1. THE (VEXING) OWNERSHIP,
ENTERPRISE/SUPPLIER DEVELOPMENT
AND SOCIO-ECONOMIC DEVELOPMENT
PROVISIONS OF THE NEW CODES
29 January 2014

2. PRIORITY ELEMENTS
 The priority elements are - ownership, socio-economic
development and enterprise/supplier development.
 If a QSE or a Large Enterprise fails to comply with the 40%
minimum target for any of the priority elements, it’s
BBBEE status will automatically be downgraded by one
level.
 By way of example, if its score would have otherwise been
a level four, it will be downgraded to a level five.
2

3. KEY CODE AMENDMENT: OWNERSHIP
Ownership represents 25 of the 118 points which it is
possible to achieve under the amended Codes.
3

4. KEY CODE AMENDMENT: OWNERSHIP (cont.)
 “NET VALUE” is the portion of ownership interest of
Black people within a firm which is not subject to
outstanding acquisition debts.
 This fundamental change in the calculation of the
ownership interest will require an overhaul of the
traditional funding mechanisms for BBBEE transactions
and may in fact stifle BBBEE transactions.
4

5. OWNERSHIP - COMPLEX FORMULAE
 The Codes contain a multitude of formulae that are to be
used when calculating the Ownership score. Separate
formulae are provided for –
 measuring voting rights;
 measuring economic interest;
 calculating the deemed value for all Black Participants;
 calculating the Net Value, which is determined as the lower
result achieved by the application of two different formulae;
and
 calculating the recognition of ownership after the sale or loss
of shares by Black Participants.
5

6. OWNERSHIP - GENERAL PRINCIPLES
 Black people may hold their rights of Ownership in a
Measured Entity as direct Participants or as Participants
through some form of Entity such as –
 a Company;
 a Close corporation;
 a Co-operative;
 a Trust;
 a Broad-Based Ownership Scheme;
 an Employee Share Ownership Programme;
 a Partnership or other association of natural persons; and
 any other form of juristic person recognised under South
African law.
6

7. OWNERSHIP - SUB-MINIMUM REQUIREMENTS
 A Measured Entity is required to achieve a minimum of
40% on Net Value points.
 Non-compliance with this sub-minimum target will
result in the achieved BBBEE status level being
discounted.
7

8. OWNERSHIP - FLOW-THROUGH PRINCIPLE
(must be used for all elements except Black
peoples Exercisable Voting Rights and Black
peoples Economic Interest, where the “Modified
Flow-Through Principle may be applied)
 As a general principle only rights held by natural persons
are relevant. If the rights of Ownership of Black people
pass through a juristic person, then the rights of
Ownership of Black people in that juristic person are
measurable.
 This principle applies across every tier of Ownership in a
multi-tiered chain of Ownership until that chain ends with a
Black person holding rights of Ownership.
8

9. OWNERSHIP – ILLUSTRATION OF KEY
PRINCIPLES
9

10. OWNERSHIP - MODIFIED FLOW-THROUGH
PRINCIPLE
 The Modified Flow-Through Principle applies to BBBEE
owned or controlled companies in the Ownership of the
Measured Entity.
 In calculating Exercisable Voting Rights of Black people and
Economic Interest of Black people the following applies –
 where in the chain of Ownership, Black people have a flow-
through level of participation of at least 51%, and then only
once in the entire ownership structure of the Measured Entity,
such Black participation may be treated as if it were 100%
Black;
 the Modified Flow-Through Principle may only be applied in
the calculation of the Voting Rights of Black people and the
Economic Interest of Black people.
 In all other instances, the Flow-Through Principle applies.
10

11. OWNERSHIP - EXCLUSION OF SPECIFIED
ENTITIES WHEN DETERMINING OWNERSHIP
 When determining Ownership in a Measured Entity,
Ownership held by Organs of State or Public Entities
must be excluded.
 Exclusion of Ownership held by the Organs of State or
Public Entities is to be effected before any other
Ownership discounting methods are applied.
11

12. OWNERSHIP - BBBEE FACILITATOR STATUS
 The Minister may by notice in the gazette, designate
certain organs of State or Public Entities as BBBEE
Facilitators. In calculating their Ownership score,
Measured Entities must treat BBBEE Facilitators as
having rights of Ownership held –
 100% by Black people;
 40% by Black woman;
 20% by Black designated groups;
 without any acquisition debts; and
 without any third-party rights.
12

