Shifting the BEE landscape BEE Survey. kpmg.co.za

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1 Shifting the BEE landscape 2012 BEE Survey kpmg.co.za

2 2012 BEE Survey 2006: Benchmarking BEE 2007: Making economic sense of empowerment 2008: Monitoring the changing of the guard 2009: Are we there yet? 2010: The Evolution of BEE Measurement 2011: A Time for Transformational Leadership

3 Shifting the BEE landscape 1 Contents 1. A message from the Chief Executive and Foreword from the BEE Advisory Team 2 2. Survey approach 4 3. Participants of the survey 6 4. Survey questions How South African organisations are progressing with B-BBEE Drivers for compliance Do you believe B-BBEE is achieving its objectives? Revised B-BBEE Codes of Good Practice Conclusion Glossary Contact details 28

4 BEE Survey 1 A message from the Chief Executive This marks the seventh year of the annual KPMG BEE Survey; a remarkable achievement which we could not have done without the sustained interest and support of leaders like you. The changes looming in BEE legislation and the renewed focus on BEE in South Africa s economy have informed our Shifting the BEE landscape theme for this year s report-back and analysis of what our survey respondents are telling us. This year s results have been much anticipated in terms of objectively gauging the reaction from corporate South Africa to the proposed changes that have been communicated to the public. Last year we saw how the BEE topic moved up the organisational strategic agendas and it seems that this has not changed in light of the amendments. On any day, one will not open a newspaper or business periodical in South Africa without BEE receiving a mention. This is very positive. We are excited this year to be at the forefront of the reactions that organisations shared with us in response to the proposed legislative changes. Job creation, poverty alleviation and skills development, at the heart of issues faced by South Africans, are seen to be the drivers of the proposed changes in BEE. The alignment between B-BBEE with many of the fundamental goals of the National Development Plan (NDP) is obvious and crucial. We continue to be grateful to those companies who every year take their time to respond to this survey, thereby establishing its authority. Without your support, this survey would not be possible. With your support, we are collectively able to make a meaningful contribution to the practical achievement of the desired outcomes of the legislation. While this survey is all about BEE, this is only part of the journey towards normalising and sustainably growing South Africa. With an overarching national goal of sustainable growth in a normalised society, the cohesion between fundamental Government-led initiatives such as around BEE and the NDP, as well as business-led initiatives such as the World Economic Forum and attainment of the United Nations Millennium Development Goals (MDGs) is crucial. At KPMG, we believe that we have certain specific responsibilities and opportunities in this regard of substantial relevance to South Africa and all of her stakeholders. This is why we have strategically focussed our energies on relevant drivers that we can lead, such as this survey and the work that we are doing in promoting the desired outcomes of the NDP. Similarly, achievement of the MDGs is close to our hearts, with particular emphasis on education, poverty alleviation and gender empowerment. As a Strategic Partner of the World Economic Forum, we are actively engaged with this outstanding organisation changing Africa and changing the world. Ultimately, it is indeed all about a rapidly changing landscape, transforming the hearts and minds of every South African and those who we do business with. If you would like to engage with our people experts driven by a passion for South Africa on the outcomes of this survey or any of the areas where we are actively working to positively shape the necessary changes, please do so at any time. We would love to share the future with you. With kind regards Moses Kgosana, Chief Executive, KPMG in South Africa

5 Shifting the BEE landscape 3 Foreword from the BEE Advisory Team KPMG is once again pleased and honoured to put forth the findings of our 2012 B-BBEE Survey results. The Department of Trade and Industry issued the proposed Revised Codes of Good Practice 2011 for comment in the last quarter of The comment period closed on 5 December 2012 and it is for this reason that our 2012 Survey questions were only issued in January This allowed for participants to comment on the proposed changes. During the same period, the B-BBEE Amendment Bill was tabled in Parliament and is still in the process of being gazetted. The results of the survey show that the BEE landscape has indeed shifted as: Strategies are being revisited to take into consideration the looming changes in legislation Targets have increased in respect of employment equity and preferential procurement More customers are exerting pressure on their suppliers to comply with minimum B-BBEE levels. This is now a business imperative and not just a competitive advantage B-BBEE remains a critical competitive advantage in South Africa as evidenced by customers exerting compliance pressure on their suppliers The key question at the five year review of B-BBEE Codes of Good Practice is whether or not B-BBEE is achieving its intended objectives. KPMG attempts to pin down explicit challenges faced by organisations have revealed that entities are battling with certain elements of the B-BBEE scorecard as well as the cost of implementing BEE in their organisations. Our survey findings and analysis over the following pages provide insights into the progress of black economic transformation in South Africa. Our findings are benchmarked against our 2011 BEE Survey to assess the pace of B-BBEE implementation, monitoring and reporting over the past year. BEE Advisory Team from left to right: James Ledwaba, Boitumelo Ngutshane, Mpho Ford, Bonolo Sinobolo and Pop Motsisi

