Draft amendments to the Amended B-BBEE (BEE) Codes of Good Practice

Draft amendments to the Amended B-BBEE (BEE) Codes of Good Practice

A few weeks ago, the DTi released a number of proposed amendments to the Amended Codes of Good practice for public commentary.

Many of these amendments are there to simply provide clarity on the way that certain parts of the existing Codes should be interpreted, but there are other proposed amendments, which are potentially far reaching in impact. The two draft amendments have been gazetted through Government Gazette 41546, in the following forms:

  • Draft Statement 000, Code Series 000 of 2018 (Draft General Principles Statement)
  • Draft Statement 300, Code Series 300 of 2018 (Draft Skills Development Statement)

There are many smaller amendments proposed, which are of importance to all companies operating in the South African business environment. However, some of the most important principled amendments are as follows.

The YES initiative

This is definitely one of the most exciting concepts proposed by government in the past few years. As citizens of South Africa, Inc., one of the things that we all agree on is that we have to find a way to increase job creation, particularly amongst our youth. With youth unemployment officially at 54% (more than double the rate of unemployment in older sectors of the population), this translates into 3,3 million youth between the ages of 15 and 24 who lack employment prospects – and in a world where entry level jobs are increasingly at a semi-skilled or skilled level, up from the unskilled levels of the past. We lack opportunities for workers to build skills which will place them in optimum positions for future longer term employment.

YES is poised to be strategically included in the Amended Codes to potentially increase the BEE recognition of a measured entity effectively by a level or more. This is particularly important for entities who fail in complying with one or more of the priority pillars, such as ownership, skills development or any of the others. It is proposed that if an entity either complies with all of the priority elements, or if they exceed an average of 50% of the collective priority points, (namely if ownership is counted as 8 points to represent the relevant indicator as specified in the draft: 34 points of a possible 68 points on the generic scorecard), then that entity will be able to fully comply with the YES pillar and be restored to their actual level.

At Advance, we see this of great importance to those entities who lack sufficient ownership to meet the minimum 3.2 net value points (but who are able to achieve transformation compliance in other priority pillars). Those companies who don’t have sufficient ownership will be able to ameliorate the impact of the priority pillar reduction by introducing a fully compliant YES programme into their company. The design of the Amended Codes does mean that entities are unable to achieve a respectable score without achieving any points for ownership, and as a firm we do urge our clients to embrace all elements of transformation including ownership.

Alternatively, companies that do achieve the priority pillar requirements but struggle through organisational limitations to achieve a higher level will now be able to do so through implementation of the YES pillar.

Increase and clarification in deeming provisions for Black-owned entities

Small majority black-owned entities have been able, under the Amended Codes regime, to benefit from deeming provisions which allow entities which meet the definition of Black owned in the Codes to automatically be a level 2 contributor to B-BBEE. If that entity is 100% Black-owned, then it is automatically deemed to be a level 1 contributor.

The calculation of these deeming provisions has been clarified however. Those who work with BEE, will know that the Codes calculate ownership in what is commonly referred to as, “effective black ownership”. This is the percentage black ownership given to an entity through utilisation of a number of different ownership options. It is proposed however, that for small entities, ie EMEs and QSEs to claim the deeming provision level in their scorecards, that the black ownership percentage has to be calculated without use of the Modified Flow Through Principle (“MFTP”).

It has been common for many M&A advisors to advocate the creation of BEE ownership structures which have an actual black ownership of only 26%, but through use of the MFTP, are able to claim an effective black ownership of 51%. This allows them to bypass the requirement of complying with the other elements of the QSE scorecard, and claim an automatic, and excellent, level 2 status. The BEE Commission issued a notification in 2017 cautioning against any structures designed in this manner, and this DTi has agreed with the principle. It is proposed that only entities which calculate their effective black ownership without use of the MFTP will be able to claim the automatic level 2. This means that all other structures which are built totaling 51% Black ownership or more will have to actively comply with the remainder of the QSE BEE scorecard in order to achieve their B-BBEE level status.

