Codes of Good Practice for Broad–Based Black Economic Empowerment: Workshop Day Two

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Trade and Industry

15 August 2007
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Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
16 August 2007
CODES OF GOOD PRACTICE FOR BROAD–BASED BLACK ECONOMIC EMPOWERMENT: WORKSHOP DAY TWO

Chairperson: Mr B Martins (ANC)

Documents handed out:
COGP for preferential procurement
COGP for Enterprise Development and Socio- Economic Development

COGP for qualifying small enterprise scorecard

Audio recording of meeting

SUMMARY
The Department of Trade and Industry continued its workshop on the Codes of Good Practice for Broad-Based Black Economic Empowerment (B-BBEE), focusing on the B-BBEE Codes of Good Practice for preferential procurement, for enterprise development and for socio-economic development. Targets had been developed for procurement from black owned and black women owned enterprises. Companies need to spend 3% of their profits on enterprise development. Socio-economic development programmes should focus on women, people with disabilities and people living in rural areas as well as people with HIV/ AIDS. The workshop then looked at the scorecard for qualifying small enterprises. Qualifying small enterprises were those with a turnover of between R5 million and R35 million. Micro Enterprises with annual revenue below R5 million were exempted from the Codes

Questions and comments from the Committee focused on:
-
encouraging local manufacturing
- staff requirements
- the verification agencies
- the prevention of corruption.
- the role of the manufacturing sector
- government’s contribution to enterprise development
- monitoring
- figures of the financial sectors contribution to enterprise development
- the industrial strategy and B-BBEE
- non financial contributions
-
socio-economic contributions required from the private sector
- integration of contributions into local planning.

The Committee agreed that there should be public hearings with the public and private sector, asking them to explain what they have done in terms of B-BBEE and what they intended to do.

MINUTES
The Trade and Industry team consisted of Mr Lionel October (Deputy Director-General: Enterprise and Industry Development, Ms Nomonde Mesatywa (Acting Chief Director: BEE Unit), Ms Janeez Hafizulla (Deputy Director: Black Economic Empowerment) and Mr Mathibela Mankge (Deputy Director: BEE Advisory Council).

Mr October introduced the second day of the workshop by pointing out that the purpose of this strategy had been to broaden the definition of what black empowerment was about and move beyond ownership to include procurement and socio-economic elements in order to transform the South African economy.

Codes of Good Practice of B-BBEE for Preferential Procurement
Ms Hafizulla led the presentation. Specific targets were determined for procurement from Micros and Qualifying Small Enterprises (QSE), black owned and black women owned enterprises.

The Broad-Based Scorecard converted all enterprises into drivers of BEE through Preferential Procurement. Compliance targets and weighting were developed for the procurement scorecard. Within five years
BEE procurement spend from all suppliers based on the BEE Procurement recognition levels, should be 50% of the total measured procurement spend and within ten years it should be 70%. BEE status for companies would be recognised based on a BEE procurement recognition level. Ms Hafizulla compared three different companies and showed how procurement decision makers should apply the Code.

Discussion
Prof B Turok (ANC) said that local manufacturing was a major policy issue and it seemed to him that the BEE codes were designed to encourage local manufacturing. DTI industrial policy usually focussed on export-led manufacturing and markets as opposed to supporting local manufacturing. He asked the DTI to further elaborate on how the local focus of the BEE codes fitted into the broader economic strategy.

Mr October replied that in the draft codes there was a requirement for a certain amount of production to be locally produced. This requirement had caused quite an uproar in the local industry. B-BBEE only indirectly supported local manufacturing. It was agreed not to burden the B-BBEE process with local production but rather use the industrial policy explicitly to further this aim. Government bought about R2 -3 billion worth of anti-retroviral drugs every year. Fifty percent of the anti-retroviral tender went to foreign companies and the rest were produced locally. Locally there was the capacity to produce the drugs and a policy was adopted with a target to produce 80% of the anti-retroviral drugs locally. In terms of the motor industry development programme, 70% of car components were imported. The aim was to get the local industry to also produce car components. There was a shift in government towards supporting local manufacturing.

