Gerhard Stols 0716743045 gerhard@amaxsa.co.za BEE New Codes Ownership Structures Joint Ventures Gerhard Stols 0716743045 gerhard@amaxsa.co.za.

Gerhard Stols 0716743045 gerhard@amaxsa.co.za
BEE New Codes Ownership Structures Joint Ventures Gerhard Stols

Overview of the New COGP
On the 11th October 2013 the DTi published the revised Codes of Good Practice and the following is a brief overview. On the 10th October 2014 they released the draft codes for QSE, There will almost certainly be amendments as more discussion reveals the finer points and DTi clarification statements are published. Gerhard Stols

Effective Date These revised Codes of Good Practice are in force for those who elect to use them. They must be used for all non-sector Code BEE measurement on or after the 1st May 2015, however no institution has been identified to do the verifications under the new codes. Gerhard Stols

Recognition Levels Gerhard Stols

QSE Framework (No Bonus points)
A point of interest is that on the Amended COGP there 18 Bonus points, however on the QSE COGP there is no points. “This proposed code is manifestly unfair for smaller companies especially in the context of 51%+ black owned QSEs not having to undertake any BEE activities except signing an affidavit to achieve a Level 1 or 2. Under this proposal it is virtually impossible for a QSE to achieve a Level 1. One of our customers describe this as a “land grab”!” (Mantis Networks) If left as is, we may well see many smaller companies abandoning BEE as too hard and too unfair. We may also see high scoring QSEs opting to be measured under the Amended Generic COGP to gain the benefit of the extra 18 points. Gerhard Stols

QSE Framework Code Elements Points Bonus 601 Ownership (P) 25 602 Management Control 15 603 Skills Development (P) 604 Enterprise and Supplier Development (P) 30 605 Socio-Economic Development 5 Total Points 100 Gerhard Stols

Priority Elements Priority Elements are Ownership, Skills Development and the Enterprise & Supplier Development. Generic - Not meeting a minimum 40% under all of the three Priority Elements will result in the Status Level being discounted by one level. QSE - Not meeting a minimum 40% under Ownership and either of the other two Priority Elements will result in their Status Level being discounted by one level. The 40% sub-minimum is different to that previously implemented for Employment Equity in that achieving less than 40% under a Priority Element does not result in any loss of points under that element. Gerhard Stols

EME’s The turnover threshold for Exempt Micro Enterprises is increased from R5m to R10m. An EME is recognised as BEE Level 4. A >51%+ Black owned EME is recognised as BEE Level 2. A 100% Black owned EME is recognised as BEE Level 1. EMEs can be measured under the QSE scorecard if they so wish. Gerhard Stols

EME’s An EME only needs a sworn affidavit regarding annual revenue and black ownership – no BEE certificate is required. However this is academic at the moment since organisations using the current DTi Scorecard and any of the Industry Charters will demand proof of the EME’s status with an accountant’s letter or a BEE Certificate. Start-ups are treated as above and may use annualised financials if they have been trading for less than a year. Start-ups need a QSE Scorecard if they are tendering for a contract >R10m and a Generic Scorecard if they are tendering for a contract >R50m. Gerhard Stols

QSEs and Generic Entities
The scorecard is now referred to as the DTi Generic Scorecard. The turnover qualification for Qualifying Small Enterprises is increased from the current R5m to R10m. The turnover qualification for a Generic Enterprise is increased from the current >R35m to > R50m. Gerhard Stols

All entities over R10m turnover have to comply with all 5 Elements. QSEs need a BEE Scorecard as they have to demonstrate compliance with the 5 elements and require the status of an Empowered Supplier for preferential procurement recognition. A QSE’s BEE Level is enhanced to Level 1 if it is 100% black owned and to Level 2 if it is 51% black owned. Such an enhancement only requires a sworn affidavit. Gerhard Stols

The scorecard is the same for both Generics and QSEs except for the Priority Element compliance and the Empowering Supplier criteria, targets are more reasonable. An shift have been notice with the release of the QSE codes, we believe that this might be a shift that can improve the sector codes and improve there release dates of there sector codes. This is mainly due to the referral back to Statement 100, rather than to add measurement clauses, meaning that sectors like Construction and Tourism might remove extra measurement areas from there codes. Gerhard Stols

Ownership Ownership points are left at 25 points with targets approximately the same as before. There are no bonus points so the ownership weighting is dropped by 2 points that is not so different to the current scorecard. A minimum of 40% of the 8 points under the Net Value score (3.2 points) is required to avoid a discounted BEE Status level. The key factors in this formula are the black economic interest performance and the extent of debt on shares using the time graduation factor. Gerhard Stols

Criteria Weighted points Target Actual % Score Min 40% achieved Exercisable Black Voting Rights 5.00 25%+1 Vote 0.00% 0.00 N/A Exercisable Black Women Voting Rights 2.00 10.00% Economic interest - black people 25.00% Economic interest - black women Economic interest - Black Designated Groups & ESOPs, Broad-based Schemes / Co-ops 3.00 3.00% Net Equity Value 8.00 formula No Total Ownership Score 25.00 Gerhard Stols

