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DRAFT CONSTRUCTION SECTOR CODE DETAILS

DRAFT CONSTRUCTION SECTOR CODE DETAILS

CONSTRUCTION SECTOR CODE

"It presents the industry with the ideal opportunity for the advancement of transformation and BEE in the procurement of construction programmes and services. The Code also seeks to regulate a target of 30% black ownership in the industry over the next 10 years" – The Department of Trade and Industry

The Draft Amended Construction Sector Code gazetted in terms of Section 9 (5) of the Broad Based Black Economic Empowerment (B-BBEE) Act 53 of 2003 as amended by B-BBEE Act 46 of 2013[Office1].

Dr. Rob Davies, the Minister of Trade and Industry, has invited members of the public to make inputs and comments on this code, until 28 December 2016. "Construction Sector Code remains one of the key sector codes that affect domestic infrastructural development and as such is one of the catalysts for the implementation of B-BBEE in the country. One of the key unique features of the draft sector code is that the target for Black Ownership is set at 35% (32.5% for the first four years of implementation thereafter 35%). This is higher than the ownership target for the Generic Codes and it is the second highest black ownership target, behind the Black Ownership target of 40% of the Media and Advertising Sector Code (MAC)," says Minister Davies.

The draft Amended Sector Code further mentions that at least 50% of black shareholding needs to be held by professionals in an attempt to discourage passive shareholding.

Key points of this uniquely different Sector Code are as follows:-

  1. For the first time BEE verification agents have specific duties under a sector code in that:
    • It is compulsory for them to provide Construction Sector scorecards in prescribed format to the Construction Sector Charter Council (CSCC) so that BEE performance across the sector can be assessed;
    • They have to collect a prescribed levy for each BEE verification under this sector code and pay it to the CSCC. The CSCC will return a unique certificate number that must be reflected on the BEE certificate issued. Certificates without such a number will be invalid.
  2. The Code will come into effect on the date of its publication. However, entities with measurement periods prior to the publication date will be measured under the old construction code:
    • During the run off of the old codes there will be a deemed equivalence in various terms such as Empowering Supplier: Minimum Level 8, 51% black owned: 50% black owned, Supplier Development Beneficiary: category A etc;
    • Measured Periods must have ended within 12 months of the commencement of the verification.
  3. Affidavits and CIPC Certificates will not apply to the Construction sector; only BEE certificates issued by Verification Agents will be accepted.
  4. The definition of an Empowering Supplier within the Construction Sector is tailored to the sector. Qualification includes compliance with the Employment Equity Act, the Skills Development Levies Act and having a valid Tax Clearance Certificate. Generic entities have to comply with 3 of 7 qualifiers and QSEs with only one.
  5. Specific provisions cover unincorporated joint ventures (UJV) and how to calculate their BEE score. Where UJVs are contracting for government contracts they may not subcontract more than 25% of the work to an entity that does not have an equal or better BEE level.
  6. The code distinguishes between Built Environment Professionals (BEPs) and Contractors in respect of weightings, targets and methodology.
    • Where a group covers different sub-sectors, a subsidiary will not be able to tender a consolidated certificate but will have to be measures according to its core activities;
    • Construction material suppliers are to be measured as contractors.
  7. Priority elements with a 40% subminimum are Ownership, Skills Development and ESD. Generic entities have to meet all three subminimum and QSEs, Ownership and one other, to avoid a level drop.
    • Black owned QSEs and EMEs who qualify for an automatic level 1 or 2 have to comply with the Skills Development priority element to avoid a discounting by one level. This does not apply to BEPs of <R1.8m and Contractors of <R3m.
  8. EMEs thresholds and automatic BEE levels are:-
    • Contractors: R10m
    • BEPs: R 6m
    • <30% black ownership: Level 5
    • 30% and <51% black ownership: Level 4
    • 51% black ownership: Level 2
    • 100% black ownership: Level 1
  9. EMEs can enhance their BEE level by:
    • Using the QSE scorecard
    • Achieving full points under the QSE Skills Development element thereby enhancing their BEE level by one.
    • Achieving full points under the Supplier Development indicator thereby enhancing their BEE level by one.
    • Using both these mechanisms to enhance their BEE level by two.
  10. QSE thresholds are:
    • BEPs: <R25m
    • Contractors: < R50m
  11. QSEs who qualify for an automatic BEE level 1 & 2 via black ownership must do so without the use of modified flow through.
    • A QSE can enhance its level by one if it achieves full points under either the Skills Development or Preferential Procurement & Supplier Development elements.
  12. Start-up enterprises do not have to concern themselves with any priority element.
  13. There are the usual 5 elements referred to under a CSC nomenclature with points as follows:-
    • Overall Scorecard Table