6 BEE Survey 2 Survey approach This section outlines the approach and methodology used for the KPMG Black Economic Empowerment (BEE) Survey. Duration of the Survey South Africa has, over time, moved through a number of phases where B-BBEE is concerned, and KPMG is committed to reporting on such developments on an annual basis. This is the seventh year of reporting. In order to measure and evaluate the extent of B-BBEE advancement in the country, the results of the 2012 KPMG BEE Survey are compared to the results from the 2011 KPMG BEE Survey. In this year s survey, participants were also asked to comment on the pending changes to B-BBEE legislation. Measurement Criteria Industry Sector Codes, Charters and the dti Codes of Good Practice The following gives an indication of the criteria employed by the annual KPMG BEE Survey in measuring respondents B-BBEE contributions: 2006 and 2007 dti Codes of Good Practice 2008 to 2012 dti Codes of Good Practice, industry sector codes and charters. This enables yearly comparisons to be drawn in the results obtained from 2006 to 2011 and beyond. Sample and Categorisation The KPMG 2012 BEE Survey was sent to over organisations operating in different industries. Consistent to previous years, the responses received were analysed according to industry, company type and company size. These categories were further divided into the following subcategories, as per the dti Standard Industrial Classification: Construction A Finance, Real Estate and Business Services B Manufacturing C Mining and Related Sectors D Personal Services E Agriculture, Forestry and Fishing F Wholesale, Retail, Motor Trade and Accommodation G. Electricity, Gas and Water H General Government Services I Company type JSE Listed Large Unlisted Small to Medium Entities Non-profit Organisations.

7 Shifting the BEE landscape 5 Company size (based on the entity s annual turnover in accordance with its most recent fiscal year-end) Organisations with an annual turnover of less than R5 million With current BEE Codes of Good Practice these organisations enjoy exemption from complying with B-BBEE. Organisations with an annual turnover of between R5 million and R10 million Currently these organisations are required to adhere to reduced B-BBEE requirements. The proposed Revised Codes of Good Practice will exempt these organisations from BEE compliance. Organisations with an annual turnover of between R10 million and R35 million These organisations are currently classified as Qualifying Small Enterprises and have reduced requirements to adhere to BEE Codes of Good Practice. Organisations with an annual turnover of between R35 million and R50 million (this is a new separately identified category in 2012) These organisations are currently classified as Generic and have to comply with all the elements of the BEE Codes of Good Practice. With the proposed Revised BEE Codes, compliance requirements of these companies will be reduced to comply with the Qualifying Small Enterprises requirements. Organisations with an annual turnover of more than R50 million These organisations are measured according to the Generic scorecard on both the current and the proposed revised Codes of Good Practice.

8 BEE Survey 3 Participants of the survey This section outlines the participants in relation to the level and nature of responsibilities of the respondents, as well as the response coverage by industry, company type and size. Respondent titles The chart below gives an analysis of the designation and responsibilities of the respondents in their respective organisations. Respondent titles (2012) 13% 15% 13% 13% 33% 11% 2% This year the senior and middle management categories were introduced as new categories from the previous year. These categories allowed for a further analysis of individuals in other categories. The majority of respondents, accounting for 33 percent, were from the Senior management category. Fifteen percent of respondents are from the Middle management category. Chief Financial Officers, Executive Directors and Transformation Managers collaboratively comprised 28 percent of respondents. Noticeable is the drop from 20 percent to 13 percent of respondents who are Transformation Managers. It is evident from the survey that the majority of respondents are senior members of staff in their respective organisations. This indicates the growing importance of B-BBEE at senior management level in organisations. Chief Executive Officer Chief Financial Officer Executive Director Senior Management Middle Management Transformation Manager Other Respondent titles (2011) 7% 10% 48% 5% 7% 3% 20% Chief Executive Officer Chief Financial Officer Executive Director HR Manager Transformation Manager Administrator/Officer Other

