act, Strategy and the Code through charters Reduce confusion resulting from multiplicity of definition for the same BEE principles in different charters. Publication of charter in the Gazette Minister to publish in the Gazette as a charter if meet all s12 requirements. Minister can also elect to publish charter as a Code (s9) if it meet all requirement of the Strategy and this Statements. Gazetted Charter are an evidence of sector commitment to transformation On the other hand, Charter gazetted as a Code of Good Practice has same status as a Code (can be used in determination of BEE status) 15

Statement 030 – Implementation of Broad-based BEE Identify policy instruments and initiatives that can promote broad-based BEE Align the implementation of policy instruments and initiatives to broad-based BEE 16 1

Statement 030 – Implementation of Broad-based BEE Key Principles Description Implication Policy Instruments Identifies policy instruments and initiatives that can be used to promote broad-based BEE Increase awareness of public and private sector decision maker of when broad-based BEE status can be applied Application of Broad-based Principle Differentiate between the use of broad-based measures (based on the scorecard) and narrow-based measure (based solely on ownership). Identify the risk of narrow-based application to the BEE process and the economy. Provide implementation and reporting guidelines to align policy instruments to broad-based BEE Raise the awareness of the risks and potential conflicts around the use of narrow-based BEE measures Promote the adoption of the scorecard as contained in the strategy and the Code. Transitional Provisions Entities currently applying measures that are either narrow-based or that are contrary to the Code will be given 12 months to adapt their decision-making and reporting mechanisms. Align all public and private sector policy instrument and initiatives to broad-based BEE over 12 months Enhance the multiplier effects as envisaged in the broad-based BEE model 17

Other Statements within Code 000 Key Principles Description Implication Advisory Council (020) Establish the guidelines for the creation and the operations of the BEE Advisory Council Facilitate the creation and operation of the BEE Advisory Council Glossary (040) Provide a standard glossary of all terms and definitions used in the Code of Good Practice Collate all BEE terms and definitions used in the Code of Good Practice Provide a centralized source of BEE definitions that can assist sector organizations, entities and practitioners Approved Accreditation Agencies (050) Establish the technical and BEE qualification criteria for accreditation agencies. Create an approval mechanism for dti to approve accreditation agencies. Create a framework whereby Government can leverage the work and information of the accreditation agencies to accelerate BEE Provide an approval framework to ensure that all accreditation agencies have the necessary technical and BEE credentials to evaluate BEE 18

Agenda AN IMPLEMENTATION FRAMEWORK FOR BROAD-BASED BLACK ECONOMIC EMPOWERMENT STRUCTURE OF THE CODE OF GOOD PRACTICE CODE 000: IMPLEMENTATION FRAMEWORK CODE 100: EQUITY OWNERSHIP CODE 200: MANAGEMENT 19

Code 100 – Ownership Objective of this Code: This code comprises of statements that inform the recognition and measurement criteria for black ownership. The code also ensures that the BEE process can result in the transfer of genuine, substantive and sustainable ownership to black people. The Code also aims to reduce ‘fronting’ and misrepresentation of black ownership by companies through the stipulation of a standard set of principles and guidelines for its measurement and reporting. 20

Code 100 – Ownership Statement(s) currently contained in this Code: Statement 100: Recognition and Measurement of BEE Ownership Objectives To increase the number of black people that manage, own and control enterprises and productive assets. Provide recognition and measurement criteria for black ownership Provide key principles to be used in determining ownership by black people 21

Statement 100 – Ownership Key Principles Description Implication Ownership as Economic Interest and Voting Rights Ownership is measured as an entitlement to both voting rights and economic interests. Prevent transactions where black people are given voting right but no economic interest. Prevent fronting transactions where no real economic transfer take place. Flow Through Principle Ownership is included if it is held by natural person. In the case of holding by a juristic person such as a company, only the portion of ownership in that entity by a natural black person will be included. Pierce through pyramid holding structures that are been used to inflate black ownership in entities Measures and reports the actual levels of economic ownership held by black people Will determine what are the actual economic benefits flowing to the BEE equity holders. Restrictions Identifies and exclude any equity subject to any rights limitations Penalize transactions where the rights attached to the equity holding of black owners are limited Reduce ‘Fronting’ transactions 22

