Codes of Good Practice: briefing

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
31 January 2007
CODES OF GOOD PRACTICE: BRIEFING

Chairperson: Mr B Martins (ANC)

Documents handed out:
Codes of Good Practice for Broad-Based Black Economic Empowerment presentation

SUMMARY
The Department of Trade and Industry presented a draft form of the revised Codes relating to broad based black economic empowerment implementation, which had been approved by Cabinet in December 2006. The history and background were explained, together with the aims of empowerment. The Codes were issued pursuant to Section 9 of the Act and were intended to redress the lack of understanding, lack of clarity, disparity in definitions and targets, and lack of guidelines that had led to some sham fronting in the past. They also focused more specifically on a broad base of empowerment. The Department detailed the different Codes, and indicated the key principles and implications, management control indicators, measuring standards and weighting points. Once gazetted, three documents would be made available and there would be a twelve month transitional period before full compliance was monitored. The business community had expressed some concerns, which were often related to lack of understanding of the concept. The Codes and scorecards, which were explained, worked together, in that they created incentives to comply. The South African National Accreditation System would be mandated to create a new single set of standards and to certify verification agencies. Provision had now been made for full participation instead of hollow representation, for multinational corporations, new entrants into ownership, and executive as opposed to non executive roles. A ten year period was set out, divided into five year incremental phases. Black youth unemployment would be targeted and the national economy as opposed to individual gain was fundamental. Enterprise development provisions would tackle the high failure rates, and socio economic contributions would be made to enhance development. Micro enterprises with turnovers of R5 million and less had a exemption, while those with turnovers between R5 million and R35 million would be allowed to select four of the seven elements. 

Members’ questions addressed whether dti had achieved an optimum balance, and had addressed social development and skills shortage sufficiently, whether the exemption of R5 million was low enough, whether fair labour practices could be incorporated into the Codes, and the monitoring process. It was clear that companies would have to self-comply, with economic pressures being applied. Concern was expressed over a company reverting to white ownership yet retaining points, and the Department clarified this and other points, mentioning the options that were available to address all concerns. The shortage of skills, possible punitive measures, employment of black foreign nationals, vendor financing by banks, and the increase in consultancy firms were raised. The Department clarified that it was reexamining the Act in regard to authorizations, companies exporting to foreign markets and lack of enforcement measures.

MINUTES
Codes of Good Practice: Department of Trade and Industry (dti) Briefing
Ms Polo Radebe, Chief Director for empowerment, Department of Trade and Industry (dti) presented the history and background to the Codes of Good Practice on Broad-Based Black Economic Empowerment (BBBEE). BBBEE was defined as an integrated and coherent socio-economic process that would directly contribute to the economic transformation of South Africa and would bring about significant increases in the numbers of black people that managed, owned and controlled the country’s economy, as well as significant decreases in income inequalities. It would thus encompass human resource development, employment equity, enterprise development, preferential procurement, as well as investment, ownership and control of enterprises and economic assets The Codes were issued pursuant to Section 9 of the Act, to give further interpretation, indicators for measurement, and guidelines for stakeholders. BBEEE would work properly only if there was consistency, visibility and clear direction. Before the Codes were drafted, there had been some lack of understanding, lack of clarity, disparity in definitions and targets, and lack of guidelines had led to some sham fronting. A focus on narrow based empowerment had led to a narrow band of beneficiaries.

Ms Radebe reported that the Codes were arranged under sub sections of Conceptual Framework; Ownership; Management Control; Employment Equity; Skills Development; Preferential Procurement; Enterprise Development; Socio-Economic Development; and Qualifying Small Enterprises. Ms Radebe stressed that the Codes were still in draft format. However, public enterprises had already begun to abide by the Codes and an effect had thus started rippling through the economy. She indicated, for each of the Codes, some key principles and implications, management control indicators, measuring standards and weighting points.

The Codes would be gazetted once the Minister of Trade and Industry had approved this, and three documents would be made publicly available, being the Codes, a guide to the Codes and  lastly a summary or quick reference book on how to interpret the Codes. There would be a 12 months transitional period after the gazetting of the Codes and after that time compliance will be monitored.

Ms Radebe said that there had been concerns expressed in the business community over the implementation of BBBEE and this was partly due to a lack of understanding of the concept. She stressed that the Codes were specifically designed to give greater direction and understanding and provided an implementation framework. She explained that companies would be graded on their Code implementation framework vis-à-vis the Generic Scorecard. The Scorecard ranked the Codes, assigned a weight to each specific Code and gave Compliance Targets. For example, Code 100 was Ownership, which had a weighting of 20 points and a Compliance Target of 25%+1. This was assessed against the weighting column that had a total of 100 points. BEE recognition levels would be the result of that score. If a company achieved a score of between 85 and 100 points, it would be recognised as Level 2, or 125% compliant. A company achieving only 40 out of 100 points would be at level 7, or only 50% compliant. The Codes and scorecards worked together, in that they created incentives to comply, and customers, wishing to enhance their own reputations in turn, would prefer to interact with and procure from businesses with higher BBBEE status.  This would create a multiplier effect throughout the economy.

