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B-BBEE Sector Code Analysis: Construction Sector – Ownership Element

1. Introduction and Applicability

  • 1.1 Sector Code Overview: The Amended Construction Sector Code provides a framework for measuring B-BBEE compliance specifically within the construction sector in South Africa. It aims to address the unique challenges and opportunities for transformation in this sector, including the project-based nature of much of the work.
  • 1.2 Scope of Application: The Construction Sector Code applies to a wide range of construction-related activities, including:
    • Contractors: General building, civil engineering, electrical engineering, plumbing, and other specialized construction trades.
    • Built Environment Professionals (BEPs): Architects, engineers, quantity surveyors, project managers, and other professionals involved in the design and management of construction projects. Note: There are separate scorecards for Contractors and BEPs.
    • Construction Material Suppliers: Only if more than 50% of their revenue comes from the sale and/or manufacturing of construction materials to construction sites.
    • Excludes activities covered by other sector codes (e.g., manufacturing of materials not primarily for construction) unless those activities are integral to the construction operation.
  • 1.3 Legal Basis: Section 9(1) of the Broad-Based Black Economic Empowerment Act (No. 53 of 2003, as amended) and the Amended Construction Sector Code (Government Gazette No. 41287, 01 December 2017).
  • 1.4 Effective Date: 01 December 2017.
  • 1.5 Precedence: This Sector Code supersedes the Generic Codes for entities within its scope.

2. Ownership Scorecard and Thresholds

  • 2.1 Ownership Scorecard: The Construction Sector Code has separate scorecards for Contractors and Built Environment Professionals (BEPs). Contractors: Indicator Weighting Target Exercisable Voting Rights (Black People) 4 points 25% + 1 vote Exercisable Voting Rights (Black Women) 3 points 10% Economic Interest (Black People) 4 points 25% Economic Interest (Black Women) 3 points 10% Economic Interest (Black Designated Groups/Broad-based schemes) 4 points 10% Realisation Points (Net Value) 11 points See Below Total 29 points Built Environment Professionals (BEPs): Indicator Weighting Target Voting Rights (Black People) 7 points 32% + 1 vote Economic Interest (Black People) 7 Points 32% Economic Interest (Black Designated Groups) 2 Points 10% Economic Interest (Black New Entrants) 2 Points 10% Net Value 7 points See Below Total 25 points Net Value Target: Based on a phased-in approach.
  • 2.2 Priority Element Status: Ownership is a priority element for both Contractors and BEPs.
  • 2.3 Subminimum Requirements:
    • Contractors: 40% of the Net Value points (i.e., 40% of 11 points = 4.4 points).
    • BEPs: 40% of the Net Value points (i.e., 40% of 7 points = 2.8 points)
  • 2.4 Entity Size Thresholds:Contractors:
    • EME Threshold: Annual Total Revenue of R10 million or less. (Same as the Generic Codes).
    • QSE Threshold: Annual Total Revenue between R10 million and R50 million. (Same as the Generic Codes).
    • Generic Threshold: Annual Total Revenue above R50 million. (Same as the Generic Codes).
    Built Environment Professionals (BEPs):
    • EME Threshold: Annual Total Revenue of R6 million or less. (Lower than the Generic Codes and Contractors).
    • QSE Threshold: Annual Total Revenue between R6 million and R25 million. (Lower than the Generic Codes and Contractors).
    • Generic Threshold: Annual Total Revenue above R25 million. (Lower than the Generic Codes and Contractors).
  • 2.5 Automatic Recognition for EMEs/QSEs:
    • The usual automatic levels apply (Level Four for EMEs, Level One/Two for 100%/51%+ Black-owned EMEs and QSEs).
    • Crucially: Are there any conditions or restrictions on this automatic recognition? YES. For BEPs, automatic recognition is conditional on meeting the requirements of Clause 3.1.3 (see below). If a BEP firm does not meet these requirements, it loses the automatic level enhancement.