13. OWNERSHIP - MANDATED INVESTMENTS
 When determining Ownership in a Measured Entity, rights
of Ownership of Mandated Investments (i.e. pension funds,
medical schemes, insurers, banks etc.) may be excluded.
 The maximum percentage of the Ownership of any
Measured Entity that may be so excluded is 40%.
 A Measured Entity electing not to exclude Mandated
Investments when it is entitled to do so, may either treat
all of that Ownership as non-Black or obtain a competent
person’s report estimating the extent of Black rights of
Ownership measureable in the Measured Entity and
originating from that Mandated Investments.
 A Measured Entity cannot selectively include or exclude
Mandated Investments. An election to exclude one
Mandated Investment is an election to exclude all
Mandated Investments and visa versa.
 A Measured Entity applying the Exclusion Principle to
Mandated Investments cannot benefit from the Modified
Flow-Through Principle.
13

14. OWNERSHIP - RECOGNITION OF OWNERSHIP
AFTER THE SALE OR LOSS OF SHARES BY BLACK
PARTICIPANTS
 A Measured Entity is allowed to recognise a portion of
Black Ownership after a Black participant has exited
through the sale or loss of shares as long as –
 the Black participant has held shares for a minimum period
of 3 years;
 net value, calculated on a time-based formula, has been
created in the hands of Black people; and
 transformation has taken place within the Measured Entity
using the BBBEE Recognition level from the period of entry
of Black participants to the exiting period.
 Black participation arising from continued recognition of
Black Ownership cannot contribute more than 40% of
the score on the Ownership scorecard.
14

15. OWNERSHIP - BBBEE OWNERSHIP SCHEMES
AND EMPLOYEE SHARE OWNERSHIP
PROGRAMME
 Black participants in BBBEE Ownership Schemes and
Employee Share Ownership Programmes which hold
Ownership rights in a Measured Entity may contribute –
 a maximum of 40% of the total points on the Ownership
scorecard of the Measured Entity if they meet specified
qualification criteria;
 100% of the total points on the Ownership scorecard of
the Measured Entity if they meet additional qualification
criteria.
15

16. OWNERSHIP - PRIVATE EQUITY FUNDS
 A Measured Entity may treat any of its Ownership
arising from a Private Equity Fund as if that Ownership
were held by Black people, where the Private Equity
Fund meets the following criteria –
 at least 51% of any of the private Equity Managers’
Exercisable Voting Rights associated with the Equity
Instruments through which the Private Equity Fund holds
rights of Ownership, must be held by Black people;
 at least 51% of the Private Equity Funds’ Executive
Management and Senior Management must be Black
people;
 at least 51% of the profits made by the Private Equity
Fund Manager after realising any investment made by it,
must by written agreement, accrue to Black people; and
 a long list of additional rules and qualifications apply.
16

17. OWNERSHIP - TRUSTS
 Black participants in a Trust holding Ownership rights in
a Measured Entity may contribute –
 a maximum of 40% of the total points on the Ownership
scorecard of the Measured Entity if the Trust meets certain
qualification criteria;
 100% of the total points on the Ownership scorecard of
the Measured Entity if the Trust meets additional
qualification criteria.
17

18. OWNERSHIP - OPTIONS AND SHARE WARRANTS
 Exercisable Voting Rights and Economic Interest will be
recognised where a Participant holds an instrument
granting the holder the right to acquire an Equity
Instrument or part thereof at a future date, if the
following requirements are met –
 the Exercisable Voting Rights attached to that instrument
are irrevocably transferred to the holder for the option
period and are exercisable by the holder before acquiring
the Equity Instrument;
 the Value of any Economic Interest is irrevocably
transferred to the holder for the option period and paid to
the holder of that instrument before the exercise of that
right; and
 the Value of the instrument must be determined by using
a Standard Valuation Method for calculating the Net Value.
 Not sure when this scenario would ever arise!
18

19. OWNERSHIP - EQUITY INSTRUMENTS CARRYING
PREFERENCE RIGHTS
 An Equity Instrument carrying Preferential Rights is
measurable in the same manner as an ordinary Equity
Instrument.
 An Equity Instrument carrying Preferential Rights that
has the characteristics of a debt must be treated as an
ordinary loan. If the debt is that of a Black Participant,
it may be subject to measurement under Net Value.
 In evaluating an instrument that has a hybrid nature
including the characteristics of a debt, only that portion
that represents a debt, will be measured under current
equity interest. The remainder is measurable as an
ordinary equity instrument.
19