Ms Radebe explained how the verification agencies would become accredited to identify BEE compliant companies. In the past there had been numerous problems with this process and also issues surrounding standards, methodologies and the exclusion of some verification agencies. The South African National Accreditation System (SANAS), an internationally recognised public entity, would be mandated to create a new single set of standards and to certify verification agencies.

Ms Radebe explained that Code 100, dealing with Ownership, called for black ownership to provide full participation and discouraged hollow representation. There must be provision for full voting rights and all else that was attached to ownership status. This issue was key in the Codes.

Special provision had been made in Code 100 for Multinational Corporations (MNCs), as dti had recognised that some MNCs were not allowed to sell or change their ownership for various reasons. However, dti was still mindful of the importance of achieving BBE goals and was intending to liaise closely with MNCs to find innovative ways to increase black representation.  

Code 100 also provided for new entrants into positions of ownership. A feature of the Code was to exclude people who had already been used over and over in ownership. The dti felt that there were many young black entrepreneurs who should now be give an opportunity. Dti had thought much about how to treat shareholding in private equity funds.

Codes 200 and 300, respectively Management Control and Employment Equity, would focus on executive and non-executive roles. At present most black people held a non-executive role and thus were effectively outside the operational management and decision-making process. Targets had generally been met below general management but representation was falling short of the mark above this level and within the ranks of junior managers.

For Code 300 companies would be given 10 years overall to meet the requirements, divided into two five-year incremental phases. The reasons for this was to get companies on the road to proper representation at an earlier stage, by discouraging them from waiting until year 9 or 10. She stated that 50% of all targets must be black women.

Code 400, Skills Development, was specifically designed to tackle the high unemployment ratio of black youth.

Code 500, Preferential Procurement, was created to promote BEE compliance with a focus on the entire national economy. Those companies assessed as adding value would be given bonus points in the Generic Scorecard because they created further employment locally as opposed to merely importing and selling. This would also encourage the procurement of locally made goods and services.

Ms Radebe reported that dti had noted that there was a high start-up rate of new enterprises, but an equally high failure rate. Code 600 sought to address this dilemma, as it dealt with enterprise development and advanced access to credit, through loans, equity, seed capital and others. Industry Specific Contributions under this Code would also encourage companies to make monetary donations or provide a service or skill.

Code 700 promoted a compliance target of 1% of net after-tax profit, or 0.125% of turnover, to socio economic development. The contributions would be invested in public programmes that enhanced such development.

Code 800 would be a measurement of BEE in small enterprises. Micro Enterprises, those with a turnover of R5 million and below would be given an exemption and automatic level four recognition. Enterprises with a turnover between R5 million and R35 million would be allowed to select four of seven elements for purposes of appraisal, and all elements would be weighted at 25% and adjusted for small enterprises. Those companies exceeding turnover of R35 million would be graded on compliance to all seven elements.

Discussion
Prof B Turok (ANC) said that this seemed to be a great improvement over previous work. However, he would question if the balance was yet correct. This Committee had changed  the concept of Black Economic Empowerment to one of broad based black economic empowerment to help shift the balance away from the economic elite. In the past week the President had attacked the personal accumulation of wealth. Prof Turok said that there was a clear need to promote social development and move away from enrichment and elite creation. He asked Ms Radebe to comment on the balance. 

Ms Radebe acknowledged the challenge of acquiring the best balance possible. She urged Prof Turok to look at some of the later Codes,  such as Skills Development, which addressed problems in the second economy, and Preferential Procurement, which was intended to help emerging start-ups that had solid potential. She added that the Codes would facilitate financing for those who had business opportunities but no way of accessing capital. There would be greater job creation through all these measures. 

Ms Radebe went on to add that she believed that dti had achieved the correct mix, through the assignment of points to social development and skills shortages. 45 of the 100 points were allocated towards matters such as Ownership and Management Control, while 55 points were directed at helping the broader unemployed segment of society.

Dr P Rabie (DA) praised Ms Radebe for the new work that had been presented. His concern related to the turnover bracket for Micro Enterprises. He noted that the Department of Agriculture had asked that the qualifying turnover should be lower than the current R5 million.

Ms Radebe said that different sectors, industries and departments within government should come forward with their specific suggestions, so that the dti could try to address their representations as best as possible. 

Dr Rabie raised the question of rural labour-intensive companies, enquiring whether if it would be possible to incorporate some sort of fair-labour practice into the Codes,  aimed at such businesses.

Ms Radebe answered that dti had created incentives for labour-intensive businesses, but had decided that labour policy fell under the Department of Labour. Dti were not experts in industrial policy and had to be very careful. However, the system of giving bonus points to value-adding businesses did in one sense reward labour-intensive companies.

Ms M Ntuli (ANC) wanted to know how dti would go about monitoring, and raised the issue of whether there was capacity. 

Ms Radebe answered that companies who did not comply with the Codes would not be awarded tenders.

Mr S Njikelana (ANC) expressed his deep concern over certain issues in the Codes. He was especially worried what would be done if a company reverted back to white control in the future, as it would still be able to retain its points.