Flow Through Principle Effective black ownership in Company C is 51%*51%*51% = 12.5 percent

Determinant of Ownership Score All Black S/H All Black S/H Voting Right Ownership (20% of BEE Scorecard) Black Women Black Women Economic Benefit Broad-based Groups Broad-based Groups Unencumbered Interest New Entrants New Entrants MEASUREMENT PRINCIPLE: Recognize and reward companies for the ability of black people to exercise and benefit from ownership rights, as well as the extent of the beneficiary base. (2 Ways to allocate scores for BEE Ownership) Allocation by black people’s ability to exercise ownership rights including: unrestricted voting right the right to receive economic interest such as dividends and capital gains unrestricted and unencumbered entitlement to economic interest Allocation by the beneficiary base, taking into accounts participation by: black women new entrants, and black designated groups (such as black workers, black youth, black people with disability and black people living in rural areas) 23 1

Ownership Score Allocation Allocation by categories ensures that only companies with black women and designated group participant get 100%. Allocation by ownership right differentiate between the rights accrual to black investors 24

25 Ownership measured through the matrix table, allocating point for different categories of rights and different beneficiaries

Key Principles Options and Contingent Claims: Where an option is used where the economic interest is contingent upon a future event, the economic interest will be projected on a fair and reasonable basis, but will be recognized as restricted economic interest. Organs of State, Pension Funds and Superannuation Schemes: The BEE ownership by organs of state, pension funds and superannuation schemes are specifically excluded from the calculation from both numerator and denominator. The amount excluded from total ownership (denominator) is limited to the lower of 25 percent or the level of economic interest owned by black people. An enterprise with more than 75 percent ownership by the state is specifically exempted from the application of this statement. 26

Key Principles (Continued) Bonus Points: The statement provide for: one (1) bonus point to be awarded for new entrants, where the black people buying into the enterprise have not entered into a previous transaction where the fair market value of the company exceed R 20 million in value. The statement also provide one (1) bonus point to be awarded to company who have exceeded the 25 percent target for voting right or economic benefits Non-Circumvention: The non-circumvention principle allows for identification of fronting or other structures which aims to misrepresent the level of ownership. Rating agencies are required to maintain a database of such structures. In order to ensure that ownership information is not misrepresented, enterprises are required to provide appropriate documentation to evidence their ownership. 27

Agenda AN IMPLEMENTATION FRAMEWORK FOR BROAD-BASED BLACK ECONOMIC EMPOWERMENT STRUCTURE OF THE CODE OF GOOD PRACTICE CODE 000: IMPLEMENTATION FRAMEWORK CODE 100: EQUITY OWNERSHIP CODE 200: MANAGEMENT 29

Code 200 – Management Objective of this Code: This code contains the statements which guide the recognition and measurement of black management representation. Management represent the second leg of direct empowerment component of the BEE balanced scorecard. Statement(s) currently contained in this Code: Statement 200: Recognition and Measurement of Management 30

Statement 200 – Management Provide Recognition and Measurement Criteria for Management Key Principles Description Implication Weighted Measurement Criteria The measurement criteria for management is weighted to give recognition to key executive (2), executive (1) and non-executive positions (0.5) Reward enterprises for appointing black management into key executive rather than non-executive positions Prevent black management requirement from becoming a numbers game Management Target The management target is currently set at 40 percent of the weighted score Similar to mining charter requirements Percentage score calculated as a percentage of the target Limitation of non-executive recognition The statement limit the recognition of non-executive to 10 percent of the scorecard Prevent enterprise from achieving quota by only appointing black non-executives Counters market trend in appointing black non-executives rather than executives Additional Recognition for Women Black women management at all levels are allocated more significant weightings Provide bonus and reward enterprise which appoint black women management 31

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Thank You 33