20. MORE RULES!
 The Codes contain detailed rules (and additional
criteria) for –
 Broad-Based Ownership Schemes;
 Employee Share Ownership programmes;
 Trusts; and
 Family Trusts.
20

21. OTHER CHANGES TO OWNERSHIP
 Two BBBEE ownership points (with a 2% compliance target) have
been allocated to the economic interest of “black new entrants”.
 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.
21

22. ENTERPRISE/SUPPLIER DEVELOPMENT
 A firm must achieve a minimum of 40% of each of the targets in the
following areas (excluding bonus points) –
Preferential Procurement;
Enterprise/Supplier Development.
 A firm’s BBBEE status will be automatically reduced if it fails to meet
the minimum 40% target (even if the firm has made genuine efforts to
comply).
22

23. ENTERPRISE/SUPPLIER DEVELOPMENT (cont.)
Enterprise/Supplier Development accounts for 40 points
(plus 4 bonus points) out of the total of 118 points. The
preferential procurement component accounts for 27
points as follows
23

24. ENTERPRISE/SUPPLIER DEVELOPMENT (cont.)
PROCUREMENT
 The requirements for an “Empowering Supplier” are  a “BBBEE compliant entity” and a “good citizen”;
 complying with “all regulatory requirements”; and
 a large enterprise must meet at least three of the following criteria, or
one if it is a QSE –
 at least 25% of cost of sales, excluding labour cost and depreciation,
must be procured from local producers or local suppliers in SA;
 50% of jobs created are for black people provided that the number
of black employees since the immediate prior verified BBBEE
Measurement is maintained;
 at least 25% transformation of raw material/beneficiation;
 skills transfer – at least spend 12 days per annum of productivity
deployed in assisting Black EMEs and QSEs beneficiaries.”
24

25. ENTERPRISE/SUPPLIER DEVELOPMENT (cont.)
PROCUREMENT (cont.)
 EMEs and Start-Ups are automatically recognised as
“Empowering Suppliers”.
 The recognised BBBEE procurement spend attributed to
a supplier or QSE/EME with a minimum 3 year contract,
and first time suppliers, is multiplied by 1.2.
 The amended Code assumes that “Empowering
Suppliers” are available in every sector of the economy,
which is clearly not the case.
 Ironically these changes will prejudice black-owned and
controlled firms that do not qualify as “Empowering
Suppliers” as there will no incentive to prefer such
black-owned and controlled firms.
25

26. ENTERPRISE/SUPPLIER DEVELOPMENT (cont.)
EXCLUSIONS FROM TOTAL PROCUREMENT SPEND
 Taxation – any lawful tax or levy, including rates
imposed by a municipality
 Salaries, wages, remuneration and emoluments
 Pass-through third party procurement
 Imported capital goods or components for value added
production in RSA provided –
 no existing local production;
 such import promotes further valued-added production
within RSA.
 Imported goods and services, which are not produced in
RSA and carry a different brand name and have
different technical specifications.
26

27. ENTERPRISE/SUPPLIER DEVELOPMENT (cont.)
Enterprise/Supplier Development accounts for 40 points (plus 4 bonus points) out of
the total of 118 points. The supplier development component accounts for 17
points as follows
CRITERIA
WEIGHTING
POINTS
COMPLIANCE
TARGETS
10
2% of NPAT
5
1% of NPAT
SUPPLIER DEVELOPMENT
Annual value of all Supplier Development
Contributions made by the Measured Entity
as a percentage of the target
ENTERPRISE DEVELOPMENT
Annual value of all Enterprise Development
Contributions and Sector Specific
Programmes made by the Measured Entity
as a percentage of the target
BONUS POINTS
Bonus point for graduation of one or more
Enterprise Development beneficiaries to
graduate to the Supplier Development Level
1
Bonus point for creating one or more jobs
directly as a result of Supplier Development
and Enterprise Development initiatives by
the Measured Entity
1
27

