PRESENTATION ON THE AMENDMENTS TO THE BBBEE ACT

53 OF 2003 AND THE CODES OF GOOD

PRACTICE ISSUED IN TERMS OF THE

BBBEE ACT

DATE: 29 JANUARY 2014

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INTRODUCTION

The Broad-Based Black Economic Empowerment Act 53 of 2003 (“BBBEE Act”) provides the legislative framework for broad-based black economic empowerment (“BBBEE”) in South Africa. The Codes of Good Practice (“Codes”) are issued under the BBBEE Act.

Significant amendments to the BBBEE Act have been proposed and were passed into law on 27 January 2014, however the effective date of the BBBEE Amendment Act, 2013 has not been fixed.

Amendments to the Codes were published in the Government Gazette on 11 October 2013 and will take effect from 11 October 2014. After 11 October 2014, BBBEE compliance measurement will be in accordance with the Amended Codes.

Firms have a transitional period of one year within which to implement the Amendments to the Codes.

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INTRODUCTION (cont’d)

The Codes do not impose legal obligations on firms to comply with the BBBEE targets.

They merely set out the methodology to be used when measuring a firm’s BBBEE status.

Fundamental principle for measuring BBBEE – substance takes precedence over legal form.

However a firm’s BBBEE rating is an important consideration to successfully tender for Government or public entity contracts and sometimes obtain licences.

BBBEE is accordingly an important factor to be taken into account by any firm conducting business in South Africa.

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KEY AMENDMENTS TO THE BBBEE ACT

Establishes a BBBEE Commission

Functions of the BBBEE Commission include, inter alia, to:

oversee and supervise compliance with BBBEE;

receive and investigate complaints relating to BBBEE, BBBEE transactions and “fronting practices”;

apply to court to restrain a breach of the BBBEE Act and/or a “fronting practice”;

maintain a register of BBBEE transactions above a certain threshold.

If the Commission believes that any matter it has investigated involves the commission of a criminal offence, it is obliged to refer the matter to the NPA or an appropriate division of SAPS.

Defines terms: “Knowingly”, “knowing” or “knows”

When used in the BBBEE Act, such terms mean that the person (a) had actual knowledge; (b) was in a position in which the person reasonably ought to have (i) had actual knowledge; or (ii) investigated the matter or taken other measures that would have provided the person with actual knowledge.

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KEY AMENDMENTS TO THE BBBEE ACT (cont’d)

Defines term “Fronting Practice”

"Fronting Practice" is very widely defined – a transaction, arrangement or other act or conduct that directly or indirectly undermines or frustrates the achievement of the objectives of the BBBEE Act or the implementation of any provision of the BBBEE Act including but not limited to practices in connection with a B-BBEE initiative –

in terms of which black persons who are appointed to an enterprise are discouraged or inhibited from substantially participating in the core activities of that enterprise;

in terms of which the economic benefits received as a result of the broad-based black economic empowerment status of an enterprise do not flow to black people in the ratio specified in the relevant legal documentation;

involving the conclusion of a legal relationship with a black person for the purpose of that enterprise achieving a certain level of broad-based black economic empowerment compliance without granting that black person the economic benefits that would reasonably be expected to be associated with the status or position held by that black person; or

involving the conclusion of an agreement with another enterprise in order to achieve or enhance broad-based black economic empowerment status in circumstances in which –

there are significant limitations, whether implicit or explicit, on the identity of suppliers, service providers, clients or customers;

the maintenance of business operations is reasonably considered to be improbable, having regard to the resources available;

the terms and conditions were not negotiated at arm’s length and on a fair and reasonable basis.

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KEY AMENDMENTS TO THE BBBEE ACT (cont’d)

Introduces various criminal offences and penalties

Introduce criminal offences for knowingly misrepresenting or providing false information regarding a firm’s BBBEE status or engaging in a “fronting practice”.

A contravention may result in:

a fine and/or up to 10 years’ imprisonment for individuals or both; and

a firm may be fined up to 10% of its annual turnover;

any person convicted of an offence is banned from contracting with any organ of state and/or public entity for 10 years.

Introduces a right to cancel any contract/authorisation

Introduce a statutory right for government and public entities to cancel any contract or “authorisation” awarded due to false information on BBBEE status.

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KEY AMENDMENTS TO THE BBBEE ACT (cont’d)

Imposes reporting obligations

Imposes an absolute obligation on government, organs of state and public entities to:

take the Codes into account in developing their procurement policies and criteria for issuing licences and authorisations (previously they were only obliged to do so “as far as reasonably possible”);

develop criteria for entering into partnership with the private sector;

report on BBBEE in their audited financial statements and annual reports required under the PFMA.

Imposes an obligation on South African listed entities to provide a report to the BBBEE Commission on their compliance with BBBEE.

