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 entities registered for VAT

03 LEGISLATION

Preferential Procurement Policy Framework Act (PPPFA) 7 December 2011

PPFA Points for BEE Level B-BBEE Level80/2090/10 Level Level 2189 Level 3168 Level 4125 Level 584 Level 663 Level 742 Level 821 Non-Compliant00

BBBEE Amendment Act 24 January 2014

Section 10: Status of Sector Codes 1.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. 2.An enterprise operating in a sector with a S9(1) Code may only be measured in accordance with that code 3.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 All Organs of State and Public Entities are measureable 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 EMEQSEGeneric New Thresholds< R10mR10 – R50m> R50m BEP Thresholds< R1,5mR1,5 – R11,5m> R11,5m 100% Black OwnedLevel 1 Get rated 51% - 99% Black OwnedLevel 2 Get rated 0% - 50% Black OwnedLevel 4Get rated EvidenceAffidavitAffidavit / CertCertificate

New Scorecard ElementCode seriesCurrent WeightingProposed Weighting Ownership Management Control Employment Equity15 Skills Development Enterprise and Supplier Development Enterprise Development 15 Socio-Economic Development TOTAL 118

BEE recognition levels B-BBEE StatusCurrent QualificationNew QualificationB-BBEE recognition level Level One ≥100 points 135% Level Two ≥85 but <100 points ≥95 but <100 points125% 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 <7050% Level Eight ≥30 but <40≥40 but <55 10% Non-Compliant <30<40 0%

OWNERSHIP

Weighting Points Compliance Target 2.1 Exercisable Voting rights in the hands of the following black people: Black People425% Black Women210% 2.2 Economic interest in the hands of the following black people: Black People425% Black Women210% 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 33% New Entrants 22% 2.3 Realisation Points: Net Value8 TOTAL25

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 IndicatorWeighting Points Compliance Target 10% ESOPPoints 2.1 Exercisable Voting rights in the hands of black people: Black People425% + 110%1.6 Black Women210%5% Economic Interest in the hands of the following black people: Black People425%10%1.6 Black Women210%1.0 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 33%10%3.0 22%10% Realisation Points: Net Value83.2 Total2513.4

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 ControlGeneric PointsGeneric Targets 2.1 Board Participation Exercisable voting rights of black board members250% Exercisable voting rights of black female board members125% Exercisable voting rights of black executive directors250% Exercisable voting rights of black female executive directors125% 2.2 Executive Management Black Executive Management260% Black Female Executive Management130%

Managemet ControlGeneric PointsGeneric Targets 2.3 Senior Management Black employees in Senior Management260% Black female employees in Senior Management130% 2.4 Middle Management Black employees in Middle Management275% Black female employees in Middle Management138% 2.5 Junior Management Black employees in Junior Management188% Black female employees in Junior Management144% 2.6 Employees with disabilities Black disabled employees as a percentage of all employees22% Total19 BEP’s measured on a single management target of 60%

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

Skills Development Weighting Points Compliance Targets Skills Development Expenditure on any program specified in the Learning Programme Matrix for black people as a percentage of Leviable Amount Skills Development Expenditure on Learning Programmes specified in the Learning Programme Matrix for black people as a percentage of Leviable Amount 86% Skills Development Expenditure on Learning Programmes specified in the Learning Programme Matrix for black people with disabilities as a percentage of Leviable Amount 40.3% Learnerships, Apprenticeships and Internships: Number of black people participating in Learnerships, Apprenticeships and Internships as a percentage of total employees 42.5% Number of unemployed black people participating in Learnerships, Apprenticeships and Internships as a percentage of total employees 4 2.5% Total20 BONUS POINTS Number of learners absorbed by the Measured Entity and industry at the end of the learnership program 5100% BEP’s SD target spend = 1,5% + 0,3% = 1,8% 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: 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 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

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 Per learner per annum 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 AbledDisabled Learnership cost30,000 Sourcing1,0001,500 PLWD accommodation-4,500 Stipend (R2,000pm x 12)24,000 Cost per learner 56,000 60,000 S11(a) Deduction S12 H Rebate Youth wage subsidy Mandatory SETA Grant 2000 Net cost per learner 9,5201,200 Average Net Cost per Learnership 5,360

Maximum points for minimum cost Example Co. with 200 employees5% of workforce =10 Net cost per learnershipR5360 Total net costR53,600 Points earned27 Net cost per pointR1,985

ENTERPRISE & SUPPLIER DEVELOPMENT

2.1 Preferential Procurement Weighting Points Compliance Targets BEE Procurement Spend from all Empowering Suppliers based on the BEE recognition levels 580% BEE Procurement Spend from Empowering Suppliers QSE’s based on the applicable BEE recognition levels 315% BEE Procurement Spend from Empowering Suppliers EME’s based on the applicable BEE recognition levels 415% BEE Procurement Spend with Empowering Suppliers that are at least 51% black owned 940% BEE Procurement Spend with Empowering Suppliers that are at least 30% black women owned 4 12% Total25 BONUS POINTS BEE Procurement Spend with Designated Groups that are > 51% black Owned 2

2.2 Supplier Development Weighting Points Compliance Targets Annual value of all Supplier Development Contributions as a percentage of the target 102% of NPAT 2.3 Enterprise Development Annual value of all Enterprise Development Contributions and Sector Specific Programmes as a percentage of the target 51% 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 SD1 BEP’s ED target spend = 0,75% of leviable amount

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 CriteriaEnhancement 3 year contract with supplierx spend by 1.2 Black owned QSE or EME that is not an SD beneficiary but has a 3 year contract x spend by 1.2 First time supplierx spend by 1.2

SOCIO-ECONOMIC DEVELOPMENT

Socio-Economic Development CriteriaWeighting PointsCompliance Target Annual (not average) value of all Socio-Economic Development Contributions by the Measured Entity as a percentage of the target 51% 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 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