9 Shifting the BEE landscape 7 Industry coverage To ascertain the industry or sector extent of B-BBEE implementation, respondents were asked to indicate the industry in which their respective organisations operate. The results are depicted in the chart below. Industry coverage (2012) 25% 3% 3% 25% Responses from sectors in transport, storage and communication, electricity, gas and water supply, and general government services, are not illustrated in the chart above. The respondents from these sectors were insufficient to allow for meaningful comparison and therefore have been excluded from further sector analysis. Respondents organisations operating in the manufacturing industry increased from 23 percent in 2011 to 27 percent in Finance, real estate and business services respondents, collectively decreased from 39 percent in 2011 to 25 percent in The personal services industry has the lowest percentage of respondent coverage, at two percent compared to five percent in In 2011, the mining and related industry, construction and agriculture, forestry and fishing sectors were the lowest at three percent each. 14% 3% 27% Industry coverage (2011) Agriculture, Forestry and Fishing Construction Finance, Real Estate and Business Services 7% 11% 10% Manufacturing 5% Mining and Related Sectors Wholesale, Retail, Motor Trade and Accommodation Other 5% 39% 23% Construction Finance, Real Estate and Business Services Manufacturing Mining and Quarrying Personal Services Transport, Storage and Communication Wholesale, Retail, Motor Trade and Accommodation

10 BEE Survey Organisation type coverage In addition to industry coverage, the survey sought to establish respondent spread in terms of the type of organisations represented. This is illustrated in the chart below. Company type coverage (2012) 32% 3% 25% In the 2012 Survey, the Multinational category was considered under the Large Unlisted category. The majority of respondents in the 2012 Survey were from large unlisted entities. Thirty seven percent of respondents were from large unlisted entities, while 32 percent of respondents were from small to medium entities. Twenty percent of respondents were from JSE Listed entities this was significantly lower compared to the 2011 Survey which included 46 percent of respondents from JSE Listed entities. State Owned and Non-profit Organisations consisted of a combined six percent of respondents. For the purpose of this survey responses from State Owned and Non-profit Organisations were not further analysed due to insufficient respondents. 3% Company type coverage (2011) 37% JSE Listed Large unlisted entity Non-profit organisation Small to Medium entities State Owned entity/public Sector 26% 46% 28% JSE Listed Multinational Unlisted

11 Shifting the BEE landscape 9 Organisation size coverage Respondents were also required to indicate the size of their organisations, illustrated in the chart below. Organisation size coverage based on turnover (2012) 3% 9% 3% The Revised Codes of Good Practice are aimed at increasing the turnover thresholds for Exempt Micro Enterprises (EME) and Qualifying Small Enterprises (QSE) to R10 million and R50 million respectively. These thresholds were included in the 2011 Survey to be used as a comparison in the coming years. In the 2012 Survey, large entities made up 85 percent of respondents. This was a decrease from the 2011 Survey where large entities made up 93 percent of respondents. This could also be related to the increased thresholds. EMEs and QSEs collectively comprised 14 percent of respondents in 2012 as compared to three percent in This coverage is a slight increase from the 2011 Survey (6 percent). Company size coverage (2011) 85% 3% 3% Less than R5 million Between R10 million and R35 million Between R35 million and R50 million Greater than R50 million 94% EME (equal to or less than R5 million turnover) QSE (between R5 million and R35 million turnover) Large (equal to or greater than R35 million)

12 BEE Survey 4 Survey questions The 2012 BEE Survey includes similar questions posed in previous editions of the survey, allowing a base for comparison year-on-year. Due to the pending changes in the BEE landscape through the Amendment Bill and the Revised Codes of Good Practice, the 2012 Survey includes questions pertaining to organisations awareness of, and their reaction to the changes. The theme for the 2012 Survey, is Shifting the BEE landscape, informing on evaluation of the organisations awareness of these changes.