Prof Turok asked how many staff would be required in order to do the calculations for the preferential procurement B-BBEE COGP. He felt that the BEE codes were too elaborate and that a quick and dirty approach might be more appropriate.

Mr October said that procurement officers within SA businesses needed to implement the COGP while the DTI only developed the guidelines for B-BBEE.

Prof Turok responded by asking how the DTI would know that companies were telling the truth.

Mr October said that companies needed to provide government with scorecards when they tendered for work. Scorecards needed to be signed by the Chief Executive Officer (CEO) or it must be verified by a third party. The CEO would be liable for the scorecard and if companies lied on their scorecard they would be black listed. It was indicated that alternative methods were too onerous.  

Prof Turok asked further information on the verification agencies who would verify scorecards.

Mr October said that the
South African National Accreditation System (SANAS) would accredit the verification agencies. Verification was voluntary. The DTI would ensure that the verification agencies were not fly by nights but would have the requisite skills and use a uniform methodology. The public would also have a list of the verification companies.
 
Prof Turok also stressed that it was crucial to put in control steps to prevent corruption and cronyism in the BEE procurement system.

Mr October said that in terms of the Preferential Procurement Act that the old principles of procurement (transparency and value for money) would remain but that this would not necessarily lead to corruption. Internationally preferential procurement was implemented for example in the United States of America. Ms Mesatywa added that there were common law remedies for dealing with instances of fraud within procurement. 

Mr S Rasmeni (ANC) asked if the DTI were in a position to indicate what SA companies have the same B-BBEE profile as the examples used in their presentation.
 
Mr October said that there was a lot of detail in the B-BBEE COGP. He mentioned that the DTI had meetings with Woolworths and Edgars who committed themselves to reaching the B-BBEE targets as determined in the preferential procurement COGP. He said that the companies needed to implement B-BBEE whereas the DTI only developed the policy.

Mr Rasmeni said that corruption within procurement was not only the domain of the DTI but also other government departments. Government needed to ensure that there was proper monitoring system to ensure that fraud did not take place.

Codes of Good Practice for Enterprise Development
Ms Mesatywa focused on the COGP for enterprise development. Access to finance was a critical challenge which small enterprises struggle with. Non financial support combined with financial support should be part of a holistic and integrated strategy for enterprise development. Training and mentoring, provision of guarantees, access to infrastructure, access to markets was critical for enterprise development. Enterprise development was linked to procurement given that suppliers required tenders for their own development. Early payment for suppliers was encouraged because it advances the sustainability of small enterprises.

Some companies started enterprise development before the COGP was enacted. These companies would not be penalised but they would have to submit proof that they did enterprise development.

In terms of the COGP, companies needed to spend 3% of their profits on enterprise development.
DTI research done in SA indicated that 3% was a fair amount. Analysis indicated that the health and pharmaceuticals sector were the highest contributing sectors to enterprise development with manufacturing being the least contributing sector. DTI asked for guidance from the Committee on how to deal with those sectors that were least contributing.

Anglo Zimele and Daimler Chrysler were mentioned as examples of companies which promoted enterprise development. Daimler Chrysler gave interest and capital free loans to black Africans who wanted to buy equity in their dealerships. White owned market centres and brand centres were given incentives to sell part of their businesses to black Africans.

Training and mentoring as well as incubation programmes were also identified as important.

Discussion
Prof Turok asked why the manufacturing sector was the least contributing sector to enterprise development.

Mr October replied that the profitability rate within the manufacturing sector was very low compared to mining, financial or the retail sector. The manufacturing sector faced a number of challenges which included the exchange rate. With the strong SA currency, companies found it difficult to export. The cost of inputs in the manufacturing sector was very high for instance 50% of production costs within the clothing sector was spent on fabrics. Fabric cost was much higher than labour or electricity. Within Toyota in Japan small companies were linked into the manufacturing chain whereas in South Africa most components were imported. The DTI aimed to encourage the SA manufacturing sector to build up local suppliers like in other countries.

Mr Rasmeni asked how much government institutions, including parastatals, contributed to enterprise development. He observed that small enterprises found government requirements very stringent and asked how the private sector would be able to accommodate small enterprises given that some of them came from a semi-literate background. 