Ms Radebe acknowledged that this was a valid concern, but noted that the dti had tried to address this issue. The first point was that companies would only be allowed to retain a maximum of 40% of potential points when a sale of assets had been recognised. Secondly, dti believed that black people should just not purchase shares in a company for the sake of a shareholding, but should actively ensure that the company was transforming itself in all the necessary areas. Thirdly, dti also wished to encourage black shareholders perhaps to sell their small stakes of shares in favour of investing in their own or another 100% black-owned company. She also stated that by the time that the shareholding reverted back to white-majority ownership, the entire company might have been totally transformed.

Ms Radebe hastened to add that dti was concerned to address other concerns, and detailed some examples that had been found. Dti was aware that  black people might enter into BEE transactions in year 1, and find that the sector was likely to underperform in year 5, or had already started to underperform in year 2 or 3. It was not desirable that they should be stuck holding illiquid shares and required to keep their money in the under-performing company. Such shares would be discounted because traders knew that the company was illiquid. On the other hand, some companies entered into BEE transactions without a set fixed term and thus could sell their ownership of the company when they saw fit. Those companies were now without black representation in their ownership mix. Therefore there had to be a search for a middle road between the two extremes. These were some of the considerations that the DTI took into account, and she believed that dti had found the right balance. She admitted that it might not be absolutely ideal, but was certainly preferable to either of the extremes.

Mr L Labuschagne (DA) asked if authorisations had been made too wide with regard to the BEE Act 53 of 2003.

Ms Radebe answered that the dti was taking another look at the Act because it did have some concerns itself about authorisations. She was careful to say that she was not sure if changes needed to be made, because all the provisions in the Act need to be studied again.

Mr Labuschagne asked Ms Radebe to explain the BEE Recognition Level and BEE Status again, and Ms Radebe did so in more detail.

Mr Labuschagne asked if “black” referred to “coloured” and “Indian” people as well.

Ms Radebe answered that this was so.

Mr Labuschagne asked what would be done about black people who did not have the necessary skills, particularly in areas where there was a shortage of certain skills. 

Mr Lionel October, Deputy Director General, dti said that there was obviously a problem of under-skilled black people due to the legacy of apartheid. He acknowledged the criticism of affirmative action promotions when people with few or no skills or experience were promoted but could not perform. However, this was probably a distortion of the real situation, which could happen in a minority of cases. The targets in the Codes had been adjusted to take into account that there was a shortage or availability of skills in certain areas. For example, senior management targets were at 40%, while lower-level management targets were much higher. Dti had taken into account that it would take a period of time to find the required numbers of black senior managers, as they were currently in short supply. There were some companies that needed specific skills that currently could not be found among black people. That was not the usual occurrence and the situation would adjust itself shortly.

Mr J Maake (ANC) wanted to know if there were any punitive measures for companies who did not comply.

Ms Radebe responded that the Act did not give dti any power to apply sanctions. This was a concern and one of the reasons why dti had suggested that the Act should be looked at again. However, because a company not complying would not receive tender awards, it became an economic decision whether or not to comply.

Mr Labuschagne accepted that BEE was not for white people, but pointed out that South Africa was part of a globalised world. He enquired what would be the position if foreign black nationals wanted to come over and do business in South Africa.

Mr October replied that BBBEE requirements clearly referred to black South Africans only, and not to black people from abroad, even if they were to settle here.

Mr Maake enquired if the dti could help him understand the concerns around ABSA to the effect that it would supply black people who could not afford shares in ABSA with a loan to allow them to buy such shares. ABSA benefitted two-fold through having black shareholders and receiving interest on those loans. He added that he was not sure if he was describing ABSA’s method accurately.

Ms Radebe replied that this situation was not necessarily bad. If there were companies that could afford to fund potential shareholders through such systems then the company seemed to have confidence in itself. This was known as vendor financing and that cross-funding might even occur between banks. She reminded the Committee that it was possible to have unscrupulous dealings in any transaction.

Prof Turok asked to what extent would the Codes and dti give incentives to the poor masses. He said that history would judge the dti on this aspect, and not on how many BEE points were earned by companies. 

Mr October responded that the public had a perception that BEE was concerned with making deals, with ownership and with enrichment of the elite. However, he believed that the Codes now produced would put greater emphasis on skills development, social development, and helping entrepreneurs, in addition to executive and top-level management.

Prof Turok noted that there had been an increase in BEE verification and consultancy firms, and asked what problems could be foreseen.

Mr October replied that the Codes did allow for verification and consultancy firms to be established, provided they had been accredited by SANAS. He said that right now the total income of these firms was relatively small, but it would be interesting to see developments. It might become a concern if it could be proven that BEE consultancy fees were accounting for a disproportionate amount of businesses’ expenses.

Mr Maake noted that the Codes were not binding for the private sector, being incentive driven, and enquired the position of South African firms that only exported to foreign markets.

Ms Radebe acknowledged that this was a problem and was a further reason why the Act might have to be re-written. At the moment the Act had no teeth for compliance, but relied upon other legislation. For example, the Department of Forestry might insist upon BEE compliance as one of the conditions to be satisfied before issuing a licence under forestry administration. 

The meeting was adjourned.