In addition, there is a new deeming provision for large black owned entities. Those entities which are majority black owned, without use of any effective Black ownership mechanisms in the Amended Codes, ie greater than 51% actual black ownership, will be able to also make use of the automatic level 2 and level 1 (for 100% black owned) statuses.

Calculation of score on Joint Venture verification certificates

The proposed amendments also clarify the approach to verification certificates for Joint Ventures for tender purposes. The gazette clarifies that deemed level 2 entities will contribute a pro rata of 95 points, and level 1 entities will contribute a pro rata of 100 points.

A practice has arisen of how this is approached with many well informed verification agencies, and we at Advance who facilitate the preparation of a number of these in our Public Procurement practice have been utilising this proposed approach for a number of years, but the formalization of this methodology will now create a consistency in the market. We believe however, that the proposed approach is lacking as it does not deal with the calculation of the black ownership percentage of the joint venture, and we will urge the DTi to approach this formally in a commentary to the amendments.

One of the critical clarifications is the importance of the JV agreement. This has to be compiled and submitted to the verification agency setting out the percentage participation on the joint venture, before the certificate can be issued. We have a practice which assists our clients with the development of JV agreements and the greatest challenge we see is the arbitrary allocation of participation in the JV, without a commensurate understanding of this should work, and how to not expose the JV to a fronting risk upon submission for verification.

The introduction of an indicator to specifically measure higher education bursaries in Skills Development

Measured entities with a high payroll as a percentage of revenue have been reeling with the doubling of the skills development target, with their having to spend 6% of payroll on skills development. The proposed amendments now try and ameliorate that as they reallocate points and targets to a certain extent. Large companies are incentivized through a new indicator to assist students with bursaries, as the 6% leviable amount target has been split out into 3,5% remaining in the general skills spend indicator, and the remaining 2,5% allocated to category A Higher Education institutional learning. The scope of claimable spend has also increased to include ancillary costs for the students, not just fees paid on their behalf.

The 2016 and 2017 “fees must fall” campaign highlighted the expectations of scholars that higher education be free. Corporates will be able to contribute to the education of our youth, and others, at a tertiary education level, adding to the skills of our nation. Making more bursaries available allows more students to receive the benefits of a skilled education, which will benefit South Africa greatly in the longer term. The skills development amendments, along with the YES pillar, speak to government looking for a comprehensive long term skills development strategy, in much the same way that the Enterprise and Supplier Development pillar is structured to incentivise a longer term strategy.

Some of the other clarifications are that there can be no double-counting between the general Skills Development element, and that of the element requiring bursaries to be provided, although it is still possible to double count disabled skills development spend. There has been a clarification regarding double counting employed and unemployed learners against the headcount target and Advance welcomes this clarification. The 2007 Codes had a target of 5% learners and it was nonsensical to us that the target would have been essentially halved with the implementation of the Amended Codes. Advance has ensured that our clients and the verification agencies that we work with have not double counted against these targets. The overall 8 points available in these indicators have been lowered to an overall 6 points and the additional points redistributed into the new indicator.

The draft legislation also acknowledges that the contribution that category F & G, continued informal and workplace learning makes, should be recognized at higher than 15% of total spend, and have increased the claimable amount to 25% of total skills development spend. This will make a significant difference to a lot of large companies, especially multi-nationals, who often offer a huge amount of international, web-based training resources to their employees that are not formally accredited in South Africa, but are still extremely valuable.

These changes have not been applied to the QSE scorecard in this wording but to large entities only. In Advance’s opinion these are positive amendments for large entities.

Advance Corporate Advisors is able to advise on the impact of these proposed amendments on your business. Please contact Lisa Agbenafa at Lisa@advanceholdings.co.za or Lara Lombard at lara@advanceholdings.co.za

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