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14 BEE Survey 5 How South African organisations are progressing with B-BBEE Which elements are challenging to implement? Ownership 21% Preferential Procurement 10% Employment Equity 23% Skills Development 15% Enterprise Development 8% Management Control 21% Socio-economic Development 2% 0% 5% 10% 15% 20% 25% In previous surveys, respondents were asked questions to identify the elements they considered to be priority. In the 2012 Survey we sought to find out which elements organisations find challenging to implement. In the 2011 Survey, respondents indicated that employment equity is the most prioritised element. In the 2012 Survey, 23 percent of respondents rated employment equity as the most challenging element to implement. Ownership and management control are also seen as challenging elements, with 21 percent of respondents finding these elements difficult to implement. With a skills shortage in the country, it is not surprising that employment equity is still seen as challenging, and this is evident in it being the lowest scoring element when compared to other elements. Fifteen percent of respondents indicated that skills development is a challenging element to implement, and this is followed by preferential procurement, at ten percent. Although most companies scored highly on the enterprise development element, eight percent of respondents indicated that this element is challenging to execute. Lastly, only two percent of respondents indicated that socio-economic development is difficult to implement.

15 Shifting the BEE landscape 13 Indicate your organisation s B-BBEE score for each element Element Target Ownership Preferential Procurement Employment Equity Skills Development Enterprise Development Management Control Socio-Economic Development Total The overall scores for 2012 indicate that there was a decrease of 2.98 points in the overall BEE scores. The respondents averaged at 63.94, compared to an average of in the previous year. As a result, the average score reflects a Level Five contributor compared to Level Four in A year-on-year analysis reveals that a decrease in the average score was led by marginal decreases in average scores of ownership (0.66), preferential procurement (1.20), management control (0.7) and enterprise development (0.73) elements. Employment equity has a slight increase from an average of 7.09 in the 2011 Survey to 7.18 in the 2012 Survey. At the same time socio-economic development also showed an upward trend indicating an average increase of 0.41 point to achieve a 4.92 average score. Although overall there is a decrease in the average BEE rating level, only preferential procurement has decreased by a margin of more than 1 point.

16 BEE Survey 6 Drivers for compliance Participants were asked questions to evaluate which are the main driving forces behind being compliant with the Codes of Good Practice. The questions sought to evaluate the following: Who applies pressure on the entity to be compliant? What is the expected level of compliance? Are organisations themselves applying pressure to their suppliers to be compliant? Who or what is applying the most pressure to your organisation to comply with B-BBEE? 40% 36% 26% What minimum BEE contribution level is expected from you? 2% 5% 9% 23% 20% 0% 4% 15% 4% 9% 6% 42% 19% Customers Legislation Competitors Reputational Image Suppliers The Board of Directors Shareholders The results provide a clear indication of the drivers of B-BBEE compliance. The chart reveals that customers are the main driver for companies to comply with B-BBEE. This is certainly not a surprise as the intent is for the preferential procurement element to be the main driver of B-BBEE. The legislative requirements are second, with 26 percent of respondents reporting that legislation is a driver to comply. This is followed closely by reputational pressures at 15 percent, which could be attributed to companies that comply purely with the B-BBEE Act because of the belief that good corporate citizenship is the right thing to do. Supplier and competitor pressures scored the lowest at four percent each. Level one contributor Level two contributor Level three contributor Level four contributor Level five contributor Level six contributor Similar to the 2011 results, the 2012 results indicate that a Level four contributor is the expected BEE rating by customers of 42% of respondents. The results from the board of directors and shareholders clearly indicate that external forces are the key drivers of B-BBEE when compared to internal forces.