Only the Minister may exempt an organ of state or public entity from complying with the above requirements or deviating therefrom.

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SIGNIFICANT AMENDMENTS TO

THE CODES

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KEY AMENDMENTS TO THE BBBEE CODES

For entities that are not exempt from the scorecard, BEE compliance gets tougher:

Generic scorecard has been consolidated into five elements.

Qualifying Small Enterprises (QSE) and Large Enterprises are measured with regards to all five BBBEE elements.

Thresholds for Exempted Micro Enterprises (EME) and QSEs have been adjusted.

Introduction of “priority elements” – ownership, skills development and enterprise/ supplier development.

EMEs and QSEs that are at least 100% black owned will qualify as Level 1 and 51% black owned will qualify as Level 2.

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CHANGES TO NUMBER OF BBBEE POINTS REQUIRED TO ACHIEVE BBBEE LEVELS

Number of BBBEE points required to achieve a particular BBBEE level have been increased.

This change materially affects a firm’s existing BBBEE rating and potentially results in an automatic downgrade of its BBBEE status from 11 October 2014 eg. Current BBBEE level 4 (65 points) may become a new BBBEEE level 7.

This has major implications for business particularly those who require a minimum BBBEE level for licences etc or from suppliers or firms with contractual obligations to maintain a minimum BBBEE status.

Firms need to review their current BBBEE status to assess impact of the changes and take steps to maintain their BBBEE ratings.

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CHANGES TO NUMBER OF BBBEE POINTS REQUIRED TO ACHIEVE BBBEE LEVELS (cont’d)

BBBEE Level Amended Codes Current Codes

1 > 100 points > 100

2 > 95 but < 100 points

> 85 but < 100

3 > 90 but < 95 points > 75 but < 85

4 > 80 but < 90 points > 65 but < 75

5 > 75 but < 80 points > 55 but < 65

6 > 70 but < 75 points > 45 but < 55

7 > 55 but < 70 points > 40 but < 45

8 > 40 but < 55 points > 30 but < 40

Non-compliance < 40 points < 30

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CHANGES TO NUMBER OF BBBEE ELEMENTS

Current Codes have 7 elements that are taken into account when calculating a firm’s BBBEE rating.

Amendments reduce the number of elements to five by fusing enterprise development/preferential procurement and management control/employment equity elements. The new elements are:

Ownership

Management Control

Skills Development

Enterprise and Supplier Development

Socio Economic Development.

Changes are set out in the following table.

CHANGES TO NUMBER OF BBBEE ELEMENTS (cont’d)

Element Weighting Points (Amended Codes)

Weighting Points (Current Codes)

Ownership 25 20 plus 3 bonus points

Management control

15 plus 4 bonus points

Management control - 10 plus one bonus point

Employment equity – 15 plus three bonus points

Skills development

20 plus five bonus points

Skills development – 15

Enterprise and supplier development

40 plus four bonus points

Preferential procurement – 20

Enterprise development – 15

Socio-economic development

5 5

Total 118 107

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PRIORITY ELEMENTS AND MINIMUM REQUIREMENTS OF PRIORITY ELEMENTS

Changes indicate greater emphasis on three “priority elements” namely: ownership, skills development and enterprise or supplier development.

Amendments impose minimum requirements on priority elements:

40% of the “net value” targets for the ownership element. “Net value” measures the “debt free” portion of the BBBEE ownership of a firm;

40% of the total weighting points for the skills development element;

40% of the targets for the three subcategories of the enterprise and supplier development element.

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EFFECT OF FAILURE TO MEET MINIMUM REQUIREMENTS OF PRIORITY ELEMENTS

A Large Enterprise is required to be measured with regards with all three priority elements.

Large Enterprises presumably firms with total income greater than R50m.

A QSE is required to be measured with regards to ownership as a compulsory element and either one of skills development or enterprise and supplier development.

QSEs are firms with total annual income between R10m and R50m (previously it was between R5m and 10m).

If a QSE or a Large Enterprise fails to comply with the 40% minimum targets of any of the priority elements, their BBBEE status will automatically be downgraded by 1 level eg. if its score would have otherwise been a level 4 it will be downgraded to a level 5.

Existing BBBEE transactions will have to be reviewed to assess the likelihood and effect of the downgrade.

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MEASUREMENT OF QSEs and EMEs

Exempted Micro-Enterprises are deemed to have a level 4 rating and start up enterprises are measured as EMEs. All shelf companies are start ups and have a level 4 rating in the first year of incorporation.

Ownership changes in relation to EMEs and QSEs:

Threshold for qualifying as an EME has been increased from R5m (or less) to R10m or less total annual income;

Threshold for being a Qualifying Small Enterprise has been increased to between R10m and R50m total annual income (from between R5m to R35m under the current Codes);

EME and QSEs that are 100% black owned will be deemed to have a level 1 BBBEE status;

EMEs and QSEs that are 51% black owned will be deemed to have a level 2 BBBEE status.