There are new provisions regarding ownership arising from equity held by Organs of State, Private Equity Funds, ESOPs, Broad based schemes and Family Trusts (discretionary family trusts are now permitted). Inclusion and exclusion principles apply. Modified Flow through provisions have been clarified – can only apply once in the entire structure and not once in every chain of ownership. Gerhard Stols

Section 21 companies may now participate towards black ownership under certain conditions, we have also seen a draft being released for said companies that does not measure ownership. Ownership recognition after exit of a black shareholder is limited to the period that the shares were held. (Pro-Rata) Black Designated Groups is extended to include black “war vets”. Gerhard Stols

Management Control Black female management is specifically targeted so there is no more adjustment for recognition of gender calculations. No measurement on disabled people on QSE level. There are no sub-minimum targets for this element. No more EAP bonus points Gerhard Stols

Criteria Points Target Actual Score Executive Management Black Exec. Management as a % of Executive Management 5 50.0% 0.00% 0.00 Black Women Exec. Management as a % of Executive Management 2 25.0% Non-Executive Management Black Non- Exec. Management as a % of Non-Executive Management 6 60.0% Black Non-Women Exec. Management as a % of Non-Executive Management 30.0% Total 15 Gerhard Stols

Split is in principle the same as we always had between Top Management as per statement 200, and all other Management (old Employment Equity). The formulas provided show the targets are broken down into 6 black sub-groups but this results in:- Proportionately increased contributions to the score from the minority sub-groups such as Indian females. Dilution of the contribution from majority sub-groups such as African males. A potential over-representation from any one sub-group where the sub-group formula exceeds 100%. Gerhard Stols

This is clearly not an intended consequence and will almost certainly be amended. Opinion: The attempt to motivate demographic representation in the new Codes 200 & 300 is a mistake as it departs from the original purpose of redressing the legacy of apartheid and attempts social engineering to address a perceived current problem. It will back-fire! It may also be unconstitutional. Getting the formulae wrong is more than embarrassing for the civil servants involved. Gerhard Stols

Skills Development In the General Principles section, there is a sub-minimum qualification of 40% applying to the total weighted points for Skills development, yet in the Code 300 it suggests the sub—minimum applies to each target. Skills Development now includes training expenditure relating to black people – not just employees and the Bonus points are based on the absorption rate by the employer or industry after such training. Informal training is recognised (previously Categories G and now Category F&G) and there is no enhanced recognition of ABET programmes. Informal training is limited to 15% of the total spend. Non-core expenditure such as travel and accommodation is limited to 15% of the total. Gerhard Stols

Criteria Points Target Actual Score Min 40% Achieved Skills Development Expenditure Expenditure on Learning Programmes specified in the learning program matrix for black people as a percentage of the liveable amount. 20.00 3.00% 0.00% 0.00 Expenditure on Learning Programmes specified in the learning program matrix for black female as a percentage of the liveable amount. 5.00 1.00% Total 25.00 No Gerhard Stols

A new Skills Development Matrix is provided for the recognitions of Skills Development spend. The Categories are: Bursaries – institution based theoretical instruction with formal assessment Internships – Mixed institution and workplace learning with formal assessment Learnerships – Registered structured learning formally assessed Learnerships or Apprenticeships – Occupationally directed instruction with formal assessment by an accredited body Work-Integrated learning – Occupationally directed not requiring a contract but formally assessed by an accredited body Informal Training – Occupationally directed informal instruction involving workshops, seminars and conferences Informal Training – Work-based informal programmes The target for skills development spend is increased from 2% of payroll to 3% of payroll (Leviable Amount). Gerhard Stols

There is no adjustment for the recognition of gender. The demographic Representation split into the 6 sub categories does not apply to QSE on this element Sectorial mandatory training such as Health and Safety is excluded. Points can only be earned if there is a SETA approved Workplace Skills plan; an annual training and pivotal report; and the implementation of programmes targeting Priority Skills and the development of a trainee tracking tool can be proved. Gerhard Stols

Enterprise and Supplier Development
This element combines the current Preferential Procurement and Enterprise Development elements into a single supplier orientated element. Recognition of supplier spend is restricted to those suppliers who hold an “Empowered Supplier” status. Gerhard Stols

The definition of “Value Added” suppliers falls away and the Empowered Supplier Status will now appear on the BEE Certificate. To become an Empowered Supplier a Supplier must:- Be B-BBEE compliant A good citizen meeting all regulatory requirements (DOL reports, VAT, tax clearance etc etc) Achieve 3 out of the following 4 activities (1 of the 4 only for a QSE):- Procures 25% of cost of sales in South Africa; Allocates 50% of new job creation to black people; Achieves 25% transformation of raw material/beneficiation (local manufacturing and assembly etc); Spends at least 12 days per annum assisting black EMEs and QSEs to increase their operational or financial capacity. EMEs and Start-up are deemed to be Empowered Suppliers. Gerhard Stols

