BROAD BASED BLACK ECONOMIC EMPOWERMENT AND THE CODES OF GOOD PRACTICE PHASE 1 & 2 VENUE: CAPE TOWN -PARLIAMENT DATE: 07 March 2006.

BROAD BASED BLACK ECONOMIC EMPOWERMENT AND THE CODES OF GOOD PRACTICE PHASE 1 & 2

VENUE: CAPE TOWN -PARLIAMENT

DATE: 07 March 2006

Agenda

Background and Context

Codes of Good Practice on B-BBEE Phase 2

Dispensation for QSE’s and Micro’s(Code 1000 -1700 : Statement 1000 -1700)

Ownership Additional Clarification


The Transformation Imperative

• Colonisation & Apartheid systematically disempowered black people

• Result: significant imbalances in SA economy– 90% of population owns less than 5% of JSE– 40% of black South Africans unemployed vs. 10% of

white South Africans– Majority of SA population excluded from SA economy

Economic Prerogative of Broad-Based BEE

• Increase the level of participation by black people in mainstream economy

• Increase income through resultant economic growth

• Increase the real market in the SA economy

Second Economy

BE

EU

pliftm

ent

Second Economy

Mainstream EconomyMainstream Economy

More economic participants

Higher Economic Growth

A Bigger Market for All

The Poverty Barrier

The Skills Barrier

The Business Barrier

The Opportunity Barrier

EmploymentEquity/Job creation

CorporateSocial Investment

Skills Development

PreferentialProcurement

OwnershipAnd Management

Equitable Economic Opportunities

EnterpriseDevelopment

• Broad-based BEE must be inclusive

• Result in economic growth Accounted for with substance over form

Emerging black middle

class & investors

Black entrepreneurs

Black workers, professionals,

graduates, school-leavers

Black unemployed &

rural poor

Broad-Based Beneficiary Base

BEE Legislative Framework

2004 - Broad-BasedBEE Act

• Enabling framework for the promotion of BEE• Empowers minister to issue codes of good practice on BEE• Establishes the BEE Advisory Council

2003 - Broad-BasedBEE Strategy and

Scorecard

• Defines Government’s Broad-Based Strategy• Provide the generic balanced scorecard

2005 – 2006 The Codes of Good

Practice(partially complete)

• Provide certainty on B-BBEE implementation in the economy •Further interpretation of the BEE Act• Determine qualification criteria for licensing• Criteria for entering into PPP’s with private sector

Industry Transformation

Charters(To be negotiated)

• Outline industry-specific BEE weightings and targets• Establish the residual elements of the scorecard• Standardise industry BEE initiatives and reporting

Broad-Based Black Economic Empowerment Strategy

Implementation Levers to promote B-BBEE

2005-2006 Codes of Good Practice on B-BBEE

Sector Transformation Charter

Use of Balanced Scorecard in: Granting of Licences, Concessions to Private Enterprises, Sale of State Assets,

Public Private Partnerships (PPP) and Procurement.

Funding to promote B-BBEE

Agenda






3

• Lack of full understanding and appreciation of the principles of broad-based BEE

• Inconsistent application of BEE

• Extensive debates could result in delays – biggest 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

Codes of Good Practice aims to address these Concerns and Risks around the B-BBEE

Process

Codes of Good Practice (1) In order to promote the purposes of the Act, the Minister by notice in the

Gazette has issued the codes of good practice on black economic empowerment that include—

(a) the further interpretation and definition of broad-based BEE and the interpretation and definition of different categories of black empowerment entities;

(b) qualification criteria for preferential purposes for procurement and other economic activities;

(c) indicators to measure broad-based BEE ; (d) the weighting to be attached to broad-based BEE indicators referred to in

paragraph (c); (e) guidelines for stakeholders in the relevant sectors of the economy to draw

up transformation charters for their sector; and (f) any other matter necessary to achieve the objectives of this Act.