3. Specific Ownership Requirements and Interpretations

  • 3.1 Unique Ownership Targets:
    • Contractors: The targets for voting rights and economic interest are generally aligned with the Generic Codes (25% + 1 vote and 25%), but with a higher overall points allocation (29 points) and a greater emphasis on broad-based ownership.
    • BEPs: Higher targets for voting rights and economic interest (32% + 1 vote and 32%) compared to the Generic Codes and Contractors.
  • 3.2 Flow-Through and Modified Flow-Through: Standard Flow-Through and Modified Flow-Through Principles apply.
  • 3.3 Exclusion Principle: Standard Exclusion Principle applies.
  • 3.4 Treatment of Specific Entities: The Construction Sector Code provides specific recognition criteria for:
    • Broad-Based Ownership Schemes (BBOS): Must meet the rules in Annexure A of the Code.
    • Trusts: Must meet the rules in Annexure B of the Code.
    • ESOPs: Must meet the rules in Annexure C of the Code.
  • 3.5 Multinationals: No specific provisions beyond the Generic Codes. Equity Equivalents would likely apply as usual.
  • 3.6 Ownership by Qualified Professionals/Specific Roles:
    • Contractors: No specific requirement.
    • BEPs:Critically: Clause 3.1.3 of the Construction Sector Code imposes a mandatory requirement on BEP firms: more than 50% of the total ownership must be held by individuals who are both professionally registered with a relevant statutory council and members of the firm’s Executive Management (defined as “Top Management” in terms of Employment Equity Regulations). If this requirement is not met:
      • Only 50% of the Black ownership held by owners who do not meet both criteria can be counted.
      • The firm loses automatic level enhancement (if applicable).
      • The firm loses bonus points on the ownership scorecard.
      • This is a fundamental requirement for BEPs.
  • 3.7 Sale of Assets: No specific deviations from the Generic Codes.
  • 3.8 Private Equity Funds: Ownership by B-BBEE compliant Private Equity Funds is possible under the Construction Sector Code, provided the fund meets the requirements outlined in the Generic Codes (Statement 100, paragraph 3.10). No specific provisions prevent or modify this.
  • 3.9 Other Unique Provisions:
    • Separate Scorecards: The existence of separate scorecards for Contractors and BEPs is a significant difference from the Generic Codes.
    • Consolidated Verification: The Code allows for consolidated verification in certain circumstances, which addresses the project-based nature of the industry.
    • Clause 3.1.3 (BEPs): The mandatory requirement for majority ownership by professionally registered individuals in executive management is a critical and unique provision for BEPs.
    • Definition of “Black People” (BEPs): Tied to professional registration.

4. Areas of Uncertainty and Interpretation

  • 4.1 Ambiguities: As with the Generic Codes, valuation methodologies and the application of the Flow-Through Principle can be areas of interpretation. The specific requirements for BBOS, Trusts, and ESOPs in the annexures may also require careful interpretation. The scope of application (particularly for construction material suppliers) can be ambiguous. For BEPs, the precise definition of “Executive Management” and the application of the 50% rule in complex ownership structures are key areas of uncertainty.
  • 4.2 Industry Practice: Industry practice is still developing in some areas, particularly regarding the interpretation of the annexures and the implementation of Clause 3.1.3 for BEPs.
  • 4.3 Potential Disputes: Valuation disputes, challenges to the legitimacy of ownership structures, and disputes over the scope of application. For BEPs, disputes are likely to arise regarding compliance with Clause 3.1.3.

5. Deal Process, Parties, and Costs

  • 5.1 Typical Deal Structures: Direct ownership, trusts, BBOS, and ESOPs. For BEPs, deal structures must carefully consider Clause 3.1.3.
  • 5.2 Key Parties Involved: Construction companies, BEP firms, Black investors, community trusts, legal advisors, financial advisors, B-BBEE verification agencies.
  • 5.3 Deal Process Overview: Similar to the Generic Codes: due diligence, valuation, negotiation, legal documentation, and implementation.
  • 5.4 Cost Considerations: Similar to the Generic Codes: legal fees, valuation fees, advisory fees, B-BBEE verification fees, and the cost of the ownership transaction itself.

6. Gotchas and Best Practices

  • 6.1 Common Mistakes: Failing to meet the Net Value subminimum, inadequate documentation, fronting, not understanding the specific requirements for BBOS, Trusts, and ESOPs in the Construction Code, incorrect classification (Contractor vs. BEP). Critically for BEPs: Failing to meet the requirements of Clause 3.1.3 (majority ownership by professionally registered individuals in executive management). This is the most significant “gotcha” for BEPs.
  • 6.2 Fronting Risks: High risk, particularly given the prevalence of joint ventures and subcontracting in the industry.
  • 6.3 Best Practices: Thorough planning, expert advice, genuine commitment to transformation, careful structuring of ownership deals, ongoing monitoring of compliance. For BEPs, structuring ownership to comply with Clause 3.1.3 from the outset is essential.

7. Alternatives to Ownership

The other elements on the scorecard will depend on whether the entity is a Contractor or BEP. They will include:

  • Management Control
  • Skills Development
  • Enterprise and Supplier Development
  • Socio-Economic Development

8. Conclusion

The Construction Sector Code, with its separate scorecards for Contractors and BEPs, and different thresholds for BEPs, reflects the diverse nature of the industry. The Code builds upon the Generic Codes but introduces specific requirements and nuances, particularly regarding broad-based ownership and the recognition of different types of ownership structures. The higher ownership targets for BEPs, and especially the mandatory requirements of Clause 3.1.3, reflect the need for greater transformation among professionals in the built environment. Compliance with Clause 3.1.3 is the defining characteristic of BEP ownership under this Sector Code.

Please contact us for a confidential discussion around your unique BEE ownership needs.

Chapter: Sector codes:
Chapter: Sector codes:
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