17 Shifting the BEE landscape 15 Have you set a minimum B-BBEE Status / Contribution Level for your suppliers to achieve? What minimum B-BBEE Level have you set for your suppliers? 15% 8% 8% 33% 8% 67% 61% Yes No Supplier B-BBEE contribution levels are critical in measuring the B-BBEE rating of entities. The B-BBEE score level of the measured entities is impacted by the B-BBEE contribution level of its suppliers through the preferential procurement element pillar. On average, less than 40 percent of respondents set minimum B-BBEE requirements for their suppliers. Thirty-three percent of JSE listed entities set these minimum B-BBEE requirements. The majority of respondents, 67 percent, indicated that they do not set minimum requirements for their suppliers. Small to medium enterprises also set minimum requirements, with 36 percent of respondents in the small to medium businesses, indicating this trend. Level one contributor Level two contributor Level three contributor Level four contributor Level five contributor The majority of companies, accounting for 61 percent, have set targets with a minimum Level Four B-BBEE rating. It appears that a Level Four B-BBEE status is still the most preferred level when choosing a supplier. The rationale for choosing this level is that a Level Four B-BBEE status allows the measured entities to claim at least 100 percent of their procurement spend with suppliers towards their own B-BBEE scorecard. Twenty-four percent of respondents have set a higher than Level Four B-BBEE rating. Only 15 percent of respondents set a lower B-BBEE level.

18 BEE Survey 7 Do you believe B-BBEE is achieving its objectives? Participants were asked questions to evaluate their view of the success of B-BBEE in its current form. The questions sought to evaluate the following: Measurements and costs associated with implementing the regulations Benefits achieved from implementing the regulations The most expensive element to implement Do you believe B-BBEE is achieving its objectives? Do you measure the economic value added to your organisation as a result of compliance with B-BBEE? 25% 29% 15% 23% 62% 46% No Partially Yes Forty six percent of respondents believe that B-BBEE is partially achieving its objectives as intended by legislation. This is followed by 29 percent who believe that it is not achieving its objectives, and 25 percent who believe that B-BBEE is achieving its objectives. A further analysis into these results revealed that the majority of organisations that view BEE to be partially working, or not working, believe BEE still benefits a select few. Other organisations have cited that companies follow a tick-box approach when implementing B-BBEE as opposed to creating sustainable programmes. No Partially Yes A large proportion of organisations have indicated that they are not measuring the economic value that B-BBEE compliance brings to them; this is evident in 62 percent of respondents. Of the population, 23 percent partly measure the value that B-BBEE brings, and only 15 percent measure the economic value of B-BBEE compliance in their organisations. This question brings to the fore that most entities do not know how much business B-BBEE brings to their organisations, and that B-BEE is still largely perceived as a cost rather than an advantage.

19 Shifting the BEE landscape 17 If yes, what is the estimated economic value added as a percentage of turnover? What is the estimated economic value lost as a result of not meeting the required B-BBEE status level (as a percentage of turnover)? 19% 31% 12% 13% 41% 25% 6% 13% 6% Less than 0.5% 0.5% - 1% 1% - 2% 3% - 10% 10% - 20% More than 20% Organisations that measure the economic value of B-BBEE have indicated the above results. Of the respondents, 31 percent indicate that the economic value added to turnover is less than 0.5 percent. This is followed by the opposite wing making up 26 percent of the sample for whom the value of turnover affected by B-BBEE is more than 20 percent. Equivalent to this are organisations whose turnover impact is between 10 and 20 percent. Such a deviation in results may be attributable to industry participation; entities whose turnover is largely affected could be dealing directly with government or supplying agents that deal with government directly, and those entities that show a low B-BBEE economic value could be operating in industries where stringent B-BBEE requirements are not required. 25% 3% 3% 3% Less than 0.5% 0.5% - 1% 1% - 2% 2% - 3% 3% - 10% 10% - 20% More than 20% A greater proportion of the respondents, (41 percent) indicate that their turnover would be lost by less than 0.5 percent if they did not meet the required B-BBEE status level. This is followed by 25 percent of respondents who believe that their turnover would be reduced by between three and ten percent. The results show a correlation with the responses from the previous question.