Codes of Good Practice

10. Every organ of state and public entity must take into account and, as far as reasonably possible, apply any relevant code of good practice issued in terms of this Act in:

(a) determining qualification criteria for the issuing of licences, concessions or other authorizations in terms of any law;

(b) developing and implementing a preferential procurement policy; (c) determining qualification criteria for the sale of state-owned

enterprises; and (d) developing criteria for entering into partnerships with the private

sector.

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

Broad-based BEE Scorecard

BEE is measured based on seven core elements:

ownership, management, employment equity, skills development, affirmative procurement, enterprise

development and residual

• Facilitate changes in business behaviour (in all key elements)

• Extend BEE benefits to as many beneficiaries as possible

• Systematic and quantifiable approach

BEE Recognition

Tiers and Multiplier

Effect

All companies measure BEE based on a score system, and receive higher recognition for

higher BEE compliance

• Foster competition among companies and industries

• Encourage all companies to implement and monitor BEE

compliance in all its economic interactions

Framework for Broad-Based BEE KEY PRINCIPLES

BEE RECOGNITION LEVEL

Level Contribution

BEE Score BEE Recognition Level (Code of Good Practice)

Level 1 > 100 135%Level 2 85~100% 125%Level 3 75~85% 110%Level 4 65~75% 100%Level 5 55~65% 80%Level 6 45~55% 60%Level 7 40~45% 50%Level 8 30~40% 10%

Non Compliant 0~30% 0%

Ownership(Code 100 : Statement 100)

Entrench a key objective of the Act, i.e. 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 financial sustainability through the use of the model of net economic interest

Provide for the empowerment of black women, black designated groups, new entrants and broad based ownership schemes

Key Principles Description Implication

Women Empowerment

Specific targets for black women to ensure participation of black women on ownership

• Encourage companies to actively involve women in organisation.

Broad-based BEE Schemes

Specific qualification criteria for broad-based schemes to ensure participation by beneficiaries. Extensive recognition for companies involving qualified broad-based schemes

• Encourage companies to involve broad-based and employee share schemes in organization• Allows for the inclusion of Trade Union or other special interest investments for black people

Ownership recognition through the disposal of asset

Provides a mechanism for enterprises to score ownership points by disposing of assets rather than shares

• Provide further ownership opportunities to black people• Allow companies to sell assets instead of shares which both achieve the same objective

OwnershipOTHER PRINCIPLES

Indicators Indicator Weighting Compliance Target (Years 0~5)

Compliance Target (Years 6~10)

Exercisable Voting Rights by Black people 3%Exercisable Voting Rights by Black Women 2%

Economic Interest in the Enterprise to which Black people are entitled

4%

Economic Interest in the Enterprise to which Black women are entitled

2%

Economic Interest in the Enterprise to which Black designated groups and Broad-based schemes are entitles to

1%

Ownership Fulfillment 1%

Ownership by Broad-based BEE Schemes or New Entrants (Bonus)

3%

25%10%

25%

10%

2.5%

No RestrictionsNet Economic Interest 10% of Target in Year 1 (2.5% of Enterprise Value)

20% of Target in Year 2 (5.0% of Enterprise Value)40% of Target in Year 3,4 (10% of Enterprise Value)60% of Target in Year 5,6 (15% of Enterprise Value)80% of Target in Year 7,8 (20% of Enterprise Value)100% of Target in Year 9,10 (25% of Enterprise Value)

7%

One bonus point for each level of Five Percent owned by New Entrants or Broad-based Schemes

Ownership Scorecard

Maximum Achievable Points under based on Gender and Broad-based Profile

0

5

10

15

20

25

Consortium with noblack Women (not

Broad-based)

Consortium ofBlack Women (not

Broad-based)

Total OwnershipPoints with no

Bonus

Inclusion of Broad-based Schemes

and New Entrants

Maximum Points Point Sacrifice Bonus Points

Scorecard encourage participation by women and broad-based schemes and new entrants

Companies entering into transaction with broad-based schemes and new entrants rewarded with bonus points

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

Participation by Top 6BEE Consortiums

Participation by BlackWomen Groupings

Participation byBroad-based BEE

Schemes

Participation by BlackEmployees

Percentage of Transaction involving different classes of beneficiaries

Prior to Draft Codes (2004) After Draft Codes (2005)