Element

Contractors

BEP

QSE

Ownership

27+4

27+4

27+3

Management Control

18+4

18+4

20

Skills Development

21+5

29+5

24+2

Preferential Procurement & Supplier Development

34+4

27+3

29

Socio-Economic Development

5+1

5+1

5

Total

123

123

110

Ownership

  • Targets for black voting rights and economic interest have been set at 32.5% going to 35% in year 4.
  • Targets for black women voting rights and economic interest have been set at 10% going to 14% in year 4.
  • There are 3 points available where Black Designated Groups, ESOPs, Broad-based schemes or co-ops are present in an ownership structure. Targets are 10% going to 12% in year 4 for Contractors and 5% going to 6% in year 4 for BEPs .
  • Net value points are 6 for Contractors and 4 for BEPs
  • Bonus points relate to higher achievements in voting rights
  • More than 50% of the investors in BEPs must be professionally registered and members of the executive management. Where black ownership does not comply only the holding up to 50% may be recognised i.e. affecting the 51% black ownership threshold.

Management Control

  • Black and black women Board participation have targets of 50% and 20% respectively
  • Black and black women senior management have targets of 60% and 30% respectively broken into EAP based demographic sub groups
  • Black and black women middle management have targets of 75% and 30% respectively broken into EAP based demographic sub groups
  • Black and black women junior management have targets of 88% and 35% respectively for Contractors only and broken into EAP based demographic sub groups. There are no junior management targets for BEPs
  • Black professional employee remuneration is targeted at 50% of the total remuneration for all professional employees.
  • The target for black youth is 30% of all staff using an adjusted recognition for gender formula.
  • The target for black disabled staff is 2% of all staff

Skills Development

  • The target for skills development expenditure is 2% increasing to 2.5% in year 3 and 3% in year 5.
  • African management and African bursaries are specifically targeted using a percentage of EAP and an adjusted recognition for gender formula.
  • Learnerships are redefined as Category A, B, C or D and have a target of 2.5% of the staff. This means that university students are included - we must applaud this inclusion! However salaries for Category A learners cannot be claimed as skills development expenditure.
  • Salaries under Category C learnerships are restricted to a 5 year period.
  • 60% of the professionally registered employees should be black
  • There are points available for the implementation of an approved mentorship programme
  • Bonus points are for absorption and completion of the mentorship programme by Cat. A,B,C & D learners and for 60% of the staff being black registered professionals.
  • Informal training is cat F&G and cannot exceed more than 35% of the total training expenditure.
  • There are no demographic targets for the 6 sub groups in Skills Development.

Preferential Procurement and Supplier Development

  • Procurement from Empowering suppliers has a target of 80%
  • There are separate targets for Procurement from EME and QSEs both at 15%
  • The target for procurement from 51% black owned suppliers is 20%
  • Procurement Bonus points are a mystery
  • There are points available for compliant supplier and contractor development programmes using a complex formula reminiscent of the Old Construction Charter that equate the size of the programmes to the turnover of the Measure Entity.
  • The Supplier development target is 3% of NPAT for contractors and 0.2% of Leviable amount for BEPs. The NPAT is the average over the past 3 years.
  • Additional points are given if 20% of that expenditure is with black owned suppliers.
  • Beneficiaries of Supplier Development contributions are 51% black owned EMEs or QSEs. However for Large Measured Entities (R50m for contractors and R25m for BEPs) the definition changes to any entity whose revenue is less than 35% of the Measured entity. No mention of black ownership!
  • Further qualifications for a supplier development beneficiary is that the Measured Entity may not hold a stake greater than 20%, it must employ more than 3 people, it must be in possession of a tax clearance certificate and it must have a BEE certificate.

Socio-economic Development

  • The target is 1.25% of NPAT with further points for 30% of the recognised contributions being to disadvantaged communities.
  • Contributions to black disabled people are recognised at an enhanced rate of 1.25%
  • Bonus points relate to any of these contributions that structured SED initiatives meaning that there is a plan with a project impact analysis in place.

QSEs

  • At first sight this seems to be a straightforward scorecard with little or no surprises.
  • Skills development re-incarnates the concept of a cascade of targets based on the overall spend on black people

Supplier Development targets are 1% of NPAT for Contractors and 0.2% of Leviable Amount for BEPs.

RVN Empowerment

       
New Draft Construction Sector Codes
Update: Employment Tax Incentive (ETI)
 

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