20 BEE Survey What is the estimated cost of complying with B-BBEE for your organisation as a percentage of turnover? Which BEE element do you believe is the most costly to implement in your organisation? 5% 5% 11% 6% 26% 15% 35% 11% 10% 6% 9% 15% 15% 31% Less than 0.5% 0.5% - 1% 1% - 2% 2% - 3% 3% - 10% 10% - 20% More than 20% Ownership Preferential procurement Employment equity Skills development Enterprise development Management control Socio-economic development This question measures the extent of costs that organisations carry in implementing B-BBEE. Thirty-five percent of organisations that are implementing B-BBEE are carrying a cost of less than 0.5 percent of turnover. Fifteen percent of respondents incur a cost of 0.5 to 1 percent of turnover while a similar proportion of respondents incur costs of 1 to 2 percent of turnover. The highest costs incurred in implementing B-BBEE are between 10 and 20 percent. Of the seven scorecard generic elements, skills development is selected by 31 percent of the respondents as the most costly element to implement. A target of three percent of payroll costs is required to be spent on this element. Ownership is viewed as the second most costly element to implement with 26 percent of respondents indicating this. This is no surprise as undertaking an ownership deal requires a fairly large investment. Management and control, and enterprise development ranked third at 11 percent, with employment equity at nine percent coming fourth. Lastly preferential procurement and socio-economic development scored six percent; the cost to implement these elements is minimal to organisations.

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22 BEE Survey 8 Revised B-BBEE Codes of Good Practice Participants were asked questions to evaluate their awareness and reaction to the proposed changes in B-BBEE legislation. The questions sought to evaluate the following: Awareness in respect of the proposed changes The perceived impact of the changes on the organisations The perceived impact of the changes on the overall South African environment The perceived impact on compliance Are you aware of the Revised B-BBEE Codes of Good Practice? 8% If you are aware of the proposed Revised Codes, what impact do you think they will have on your BEE score? 5% 4% 92% No Yes A significant 92 percent of respondents indicated that they are aware of the proposed Revised B-BBEE Codes this indicates that there was an effective awareness campaign to notify the public of the proposed Codes. Only eight percent were not aware of the Revised Codes. The Revised Codes of Good Practice were issued to the public during October 2012, with the closing date for comments in December Media coverage on the proposed changes was also extensive. 91% Decrease in BEE rating level Increase in BEE rating level No signifcant impact on BEE rating Of the total respondents, 91 percent indicated that the Revised Codes would result in a decreased B-BBEE rating level. Of the remaining nine percent, five percent indicated that the proposed changes will result in an increased rating, with only four percent indicating that the proposed changes will not have a significant impact on their BEE rating level. Among the changes proposed by the Revised Codes is the introduction of the sub-minimum thresholds that have to be met for priority BEE elements. Where the sub-minimum thresholds are not met, the impact could result in an entity s BEE rating being discounted by up to two levels depending on the size of the entity. We believe this could be one of the main drivers for respondents to believe that the Revised Codes will lead to a decrease in their BEE score.

23 Shifting the BEE landscape 21 What measures have you put in place to mitigate or comply with the Revised Codes? This question sought to understand whether entities have put in place measures to prepare for the Revised Codes. While there were varying responses to this question, it was clear that a minority of companies have indicated that they have started reviewing strategies to address the proposed changes. Many companies have indicated that they have not yet started dealing with the proposed Revised Codes until the Codes have been gazetted. Some of the companies have done predictive scorecards based on the proposed changes. A few companies have indicated that there is no point in preparing for the proposed changes as they will be non-compliant if the proposed changes are implemented as they stand. Those companies that adhere to sector charters have indicated that they will wait for their sector charters to be aligned to the proposed changes, and then only will they develop strategies. Do you think Sector Charters should be revised to take into account the Revised Codes? 40% 14% Yes No Not sure 46% At the time of this survey Sector Charters had not been aligned to the proposed changes by the Revised Codes. Forty-seven percent of respondents indicated that the Sector Charters should be aligned to the proposed changes. While 40 percent of respondents indicated they are not sure whether Sector Charters should be aligned, 14 percent indicated that there should be no alignment. The initial process of aligning Sector Charters with the current BEE Codes was time consuming and a challenging process for some Charters. Aligning with the Revised Codes could possibly present similar challenges and could be the reason why the majority of the respondents are either not sure or believe that there should be no alignment of the Sector Charters.