The Code: The Code:

Significantly increases the participation by black women, broad-based schemes and black employees

spreads the BEE ownership base, reduces the number of deals involving the top six (6) BEE consortiums

results in more than half of the companies providing forms of vendor financing to facilitate entry by broad-based BEE shareholders

Behavioral Impact of the Codes

Key Principles

Description Implication

Setting Targets for Board Representation and Executive Involvement

Setting specific targets for Board representation and executive involvement

• Prescribe the ideal representation level for participation by black people on the board of directors and by black women

Specific Target for Black Women Management

Specific target set for black women management participation

• Companies will not be able to achieve the full score for management without the participation by black women in top management

Specific Measurement of Executive Representation

Specific allocation for black representation in executive committees and top executive management

• Prevent enterprise from achieving quota by only appointing black non-executives• Counters market trend in appointing black non-executives rather than executives

Management Control(Code 200 : Statement 200)

KEY PRINCIPLES

Management Control Scorecard(continues)

Agenda






Employment EquityKEY PRINCIPLES


Alignment with the Employment Equity Act

Measurement of occupational levels based on schedule EEA9 of the EE Act

•Prevents contradiction in terminology and efforts in the implementation of EE initiatives in both the EE Act and the B-BBEE Act

No score allocation for Black Representation at Semi-skilled & Unskilled Levels

Measurement based occupational levels on schedule EEA9 ito EE Act, measures senior, middle and junior management (including professionals and skilled) but excludes semi-skilled and unskilled

• Prevents companies achieving high scores for EE when there is little or no black representation at skilled supervisory, management and senior levels

Specific Targets for Black people with Disabilities

Specific target dedicated to overall representation of Black People with Disabilities

• Meaningful incentive (20% of weighting) for the employment of black people with disabilities

Specific Targets for Black Women across the top two Measured Occupation Levels

Specific targets for women set for two of the more senior occupational which are measured for employment equity

• Specific incentive to employ black women at senior levels (30% of the weighting)

Employment Equity Scorecard

Criteria Weighting points

Compliance targets

Black people with disabilities employed by the Measured Entity as a percentage of all full-time employees

2 4%

Black people employed by the Measured Entity at Senior Management level as a percentage of employees at Senior Management level

2 60%

Black women employed by the Measured Entity at Senior Management level as a percentage of employees at Senior Management level

2 30%

Black people employed by the Measured Entity at Professionally Qualified, Experienced Specialists and Mid-management level as a percentage of employees at Professionally Qualified, Experienced Specialists and Mid-management level

2 75%

Black women employed by the Measured Entity at Professionally Qualified, Experienced Specialists and Mid-management level as a percentage of employees at Professionally Qualified, Experienced Specialists and Mid-management level

1 40%

Black people employed by the Measured Entity at Skilled Technical and Academically Qualified Workers, Junior Management, Supervisors, Foremen, and Superintendents as a percentage of employees at Skilled Technical and Academically Qualified Workers, Junior Management, Supervisors, Foremen, and Superintendents level

1 80%

Skills Development KEY PRINCIPLES

Key Principles Description ImplicationAlignment with Skills Development Act

Encourage Skills development initiatives to be in line with the skills development strategy

• Alignment of skills development initiatives for both the SD Act and the B-BBEE Act.

Additional Recognition for contribution to Core and Critical Skills

These include skills that are related to value adding activities in line with the core business and in areas that the Measured Entity cannot outsource.

• Focus skills development spend on skills which are core or critical to the business

Specific Skills Spend for Black Women and people with disabilities

Additional 3 points allocated to skills spend towards black women employees and to black employee with disabilities

• Specific allocation of skills development spend to those employees who were most disadvantaged in the past

Learnerships Skills development programs approved by the relevant SETA which are fully certified in terms of South African Qualifications Authority Act

• The allocation encourage registration and participation in learnerships programs

Organisational Transformation Index

Organisational Transformation index measures the extent of enterprise commitment transformation

•This allocation encourages the adoption of plans, policies and strategies to promote transformation • Qualitative Measure of transformation