Criteria Points Target Actual Score Min 40% achieved Preferential Procurement as % of TMPS BEE Procurement Spend with Empowering Suppliers 15.00 60.00% 0.00% 0.00 No BEE Procurement Spend with Empowering Suppliers Min 51% black owned 5.00 15.00% Supplier Development contributions 1.00% Enterprise Development contributions and Sector specific Programmes Total 30.00 Gerhard Stols

The 40% minimum with its one BEE status level discount implication applies to this element. It applies to all 4 targets. The new measurement of procurement from 51% black owned companies are new to QSE, and will be a problem for small companies not keeping an eye on there BEE spend. Imports can be excluded but there are conditions. Enhanced recognition for procurement from the Measured Entity’s Enterprise Development beneficiaries is retained and extended to include black QSE/EMEs where a 3 year contract exists. Gerhard Stols

Enterprise Development, now integrated within Preferential Procurement, is split with 16%% of the points focused on supplier development. Enterprise Development beneficiaries are restricted to EMEs and QSEs that are >50% black owned. The current 1.25 enhanced recognition for Category A contributions is removed, Category B beneficiaries disappear and both are replaced by a set of beneficiary criteria that must be met. Cumulative contributions are no longer applicable. No bonus points Gerhard Stols

Opinion: This element contributes 30% to the overall scorecard and has the potential to result in a one BEE Status Level discount. Organisations will have to devote resource to planning, monitoring and preparing information under this element throughout the year if they are to achieve a credible score. The BEE audit implications of these changes are significant and Auditors and Measured Entities must expect an increased workload and a commensurate increase in the cost of the audit. Gerhard Stols

Socio-Economic Development
Cumulative contributions cease being replaced by annual targets. The objective of enhancing sustainable access to the economy for black individuals is strengthened. There is specific reference to programmes that facilitate income generating activities for targeted beneficiaries The 75% threshold is retained for 100% recognition but it is defined as that percentage of the value of the contributions that benefit black people rather than the black percentage of the beneficiaries. The Benefit Factor Matrix is largely unchanged. Gerhard Stols

Criteria Points Target Actual Score Annual value of SED contributions 5 1.0% 0.00% 0.00 Gerhard Stols

Summary BEE has been amended to favour and develop black owned SMEs, enhance local value add and content and to increase transference of skills. The increased thresholds will result in fewer organisations requiring a BEE audit but for those that do, the compliancy process will be far more complex and expensive. Gerhard Stols

The narrow BEE Status Qualification bands will result in organisations focusing on every point in the scorecard – 1 point will be significant. The vast majority of organisations in the country (<R10m revenue) are now outside the ambit of this legislation but should receive the benefit of the development programmes and supplier contracts from the larger organisations to whom the codes apply. Gerhard Stols

There may be a counter-productive reaction to the administrative burden associated with the amended BEE codes from those organisations who are not trading with Government or who do not need a licence. However, except for those dealing exclusively with the public, trading in today’s South Africa without a BEE certificate is increasingly difficult unless one has a totally unique product or service. Gerhard Stols

We await the Gazetting of BEE Amendment Bill with its “trumping” clause to fully understand the reach of the amended COGP provisions. The demographic representation provisions and some drafting errors are a blot on an otherwise reasonable attempt to provide a sustainable Code of Good Practice for South African industry. Gerhard Stols

Things not covered by the COGP
JV’S and Subcontracting EME’s needs VAS status Additional Admin Additional Audit Evidence Increased cost of compliance Future of white companies Loopholes - Ownership Stats SA website Gerhard Stols

BEE Planning Ownership Trust Pref Shares Modified Flow Trough Management Placements Restructure Skills Development Learnership/Placements Enterprise and Supplier Development Procurement Companies Socio-Enterprise Development Monthly Planning BEE Scorecard Generators Know what your score is before going for verification Monthly control , check if your company is aligned every month Employment of BEE Specialist Oversees Employment Oversees Procurement Oversees Skills Development Gerhard Stols

Modified Flow Trough Principle
CO for Verification 26% Black for BEE Purposes 26% 74% Deemed 100% Black Company MFTP 51% 49% 86.74% TRUST BLACK 100% Gerhard Stols

Joint Ventures Old Codes and Amended Codes don’t Mix -Point difference makes it impossible. Old Codes (Sector Codes that has not been Amended yet) JV can be done with the two entities as long as all partners have a valid BEE Certificate AND JV Agreement that has the Profit/Project split in percentages. Gerhard Stols

Joint Ventures Example (4 QSE) each 25% in project Company 1 - Score 50 12.5 Company 2 - Score 75 18.75 Company 3 - Score 100 25 Company 4 - Score 25 6.25 Total Score 62.5 which is level 5 Gerhard Stols

Joint Ventures All need to be rated on Amended Codes or old codes JV Affidavit can’t be done by us So EME/QSE affidavits = JV Affidavit by client Gerhard Stols

Gerhard Stols 0716743045 gerhard@amaxsa.co.za BEE New Codes Ownership Structures Joint Ventures Gerhard Stols 0716743045 gerhard@amaxsa.co.za.

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