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To all our Clients

REVISED BEE CODES OF GOOD PRACTICE

This letter serves to give a summary of the

most important changes affecting BEE scorecards. There are still some uncertainties

regarding the new codes and, therefore, workshops for our clients will be run at the

beginning of 2014. Our clients will be notified of the dates and venues for these

workshops. Hopefully by then there will be more clarity on these changes. This will still

leave our clients enough time to prepare for the first audit on the new codes. It is, however,

a good idea for all our clients to read the codes themselves. If there are then any questions,

please forward to the writer for consideration and an informed reply.

General rules

The revised BEE codes will come into effect on 10 October 2014. If the entity’s next

financial year ends on a date prior to 10 October 2014, it will still be measured on the old

codes. If the financial year ends on a date after 10 October 2014, it will be measured on the

revised codes.

Note that enterprises which split, separate or divide a measured entity as a means of

ensuring eligibility as an Exempted Micro-Enterprise, a QSE or a Start-Up Enterprise, may

constitute an offence dealt with in accordance with the provisions in the BEE Act as

amended. (“Any person convicted of an offence in terms of the Act is liable to a fine or to

imprisonment for a period not exceeding 10 years or to both a fine and imprisonment; or to

imprisonment for a period not exceeding 12 months or to both a fine and imprisonment; or

to a fine of 10% of that enterprise’s annual turnover,” said Dr Rob Davies, Minister of

Trade and Industry)

A measured entity in a sector in respect of which a sector code has been issued in terms of

Section 9 of the BBBEE act as amended, may only be measured for compliance in

accordance with that sector code. This means that the revised BEE Codes do not replace

the Sector Codes until such time that the respective Sector Councils align their Sector

Charter with the revised codes. This will most probably happen at some point in time in the

future.

Priority elements, subminimum and discounting principle

There are 3 priority elements, namely Ownership, Skills Development and Enterprise and

Supplier Development. Generic entities are required to comply with each of the priority

elements. QSE entities are required to comply with Ownership and one of the remaining 2

priority elements.

The thresholds for the 3 types of entities are as follows:

Generic Annual Turnover of R50 mil plus

QSE Annual Turnover of R10 mil to R50 mil

Exempted Micro-enterprises Annual Turnover of less than R10 mil

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If a Generic entity does not achieve a subminimum in any one of the three priority

elements, the BEE status level will be discounted by one level down.

If a QSE entity does not achieve a subminimum in either Ownership or one of the other

two priority elements, the BEE status level will be discounted by one level down.

Please note that if you score less than 40% on more than one priority element your status

level will only be discounted by one level. One status level penalty is, therefore, the

maximum, irrespective of whether entities do not achieve a subminimum on one or all

priority elements.

Subminimum for Ownership

The subminimum for Ownership is 40% of the 8 points for Net Value. If entities, therefore,

do not score more than 3.2 out of 8 for net value, the overall score will be discounted by

one level. This implies that entities need to have at least 10% Black Ownership and

achieve the applicable time-based graduation factor for the entity in order to prevent a

downgrade of one level.

Subminimum for Skills Development

The subminimum for Skills Development is 40% of the total weighting points for Skills

Development, namely 8 out of 20 points.

Enterprise and Supplier Development

The subminimum for Enterprise and Supplier Development is 40% for each of the three

sub categories, namely Preferential Procurement (10 out of 25 points), Supplier

Development (4 out of 10 points) and Enterprise Development (2 out of 5 points).

Eligibility as an Exempted Micro Enterprise (EME)

An EME with 100% Black Ownership qualifies as a Level One Contributor

An EME with at least 51% Black Ownership qualifies as a Level Two Contributor

All other EME’s qualify as a Level Four Contributor

EME’s can elect to be measured as a QSE to improve their status level.

Eligibility as a QSE

A QSE must comply with all 5 elements of the New Codes, namely

Ownership 25 points

Management Control 15 points

Skills Development 20 points

Enterprise and Supplier Development 40 points

Socio-Economic Development 5 points

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Enhanced recognition

A QSE which is 100% black owned qualifies as a Level One Contributor

A QSE which is at least 51% black owned qualifies as a Level Two Contributor

Evidence required for Black owned EME and QSE businesses with

turnover of R50mil and less

A sworn affidavit, on an annual basis, confirming annual turnover and Black Ownership is

required.

Any misrepresentation in terms of turnover or Black Ownership constitutes a criminal

offence.

As a result of this risk and the fact that the PPPFA requires an accredited BEE

certificate (SANAS or Irba) if tendering for a government tender, it is recommended

that black owned EME’s and QSE’s require a BEE certificate issued by a SANAS or

IRBA accredited BEE verification agency.

Eligibility as a Generic Company

A Generic entity must comply with all 5 elements of the New Codes, namely:

Ownership 25 points

Management Control 15 points

Skills Development 20 points

Enterprise and Supplier Development 40 points

Socio-Economic Development 5 points

Eligibility as a start-up enterprise

Start-up enterprises qualify as a BEE Status Level Four, irrespective of turnover.