Skills Development Scorecard

Category Skills Development Element Weighting points

Compliance Target

Skills Development

Skills Development Spend on black employees 4 3%

Skills Development Spend on Critical Skills and/or Core Skills for black employees

2 2.6%

Skills Development Spend on Critical Skills and/or Core Skills for black women employees

2 1.4%

Skills Development Spend on black employees with disabilities

1 0.3%

Learnerships

Number of black employees on SETA-accredited Learnerships

2 5%

Number of black women employees on Learnerships 2 2.5%

Number of formerly black unemployed people and/or black people formerly residing in rural areas on Learnerships

1 1%

Skills Development Scorecard(continues)

Category Skills Development Element Weighting points

Compliance Target

Organisational Transformational Index

Existence of a comprehensive Black Economic Empowerment strategy and which is being implemented

Yes 1

Employment of a Skills Development Facilitator Yes 1

Existence of a policy on non-discrimination widely published within the Enterprise

Yes 1

Compliance with all relevant employment related legislation

Yes 1

Implementation of an effective human resource management plan

Yes 1

Existence of a program designed to give practical effect to the stated policies and programs

Yes 1

•TOTAL 6

Criteria Weighting points

Compliance target

BEE Procurement Spend from all suppliers based on the BEE Procurement Recognition Levels, QSE Recognition Levels or the Deemed Micro Enterprise Recognition Levels (as the case may be) as a percentage of Total Measured Procurement Spend

15 70%

BEE Procurement Spend from Qualifying Small Enterprises based on the QSE Recognition Levels as a percentage of Total Measured Procurement Spend

4 15%

BEE Procurement Spend from Exempted Micro Enterprises based on the Deemed Micro Enterprise Recognition Level as a percentage of Total Measured Procurement Spend

1 5%

Preferential Procurement Scorecard

Cost of Sales

Operational Expenditure

Capital Expenditure

TotalSpend

TOTAL MEASURED PROCUREMENT SPEND

Allowable Exclusions:-Salaries-Third party costs-Loans and Donations-Certain imports-Rates & Taxes, levy and- post retirement funding and -Medical aid contributions,etc.-Imports accepted to a maximum of 25% of the total procurement

BEE Spend Non-BEE spend

Statement 500 – Preferential Procurement

Enterprise DevelopmentKEY PRINCIPLES


Recognition of Monetary &

Non-Monetary Contributions

Proviso: non-monetary contributions must be quantifiable

• Insistence on quantifying contributions allows for fair

measurement of non-monetary contributions in relation to monetary

contributions

Recoverable vs. Non-

Recoverable Spend

6 weighting points given to non-recoverable contributions, whilst 4

points allocated to recoverable contributions such as loans. Indicator contributions are

summed but no more than 4% allocated to recoverable even if no

other contributions made

• Heavy emphasis place on non-recoverable contributions

•Adjustment of 6 weighting points for non-recoverable to 10% if only non-

recoverable contributions made•No adjustment of 4% weighting for

recoverable to disincentives recoverable loans as only means of

ED contribution


Contributions Measured

Cumulatively Choice of

Initiation Date

ED contributions measured cumulatively as a percentage of cumulative EBITDA. Choose of

starting point for cumulative measurement to begin from:

commencement of Codes OR any chosen date which may not be

earlier than 5 years prior to commencement of Codes

• Large corporations which contributed prior to Codes can enjoy ongoing recognition for these contributions•Entities which did not previously

contribute will not be penalized and will start on a “clean slate”

Enhanced Recognition

Enhanced recognition for:•Initiatives which ensure job

creation (150%)•Initiatives which develop micro’s

(125%)•Initiatives which develop

enterprises which produce goods not previously available in SA

(150%)

•Incentives focus on initiatives which directly lead to job creation

•Incentivises development of micro’s which would otherwise be largely

overlooked•Incentivises investment in/ creation on

companies which focus on local production

Enterprise DevelopmentKEY PRINCIPLES (continues)

Enterprise Development Scorecard

Criteria Weighting Points

Compliance Target

Cumulative Non-Recoverable Contributions made by the Measured Entity as a percentage of cumulative EBITDA measured from the commencement/Inception Date to the date of measurement.

