Transport Sector – BEE Ownership Element

1. Introduction and Applicability

• 1.1 Sector Code Overview: The Amended Transport Sector Code provides a framework for measuring B-BBEE compliance specifically within the transport industry in South Africa. It aims to address the unique characteristics of this sector, including its importance to economic activity, its historical lack of transformation, and the diverse range of sub-sectors within it.
• 1.2 Scope of Application: The Transport Sector Code is complex in its application, with eight distinct sub-sectors, each with its own scorecard and specific rules:
  • Road Freight
  • Rail Freight
  • Maritime Transport and Services
  • Aviation
  • Bus Commuter Services
  • Taxi Industry
  • Forwarding and Clearing
  • Pipelines
  • The Code applies to entities operating within these sub-sectors. The specific definitions and scope of each sub-sector are detailed in the Code itself.
• 1.3 Legal Basis: Section 9(1) of the Broad-Based Black Economic Empowerment Act (No. 53 of 2003, as amended) and the Amended Transport Sector Code (Government Gazette No. 32511, 21 August 2009, as amended). Several amendments and clarifications have been issued since 2009. Note: This is an older Sector Code, and there have been ongoing discussions about revisions.
• 1.4 Effective Date: 21 August 2009 (with subsequent amendments).
• 1.5 Precedence: This Sector Code supersedes the Generic Codes for entities within its scope. However, the sub-sector specific rules are critical.

2. Ownership Scorecard and Thresholds

• 2.1 Ownership Scorecard: The Transport Sector Code has different ownership scorecards for each sub-sector. It is impossible to present a single, unified scorecard here. However, a general pattern can be observed:
  • The ownership targets are generally aligned with or higher than the Generic Codes (25% + 1 vote for voting rights and 25% for economic interest).
  • There is often an emphasis on Black women’s ownership and participation by Black designated groups.
  • Net Value is a key component, with a subminimum requirement.
  • The precise weightings and targets vary significantly between sub-sectors.
  Example (Road Freight – one of the sub-sectors): Indicator Weighting Target Exercisable Voting Rights (Black People) 4 points 25% + 1 vote Exercisable Voting Rights (Black Women) 2 points 10% Economic Interest (Black People) 4 points 25% Economic Interest (Black Women) 2 points 10% Economic Interest (Black Designated Groups) 3 points 3% Net Value 10 points See Below Total 25 points You would need to consult the Code for the specific scorecard of each sub-sector.
• 2.2 Priority Element Status: Ownership is a priority element across all sub-sectors.
• 2.3 Subminimum Requirements: Generally, 40% of the Net Value points, but this should be confirmed for each sub-sector.
• 2.4 Entity Size Thresholds: The thresholds vary between sub-sectors. Some use the Generic Codes’ thresholds (R10m/R50m), while others have different thresholds. It is essential to check the specific sub-sector rules.
• 2.5 Automatic Recognition for EMEs/QSEs:
  • The usual automatic levels generally apply (Level Four for EMEs, Level One/Two for 100%/51%+ Black-owned EMEs and QSEs), but this must be confirmed for each sub-sector.
  • Crucially: Are there any conditions or restrictions on this automatic recognition? Generally, no, the Transport Sector Code does not have a similar provision to the Construction Sector Code’s Clause 3.1.3. However, always check the specific sub-sector rules.

3. Specific Ownership Requirements and Interpretations

• 3.1 Unique Ownership Targets: As mentioned above, targets vary between sub-sectors, but are generally aligned with or higher than the Generic Codes.
• 3.2 Flow-Through and Modified Flow-Through: Standard Flow-Through and Modified Flow-Through Principles generally apply, but check for sub-sector specific variations.
• 3.3 Exclusion Principle: Standard Exclusion Principle generally applies.
• 3.4 Treatment of Specific Entities: The Code and its sub-sectors may have specific provisions for trusts, BBOS, and ESOPs. Consult the specific sub-sector rules.
• 3.5 Multinationals: No specific provisions beyond the Generic Codes are generally apparent, but this should be confirmed for each sub-sector. Equity Equivalents would likely apply as usual.
• 3.6 Ownership by Qualified Professionals/Specific Roles:
  • Generally, not a specific requirement within the ownership provisions.
  • Crucially: Are there any requirements for ownership to be held by individuals in specific roles (e.g., executive management, as in the Construction Sector Code for BEPs)? Are there penalties for not meeting these requirements? Generally, no, but always check the specific sub-sector rules.
• 3.7 Sale of Assets: No specific deviations from the Generic Codes are generally apparent.
• 3.8 Private Equity Funds: Ownership by B-BBEE compliant Private Equity Funds is possible, provided the fund meets the requirements outlined in the Generic Codes (Statement 100, paragraph 3.10). Check for any sub-sector specific restrictions.
• 3.9 Other Unique Provisions: The sub-sector specific rules are the most important “unique provisions.” This is a highly fragmented Code.

4. Areas of Uncertainty and Interpretation

• 4.1 Ambiguities: The complexity of the Code, with its multiple sub-sectors, creates numerous potential ambiguities. Valuation methodologies, the application of the Flow-Through Principle, and the interpretation of sub-sector specific rules are all areas of potential uncertainty.
• 4.2 Industry Practice: Industry practice varies between sub-sectors. Engagement with the relevant industry bodies and the Transport Sector Charter Council is crucial.
• 4.3 Potential Disputes: Valuation disputes, challenges to ownership structures, and interpretation of sub-sector specific rules are all possible.

5. Deal Process, Parties, and Costs

• 5.1 Typical Deal Structures: Direct ownership, trusts, BBOS, and ESOPs.
• 5.2 Key Parties Involved: Transport companies (in various sub-sectors), Black investors, 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 rules of the relevant sub-sector. (Pay particular attention to any specific requirements like those for BEPs in the Construction Code). Not generally applicable, but always check the sub-sector.
• 6.2 Fronting Risks: High risk.
• 6.3 Best Practices: Thorough planning, expert advice, genuine commitment to transformation, careful structuring of ownership deals, ongoing monitoring of compliance. Crucially: Identify the correct sub-sector and carefully analyze its specific requirements.

7. Alternatives to Ownership
Other elements include:

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

These, too, vary by sub-sector.

8. Conclusion

The Transport Sector Code is highly complex due to its division into eight distinct sub-sectors, each with its own scorecard and rules. While the general principles of B-BBEE ownership apply, the specific requirements vary significantly between sub-sectors. It is essential to identify the correct sub-sector and carefully analyze its provisions to ensure compliance. Crucially, while the overall Code does not generally impose restrictive ownership requirements based on professional registration and executive management roles (like the Construction Sector Code for BEPs), it is always necessary to check the specific sub-sector rules for any such provisions. This Code requires a highly granular approach.

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