24 BEE Survey Do you think the Revised Codes will enhance compliance with B-BBEE? What impact will the Revised Codes have on your organisation s ability to create jobs? 29% 16% 50% 45% 40% 44% Percentage 35% 30% 25% 20% 24% 32% 55% 15% 10% 5% Yes No Not sure 0% Negative No impact Positive More than half, 55 percent, of the respondents indicated that the Revised Codes will have a negative influence on BEE compliance. Twenty nine percent of respondents indicated that they are not sure how the Revised Codes will impact BEE compliance, while 16 percent believe that the Codes will enhance compliance. The Revised Codes are considered to be stricter on BEE compliance. One of the topical changes is the introduction of minimum thresholds on priority BEE elements. When analysing the comments, many respondents who believe that the Revised Codes will not enhance BEE compliance indicated that some of the requirements raised by the proposed changes will be costly and in some instances impossible to adhere to. It is evident that entities are divided on how the Revised Codes will impact job creation. The majority, Forty-four percent, of respondents believe that the proposed Revised Codes will have a negative impact on their ability to create jobs. Another 32 percent of respondents see the Revised Codes as having a positive influence on job creation with 24 percent believing that job creation will not be impacted by the Revised Codes.

25 Shifting the BEE landscape 23 What impact will the Revised Codes have on small business? 60% 54% 50% Percentage 40% 30% 37% 20% 10% 9% 0% Negative No impact Positive Fifty four percent of respondents believe that the Revised Codes will have a negative impact on small business. Nine percent believe that small business will not be affected and 37 percent believe that the Revised Codes will have a positive influence on small business. One of the changes that affects small business is the increased threshold to classify Exempt Micro Enterprises and Qualifying Small Enterprises.

26 BEE Survey 9 Conclusion BEE focus areas B-BBEE still remains an important strategic objective in the minds of senior management in organisations. We have seen across industries that focus is varied, but challenges faced by these organisations are similar. It is clearly evident that employment equity is regarded as the most challenging element to implement within an organisation and this is reflected in the less than 50 percent average of the available points in this element. Although average BEE scores have decreased slightly there are no elements that have been significantly affected by this move. The Level Four achieved in the 2011 period was 66.5 which only had a small buffer for entities to drop a level. Any decrease in points in more than one of the elements would result in a decrease in the overall score achieved. Less than 2 points are required for the overall score to increase from a Level five back to a Level four. Should the changes in the Revised Codes be passed in their current format, most companies would achieve an even lower rating than is currently the case with the present Codes. BEE pressures In the past it has been thought that the main driver for BEE is the Government. It is apparent from the respondents that the main drivers for organisations to comply with BEE are in fact their customers, which in some cases could be Government, followed by legislation and reputational image pressures. This emphasises the importance of the preferential procurement element as the driver for BEE implementation. Noticeable is the requirement by customers for their suppliers to have relatively high BEE ratings. Some customers, in the mining industry, are requiring up to a Level one BEE rating from their suppliers. The fact that the overall scores have dropped from a Level Four to a Level five, indicates that pressure will continue to be applied. Most state owned entities are continuing to apply increased pressures as Government is seeking to achieve its objectives of increased employment and skills development by applying pressure through the entities that it has control over.

