The New Defence Sector BEE Code aims to develop the defence sector

“Our company supplies specialised products exclusively to organisations in the defence sector. Our company is BEE compliant, but with our certificate having to be renewed soon, I am unsure whether the new Defence Sector BEE Code will apply to our business. Up to now we have reported under the Generic BEE Codes. What will the position be going forward?”

The Defence Sector BEE Code (“Defence Code”) was published on 9 November 2018 with the aim of transforming the South African Defence Industry. Before the Defence Code, private companies which supplied products and services to the defence industry, were required to report under the Generic BEE Codes of Good Practice (“Generic Codes”) in the absence of an industry specific charter. With the Defence Code now published, it will apply to the following entities: 

  • All entities operating in the South African defence industry, including national or provincial departments, state-owned and private enterprises;
  • Entities providing products and services to the State – procured from local or foreign-owned enterprises, defence manufacturing enterprises, research and development enterprises and other entities;
  • Any role-player and stakeholder that elects to opt in; and
  • Any entity that derives more than 50% of their annual turnover from the South African defence industry.

As with the publication of any new or amended BEE code, the challenge faced by companies in the defence industry are to align their current BEE compliance initiatives with new or amended requirements applicable. Fortunately, whilst the Defence Code does contain unique requirements, most of the other elements are quite similar to that of the Generic Codes, with the following key differences worthy of highlighting:

There is a clear emphasis on the inclusion of black Military Veterans throughout the Defence Code with an extensive definition being provided and including veterans of the liberation struggle military organisations.

The Ownership element is very similar, save for higher targets which are set to be phased in from 25% for year one after the effective date of the Defence Code, 30% for year two, and 35% for year three. Black women ownership is set at 10%, increasing to 15% from year two onwards. Four points are specifically allocated to a 3% ownership stake held by black Military Veterans and/or black people in broad-based ownership schemes.

The targets contained in the Management Control element are similar to that of the Generic Codes, but the targets for board participation, middle management and junior management increases slightly in year three. There is also the inclusion of one point for the appointment of black Military Veterans as board members.

The Defence Code further aims to address the shortage of technical and critical skills in the defence industry through the Skills Development element. The overall target for this element is aligned with that of the Generic Codes, however the point allocation is adjusted to provide for additional criteria which have been added in for the promotion of the objectives of the Defence Code. These criteria comprise the inclusion of skills development expenditure on learning programmes for black Military Veterans, as well as black designated groups participating in learnerships, apprenticeships and/or internships.

Within the Enterprise and Supplier Development element, the Procurement sub-element is identical, save for a slightly lower target on procurement spend with QSE suppliers. For the remaining two sub-elements, the following provision is introduced: targets for both Supplier Development and Enterprise Development are set at 1% of an entity’s net profit after tax (“NPAT”) but with fewer points available. A further requirement is introduced, namely contributions equal to a further 1% of an entity’s NPAT to an Enterprise and Supplier Development Fund which is to be established by relevant stakeholders and approved by the Department of Defence and Military Veterans and the Department of Trade and Industry no later than 12 months after publication of the Defence Code. Until such fund is established, the target for Enterprise Development is set at 2% of an entity’s NPAT.

The Socio-Economic Development element is also similar to that of the Generic Codes, however the 1% of NPAT target is split equally between general qualifying socio-economic development contributions and socio-economic development contributions to black Military Veterans. 

The key highlight of the Defence Code is the introduction of an additional element. This is the Localisation Element which aims to measure the extent to which entities procure defence material from local enterprises that contribute to the development of manufacturing and new locally developed technology. This element requires entities to procure at least 60% of defence materials produced locally, as well as locally produced technologies.

The inclusion of the Localisation Element provides for 10 additional points on the scorecard, however the recognition levels are identical to those in the Generic Codes. Therefore, even though a company such as yours would not necessarily have implemented initiatives to comply with this element yet, it is still possible to reach a Level 1 (>100 points) as there are a total of 115 points available on the Defence Code scorecard. 

Accordingly, despite the differences, it should be possible with timeous and careful planning to remain compliant when you are measured in terms of the Defence Code in your upcoming BEE verification. So don’t delay and obtain the help of a BEE consultant to align your planning with the new Defence Code.

February 12, 2019
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