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CHANGES TO THE CURRENT METHODOLOGY OF CALCULATING OWNERSHIP

Current Codes provide for one BBBEE ownership point (and a 2.5% compliance target to earn that point) for an economic interest in a frim held by “black-designated groups”.

The revised Codes scrap the bonus points but increase the number of BBBEE economic interest points to 3 with a 3% target. This provides an incentive for firms to consider these “broad-based” options.

Under the revised Codes:

two BBBEE ownership points (with a 2% compliance target) have been allocated to the economic interest of “black new entrants” in the firm;

the definition of “Black New Entrant” has also been widened to cover BBBEE owners who have not held equity in another firm with a total value of R50m (R20m under the current Codes);

these changes widen the pool of new entrants and incentivise firms to use new entrants in their BBBEE ownership transactions.

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CHANGES TO THE CURRENT METHODOLOGY OF CALCULATING OWNERSHIP (cont’d)

For many firms it may be difficult to maintain their current rating as ownership will be measured more strictly.

The ownership element has been increased in weighting from 20 to 25 points out of a new total of 118.

Black ownership comply with the 40% “net value” targets by black shareholders if a transaction is to qualify for maximum available ownership points.

BBBEE shareholders may be prejudiced by being required to fund transactions using their own resources. This may have an unintended “chilling effect” on the funding for BBBEE transactions.

This may have serious implications for BBBEE ownership transactions which often involve financing to the BBBEE shareholder repayable out of dividend flows.

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CHANGES TO THE CURRENT METHODOLOGY OF CALCULATING SKILLS DEVELOPMENT

The Amendments increase the number of factors to be considered under the Skills Development element from three to five. New factors:

points may be earned for training unemployed black persons and the number of black people “absorbed” at the end of learnership programmes;

the number of points and the compliance target for skills development expenditure have increased from 6 to 8 and from 3% to 6% respectively.

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CHANGES TO THE CURRENT METHODOLOGY OF CALCULATING ENTERPRISE/SUPPLIER DEVELOPMENT The revised Codes introduce the concept of an “Empowering

Supplier” under the preferential procurement subcategory of the enterprise and supplier development element.

The requirements for an “Empowering Supplier” are unduly complicated and include:

being a “BBBEE compliant entity” and a “good citizen”,

complying with “all regulatory requirements” and meeting at least three (or for QSEs, one) of certain local procurement, job creation, raw material transformation/beneficiation and skills transfer requirements.

No preferential procurement points will be obtained if a supplier does not comply with the above requirements.

Ironically these changes will prejudice black-owned and controlled firms that do not comply with the requirements for “Empowering Suppliers”

A firm’s BBBEE status will be automatically downgraded by one level if it fails to meet the minimum 40% target for supplier and enterprise development (even if the firm has made genuine efforts to comply).

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THE IMPORTANCE OF SECTOR CODES

The BBBEE Act allows a sector of the economy to have its own BBBEE code.

The current Codes provide that a sector code has equal status with any other code. This has led to confusion as to whether a firm’s BBBEE status should be measured under the sector code or the “generic” Codes.

The Amendments (as well as the pending amendments to the BBBEE Act) resolve this by providing that the BBBEE status of a firm in a sector may only be measured in accordance with the sector code for that sector (if any).

It remains to be seen whether the existing (and future) sector codes may be less onerous than the amended Codes and whether Government will take steps to align the sector codes with the revised generic Codes.

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THE IMPORTANCE OF SECTOR CODES (cont’d)

Reliance on sector codes may (to the extent that they are less onerous) mitigate the effects of the Amendments.

However firms operating in sectors whether there is no sector code will be measured according to the Amendments (and may be incentivised to develop a sector code).

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CONCLUSION

The amendments to the Codes and the BBBEE Act fundamentally change the current BBBEE framework and are a powerful expression of the Government’s intention to promote and implement BBBEE.

The new Codes are due to take effect from October 2014.

It is important that firms use the interim period to review and reassess their BBBEEE strategies to mitigate (and preferably avoid) any adverse effects resulting from the changes.

If an entity has obtained a BBBEE certificate under the current Codes by 10 October 2014, it will not be necessary for it to obtain a new BBBEE certificate under the revised Codes until the date of expiry of such certificate.

QUESTIONS AND DISCUSSION

ANY QUESTIONS?

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THANK YOU

Pieter Steyn and

Nozipho Bhengu

Legal notice: Nothing in this presentation should be construed as formal legal advice from any lawyer or this firm. Readers are advised to consult professional legal advisors

for guidance on legislation which may affect their businesses.

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