6 2%

Cumulative Recoverable Contributions made by the Measured Entity as a percentage of cumulative EBITDA measured from the commencement/Inception Date to the date of measurement.

4 3%

Residual ElementKEY PRINCIPLES


Recognition of Monetary &

Non-Monetary Contributions

Proviso: non-monetary contributions must be quantifiable

• Facilitates access to the economy for the beneficiaries

• Insistence on quantifying contributions allows for fair

measurement of non-monetary contributions in relation to monetary

contributions

Contribution Beneficiaries

Communities, Natural Persons and / or groups of natural persons

where at least 75% are black people

• Provides socio-economic improvements• Job creation

Contributions Measured

Cumulatively Choice of

Initiation Date

RD contributions measured cumulatively as a percentage of cumulative net profit after tax.

Choose of starting point for cumulative measurement to begin

from: commencement of Codes OR any chosen date which may

not be earlier than 5 years prior to commencement of Codes

• Large corporations which contributed prior to Codes can enjoy

ongoing recognition for these contributions

•Entities which did not previously contribute will not be penalized and

will start on a “clean slate”

Residual Element Scorecard

Criteria Weighting Points

Compliance Target

Cumulative Rand value of Non-recoverable Qualifying Corporate Social Investment Contributions made by a Measured Entity to Contribution Beneficiaries measured as a percentage of cumulative net profit after tax measured from the commencement date of this statement or the Inception Date until the date of measurement.

5 1.5%

Cumulative Rand value of Qualifying Industry Specific Contributions made by a Measured Entity to Contribution Beneficiaries measured as a percentage of cumulative net profit after tax measured from the commencement date of this statement or the Inception Date until the date of measurement.

5 1.5%

BONUS POINT:Qualifying Residual Contributions which benefit natural persons living in rural communities

1

Agenda






Micro Enterprises

Qualifying SmallEnterprises

(As per Statement 1000)

OtherCompanies(Exceed

Revenue orEmployee limits)

Generic Scorecard,with all seven elements(Statement 000~900)

QSEs can elect to implement the entire QSE scorecard (with enhanced recognition)

QSE Scorecard,Select five of the seven elements

(Statement 1000~1700)

All elements weigh 20%

Indicators adapted to QSEs

Micro Exemption,Automatic Level 4

Recognition

Framework for Measuring BEE in QSEs

QSE Identification and Classification Table

0

5,000

10,000

15,000

20,000

25,000

30,000

An

nu

al

Rev

en

ue

Micro QSE Lower Limit QSE Upper Limit

Qualifying Small Enterprises

Exempted Micro Enterprises

BEE Elements Code Ref.

Weighting Indicators Indicator Weighting

Compliance target

Ownership BEE 1100

20% Exercisable Voting Rights by black people

5% 25.% + 1 vote

Economic Interest in the Enterprise to which Black people are entitled

7% 25%

Ownership Fulfillment 1% No restrictions

Net Equity Value 7% 10% - 100% staggered over a 10 year period

Bonus Points:Involvement in the ownership of the Enterprise of:

-Black Women and/or-Broad-based Ownership Schemes

3% 15%

Management Control

BEE 1200

20% Black representation at Owner-Manager level;

20% 25,1% Owner-Manager Representation,

Bonus Points: Black Women representation at Owner-Manager

2% 10%

QSE Scorecard – Ownership & Management Control



Compliance target

Employment Equity BEE 1300

20% Black representation at Manager-Controller level

6% 40%

Black women representation at Manager-Controller level

6% 20%

Black employees as a percentage of total employees

4% 70%

Black women as a percentage of total employees

4% 35%

Skills Development BEE 1400

20% Application submitted to the National Skills Fund

5% Yes

Quantifiable skills development spend on black employees in addition to Skills Development Levy as a percentage of the Leviable Amount (including amount spent on learnerships)

15% 2%

QSE Scorecard – Employment Equity & Skills Dev.