28. ENTERPRISE/SUPPLIER DEVELOPMENT (cont.)
 Beneficiaries of Supplier and Enterprise Development are EMEs or
QSEs which are at least 51% black owned or at least 51% black
women owned.
 Examples of Enterprise and Supplier Development Contributions are
–
 investments in beneficiary entities;
 loans made to beneficiary entities;
 guarantees given or security provided on behalf of beneficiaries;
 credit facilities made available to beneficiary entities;
 preferential credit granted by the firm to beneficiary entities;
 direct costs incurred by the firm in assisting and hastening
development of beneficiary entities.
 It must be noted that “Annual Expenditure” is used.
28

29. SOCIO-ECONOMIC DEVELOPMENT
 Socio-Economic Development only accounts for 5 of the
possible 118 points. This is very surprising.
 Socio-Economic Development Contributions (“SED
Contributions”) are both monetary and non-monetary
contributions, made by a firm with the purpose of
facilitating income generating activities for targeted
beneficiaries.
 SED contributions are recognisable annually.
 The full value of SED contributions that are made to
beneficiaries who consist of at least 75% black people, is
fully recognisable.
 Where SED contributions are made to beneficiaries who
consist of less than 75% black people, the value of the
contribution multiplied by the percentage of black people
that benefited, is recognisable.
29

30. SOCIO-ECONOMIC DEVELOPMENT (cont.)
 The following are a few examples of SED Contributions –
 grant contributions to beneficiaries;
 guarantees given or security provided for beneficiaries;
 direct costs incurred by a firm in assisting the beneficiaries;
 overhead costs of a firm that are directly attributable to SED
Contributions;
 developmental capital advanced to beneficiary communities;
 preferential terms granted by a firm for its supply of goods or
services to beneficiary communities;
 payments made by a firm to third parties to perform socioeconomic development on the entity’s behalf;
 providing training or mentoring to beneficiary communities
(quantified by the measurement of cost of time).
30

31. SOCIO-ECONOMIC DEVELOPMENT (cont.)
BENEFIT FACTOR MATRIX
QUALIFYING
CONTRIBUTION TYPE
CONTRIBUTION AMOUNT
BENEFIT FACTOR
GRANT AND RELATED CONTRIBUTIONS
GRANT CONTRIBUTION
FULL GRANT AMOUNT
100%
Direct Cost incurred in
supporting socio-economic
development, sector
specific initiatives or
Qualifying SED
Contributions
Verifiable Cost (including
both monetary and nonmonetary)
100%
Discounts in addition to
normal business practices
supporting socio-economic
development, sector
specific initiatives or
Qualifying SED
Contributions
Discount Amount (in
addition to normal business
discount)
100%
Overhead Costs incurred in
supporting socio-economic
development, sector
specific initiatives or
Qualifying SED
Contributions
Verifiable Cost (including
both monetary and nonmonetary)
80%
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32. SOCIO-ECONOMIC DEVELOPMENT (cont.)
BENEFIT FACTOR MATRIX
QUALIFYING
CONTRIBUTION TYPE
CONTRIBUTION AMOUNT
BENEFIT FACTOR
CONTRIBUTIONS MADE IN THE FORM OF HUMAN RESOURCE CAPACITY
Professional services
rendered at no cost
supporting socio-economic
development, sector specific
initiatives or Qualifying SED
Contributions
Commercial hourly rate of
professional
80%
Professional services
rendered at a discount
supporting socio-economic
development, sector specific
initiatives or Qualifying SED
Contributions
Value of discount based on
commercial hourly rate of
professional
80%
Time of employees of the
firm productively deployed
in assisting beneficiaries
and supporting socioeconomic development,
sector specific initiatives or
Qualifying SED
Contributions
Monthly salary divided by
160
80%
32

33. SOCIO-ECONOMIC DEVELOPMENT (cont.)
TARGET
 The Net Profit After Tax (“NPAT”) or average target
applies unless –
 the company did not make a profit in the last year or on
average over the last five years;
 the net profit is less than a quarter of the norm in the
industry.
 If the Turnover is used, the target will be set at –
1% X Indicative Profit Margin (NPAT/Turnover) x Turnover
 “Indicative Profit Margin” is the profit margin in the last
year where the company’s profit margin is at least one
quarter of the industry norm.
33

34. SOCIO-ECONOMIC DEVELOPMENT (cont.)
The criteria and method used to derive a score for SocioEconomic Development is –
34

35. THANK YOU
Dave Walker
Date
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