If the start-up enterprise tenders for a contract between R10mil and R50mil it must be

measured in terms of the QSE rules using annualised data.

If the start-up enterprise tenders for a contract of more than R50mil it must be

measured in terms of the Generic rules using annualised data.

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BEE recognition levels

B-BBEE Status

Qualification

BEE

Recognition

Level

Level One Contributor

≥100 135%

Level Two Contributor

≥95 but <100 125%

Level Three Contributor

≥90 but <95 110%

Level Four Contributor

≥80 but <90 100%

Level Five Contributor

≥75 but <80 80%

Level Six Contributor

≥70 but <75 60%

Level Seven Contributor

≥55 but <70 50%

Level Eight Contributor

≥40 but <55 10%

Non-compliant Contributor

< 40 points 0%

Each of the five elements will now be dealt with.

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Ownership

The Ownership scorecard is as follows:

Major new rules:

A measured entity applying the Modified Flow-Through Principle cannot benefit from the

Exclusion Principle and, therefore, exclude up to 40% Mandated Investments and vice

versa.

The rules for Trusts, Broad Based Ownership Schemes and Employee Share Ownership

schemes are clearly stated and it is recommended that measured entities which have this

kind of ownership satisfy themselves that their Trust Deeds meet the stipulated

requirements. If the Trust Deed does not adhere to all the requirements, the black

ownership flowing through these legal entities will not be allowed for BEE points.

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The rules for family trust have been clarified. It is important to know that the Trust Deed

must define the beneficiaries and the proportion of their entitlement to receive

distributions.

Most family trusts do not meet this requirement and if the BEE points want to be

claimed for a family trust, the requirements in the new codes must be adhered to.

The ceiling for Black New Entrants has been raised to R50mil.

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Management Control

The Management Control Scorecard is as follows:

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Compliance targets for 2.3, 2.4 and 2.5 are based on the overall demographic

representation of black people as defined in the Regulations of Employment Equity Act

and Commission of Employment Equity Report as amended from time to time. Targets

will be broken down into specific criteria according to the different race sub-groups within

the definition of black.

Points are allocated for black employees and black females separately. The old recognition

for gender is replaced by this rule to measure black females separately.

Current payroll data must be used in calculating the score under the Management Control

scorecard.

Board participation and Top Management are incorporated in the new scorecard for

Management Control.

Executive Management includes only the following employees:

• Chief Executive Officer

• Chief Operating Officer

• Chief Financial Officer and

• Other Executive Managers that serve on the Board

Other Executive Management includes all executive management that does not serve on

the Board, e.g. HR executive and Transformation executive.

The 40% subminimum rule in the old codes does not apply anymore.

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Skills Development

The Skills Development Scorecard is as follows:

Measurement (as for EE) is based on the demographic representation of black people.

The target for Skills Development in point 2.1.1.1 has been increased to 6%.

Skills development for unemployed people is included in calculating Skills Development

points. Points are allocated for these unemployed people who are employed after

completing their skills development programmes.

A training tracking tool has to be implemented in order to score on point 2.1.3.

Cost for accommodation, catering and travelling is limited to 15% of total skills

expenditure.

Mandatory sector training such as induction and health and safety do not qualify for

skills development points.

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Enterprise and Supplier Development The Enterprise and Supplier Development scorecard is as follows:

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2.2 SUPPLIER DEVELOPMENT

2.2.1 Annual value of all

supplier development

contributions made by the

measured entity as a

percentage of the target

10

2% of NPAT

Procurement points can only be claimed from suppliers that are verified as Empowering

Suppliers. Generic enterprises must meet at least three of the criteria for an Empowering

Supplier and QSE’s entities must meet at least one of the criteria to be classified as an

Empowering Supplier.

The criteria for an Empowering Supplier are as follows:

• At least 25% of cost of sales, excluding labour cost and depreciation, must be

procured from local producers. Labour cost for service industries are included but

capped at 15% of cost of sales.

• At least 50% of new jobs are filled by black people

• Has at least 25% transformation of raw material/beneficiation, which includes local

manufacturing, production and/or assembly and/or packaging.

• Spend at least 12 days per annum of productivity deployed in assisting black EMEs

and QSEs to increase their operation or financial capacity.

This will require accurate data gathering by measured entities in order to prove the status

as an Empowering Supplier.

EMEs and Start-up enterprises are automatically classified as an Empowering Supplier.

Beneficiaries of Supplier Development and Enterprise Development must be QSE or EME

and should be at least 51% black owned.

2.3 ENTERPRISE DEVELOPMENT

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SOCIO ECONOMIC DEVELOPMENT

No changes except that only annual contributions are recognised and no cumulative

recognition is allowed.

Conclusion

It is our opinion that some rules are not clear and are open to different

interpretation. We will communicate with our clients again early in the new

year to provide a checklist specifying the exact evidence required for

verification in terms of the new codes.

Thank you

Dr Willem Mostert

Managing Member