Compliance target

Preferential Procurement

BEE 1500

20% BEE Procurement Spend from Suppliers based on the BEE Procurement Recognition Levels or Deemed Micro Enterprise Recognition Levels as a percentage of Total Measured Procurement Spend

20% 50%

Enterprise Development

BEE 1600

20% Enterprise development contributions made by the Qualifying Small Enterprise as a percentage of EBITDA

20% 2%

Residual Element BEE 1700

20% Qualifying Residual Contributions made by the Enterprise measured as a percentage of net profit after tax

20% 2%

QSE Scorecard – Preferential Procurement , Enterprise Development and Residual

Agenda






Ownership – Additional Clarification

Four (4) additional Codes statement have been released during Phase 2 to provide further guidance on the measurement of ownership, these statements include:

Statement 102Statement 102: Warehousing Funds

Statement 103Statement 103: Multinational Companies

Statement 104Statement 104: Public Entities and other Organs of State

Statement 105Statement 105: s21 Companies

Statement 102 – Warehousing Fund

Warehousing Funds

• Minister approved fund • Established to hold an Equity Interest in an Enterprise purchased from exiting black Participants • Fixed duration • Obligation ultimately transferring ownership to Intended Black Participants

• Create exit mechanism for black investors • Ensure companies do not lose BEE status when negotiating a BEE transaction with new black participants

Identification of Intended

Black Participants

• Tri-partite agreement • Between vendor, warehousing fund and intended black participants

• Ultimate black participants need to be identified • Final purchase price agreed before warehousing arrangement recognised as black ownership• Black ownership only recognised based on specified principles of ownership in Statement 100

PRINCIPLE:

An Enterprise may be awarded ownership points for notional black participation arising from the ownership by a Warehousing Fund. Providing liquidity and exit mechanism for black investors

Exiting Black Investors New Black Investors

Measured Entity

Warehousing Fund

Ownership – Warehousing Fund - (Code 100 : Statement 102)the recognition of ownership Contributions Arising from Investments by BEE

Targeted Warehousing Funds

Multinationals

SA Multinationals

Equity Equivalent= 25%

Sale of international interest

Sale of assets andoperations

Ownership – Option for Multinational Companies(Code 100 : Statement 103)

Sale of Shares

Companies have an option of either doing one of the followingOptions or they can apportion it using a combination of the options provided

Statement 104 / 105 – Public Entities, Organs of State and Section 21 Co.

Broad-Based

Scorecard

• All Public Entities • Organs of State• s21• Measured in terms of B-BBEE scorecard

• No business entity excluded from B-BBEE • Except exempted micro-enterprise

Notional Ownership

Points

• B-BBEE score of Public Entities, State Organs and s21 allocated notional ownership points• Based on contributions to other 6 scorecard elements

• Public entities and s21 allocated notional ownership points based on converted score from remaining 6 BEE elements• Formula: A = B / 80 * 20


Broad-based Scorecard

All Public Entities, Organs of State and s21 can and will be measured in terms of the Broad-based scorecard

• No business entity will be excluded from Broad-based BEE (unless it is an exempted micro-enterprise)

Notional Ownership Points

The Broad-based BEE score of Public Entities, State Organs and s21 will be allocated a notional ownership points based on its contribution to the other 6 elements of the scorecard

• Public entities and s21 will be allocated with notional ownership points based on the converted score from the remaining 6 BEE Elements, the formula is as follows:

•A = B/80 * 20

Ownership – Public Entities, Organs of State and Section 21 Co’s

(Code 100 : Statement 104 / 105)

THANK YOU

Contact Details

BEE Unit: The Director

Attention : Mr. Jeffrey Ndumo

The Department of Trade and Industry

Private Bag X84,

Pretoria

0001

Tel No. : (012) 394 – 1631/4

Fax No. : (012) 394 – 2631/4

e-mail address : [email protected]

[email protected]

mailto:[email protected]

mailto:[email protected]

BROAD BASED BLACK ECONOMIC EMPOWERMENT AND THE CODES OF GOOD PRACTICE PHASE 1 & 2 VENUE: CAPE TOWN -PARLIAMENT DATE: 07 March 2006.

Documents