27 Shifting the BEE landscape 25 Objectives and costs of BEE There is a split of opinion to the question of whether BEE is achieving its intended objectives. This is not surprising as this remains a national debate that has been on the table for some time. It is surprising that, in the main, organisations do not measure the benefits that BEE adds to their organisations. This indicates the possibility that organisations still regard BEE as a cost rather than a benefit of doing business. Many organisations have put in place measures to report and comply with BEE. However, the trend to measure the benefits and the costs of complying with BEE have generally not taken root. Amongst the entities quantifying the benefits of BEE, it is clear that the economic value-add of BEE in organisations can be more than 20 percent of turnover. This is significant and is indicative of the role that BEE has in the South African economy. On the other hand, the cost of compliance is also significant with organisations reporting up to 10 percent of turnover on BEE compliance. Skills development is regarded as the most costly element to implement. Companies are required to spend up to three percent of their payroll costs to meet the targets of the BEE scorecard; this can be an expensive exercise for those organisations that are labour intensive. Ownership is also regarded as expensive to comply with and many organisations are in the process of reviewing or restructuring their black ownership transactions. Finance charges, consultant fees and other costs related to implementing a black ownership structure also consume significant amounts from organisations. Changes in legislation The proposed Revised Codes of Good Practice caused a buzz in the market in late 2012 when they were announced by the dti. The proposed changes were praised by many, in particular small business, but criticised by others. The 2012 Survey reveals that many organisations believe that BEE ratings will decrease if the Revised Codes are implemented and many are hoping that some of the proposed changes will be amended to prevent this. From the comments posted on the survey, many organisations are not prepared to respond to the proposed changes. At the time of printing these survey results, the dti had indicated that they hope to have the proposed changes gazetted by June The Revised Codes also provide for a year s transitional period for companies to respond to these changes. The initial process of aligning Sector Charters with the current BEE Codes was time consuming, and for some Charters, a challenging process. Aligning with the proposed Revised Codes could possibly present similar challenges and could be the reason why the majority of the respondents are either not sure or believe that there should be no alignment of the Sector Charters. The dti has indicated that the Sector Charters will be aligned to the Revised Codes although timelines have not been indicated. Respondents also believe that, with the Revised Codes, their organisations will be rated as non-compliant BEE contributors or will realise a significant decrease in their B-BBEE rating. Respondents also indicated that this could have a negative impact on compliance with BEE in future. The impact of job creation and support of small business by the Revised Codes is divided. The answer to whether BEE is a success will depend highly on the impact it has on job creation, skills development and growth of small business.

28 BEE Survey 10 Glossary BEE Black people Broad-Based Black Economic Empowerment (B-BBEE) dti Codes of Good Practice Exempted Micro Enterprise (EME) Black Economic Empowerment. African, Coloured and Indian persons who are natural persons and: Are citizens of the Republic of South Africa by birth or descent; or Are citizens of the Republic of South Africa by naturalisation before the commencement date of the Constitution of the Republic of South Africa Act of 1993; or Became citizens of the Republic of South Africa after the commencement date of the Constitution of the Republic of South Africa Act of 1993, but who, had it not been for the Apartheid policy, would have qualified for naturalisation before then. The definition of Black people now includes South African Chinese people as per the Pretoria High court ruling on 18 June The economic empowerment of all black people including women, workers, youth, people with disabilities, people living in rural areas and unemployed people through diverse but integrated socio-economic strategies that include, but are not limited to: Increasing the number of black people who manage, own and control enterprises and productive assets Facilitating enterprises and productive asset ownership and management by communities, workers, cooperatives and other collective enterprises Human resource and skills development Achieving equitable representation in all occupational categories and levels of the workforce Preferential procurement Investing in enterprises that are owned and managed by black people. The dti Codes of Good Practice on Black Economic Empowerment gazetted on 9 February An entity with an annual turnover of less than R5 million. Generic Scorecard The balanced scorecard issued in line with the dti Codes of Good Practice, Qualifying Small Enterprise (QSE) Sector Charter (or Transformation Charter) An entity that qualifies for measurement under the Qualifying Small Enterprise Scorecard with a turnover of between R5 million and R35 million, which qualification does not result in the circumvention of the Codes. A B-BBEE Sector Charter, gazetted in terms of Section 12 of the B-BBEE Act, means that it: Has been developed and agreed upon by major stakeholders in the industry Is published for information purposes only and used as a statement of intent by industry players Is fully binding between and amongst businesses operating in the industry. A Sector Charter gazetted in terms of Section 12 has no bearing on state organs and departments.

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30 BEE Survey Contact details 11Please contact us for further information and advice. KPMG s BEE Services has its headquarters in Johannesburg. Physical Address: KPMG Crescent 85 Empire Road Parktown 2193 Johannesburg Postal Address: Private Bag 9 Parkview 2122 Contact: Boitumelo Ngutshane Director: Transaction Services and BEE Advisory, KPMG in South Africa T: E: boitumelo.ngutshane@kpmg.co.za Bonolo Sinobolo Senior Manager: Transaction Services and BEE Advisory, KPMG in South Africa T: E: bonolo.sinobolo@kpmg.co.za

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32 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG Services Proprietary Limited, a South African company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity. MC9472