Mr October replied that state owned enterprises like Telkom and Eskom were pioneers in enterprise development. Both companies gave work to BEE suppliers. Telkom has been building a black information technology sector. The private sector had not been following what has been done by government in creating opportunities for black enterprises which the COGP aimed to address.

Mr Rasmeni asked for more information about enterprise development with regard to DTI’s support for co-operatives.

Mr S Njikelana (ANC) commented that monitoring was very challenging even when approached creatively. Part of the challenge was to ensure that current or potential beneficiaries become part of monitoring.

Mr October said that government’s role was to create opportunities and an enabling environment for small business. Previously enterprise development took place but it focussed on white businesses.

Mr Njikelana asked why preferential procurement had a higher score than enterprise development. It might be important to strengthen enterprise development as opposed to preferential procurement.

Mr October replied that preferential procurement and enterprise development were interlinked. Ideally small businesses should be linked to markets and the supply chain of companies. Enterprise development could only be done by medium and large companies. Anglo Zimele was mentioned as an example. A separate entity was created with full time people to assist small businesses with loans and to help them to supply products to the mining sector. That form of mentorship worked well and has been in operation for 18 years during which one hundred BEE companies were created. Through putting the targets into codes they should be able to help 400 enterprises. DTI aimed at encouraging the private sector to upscale smaller initiatives like Anglo Zimele through the COGP.

Dr Rabie (DP) referred to the DTI presentation where it was mentioned that the most contributing sectors were the health and pharmaceautical industries with a net profit of
11.5 % after tax. He wanted to know how the contributions correlated with other emerging markets. Dr Rabie also asked what the average for the financial sector was and what their contribution was after tax.

Prof Turok said that the success of B-BBEE and enterprise development were dependent on the industrial policy. The current manufacturing policy might not have been the best policy that has been pursued for the last 13 years. Government needed to take an active stance on the exchange rate and the high cost of inputs. Asian, European and the United States government ensured that inputs were low and subsidised by government.

Dr Rabie repeated his request for the percentages of the net profit after taxes for the financial sector and how it compared with other emerging markets.

Ms Mesatywa said that research was done and that the required information would be made available to the Committee.

Mr Njikelana commented that some sectors like manufacturing and the retail sector to a lesser extent were slow to transform themselves in terms of B- BBEE.

Codes of Good Practice for Socio-economic Development
Mr Mathibela Mankge (Deputy Director: BEE Advisory Council) said that an important principle was the measurement of socio-economic contributions which should provide beneficiaries with sustainable access to the economy. C
ompanies which made a contribution prior to the COGP would be recognised.
Socio-economic development programmes should focus on women, people with disabilities and people living in rural areas as well as people with HIV/ AIDS.

Anglo Zimele was a key example of a company making a contribution to socio-economic development. They provided funding to a feeding scheme as well as funding for a computer college for street kids.

DTI research indicated that for the financial year 2004/05 companies spent R2.65 billion on socio-economic development which increased to R 2.8 billion in 2005/06. Spending matched the DTI’s target of 1% of net profit after tax regarding socio-economic development. Companies were also targeting areas like education, youth development and job creation projects

Socio-economic development had a monetary and as well as a non-monetary element.

Different types of contributions could be made by companies such as giving grants to poor communities.

Discussion
Mr Njikelana asked if contributions were only to be made financially. He asked if contributions in kind would also be acceptable.

Ms Mesatywa replied that both financial and contributions in kind were recognised.

Mr Rasmeni said that government departments should proclaim their achievements regarding socio-economic development and enterprise development and not only focus on examples like
Anglo Zimele.

Mr October responded that
Anglo Zimele was the most successful model in terms of enterprise development. A partnership between Khula and Anglo Zimele was being developed in order to roll out their enterprise development model country wide.

Prof Turok said that contributions from corporates should be integrated into local planning. Corporate contributions should not be once off but be part of a development programme. He asked if DTI insisted on integrating corporate contributions.

Ms Mesatywa replied that the DTI encouraged integrated contributions. These needed to be monitored to ensure that contributions reach the intended beneficiaries.

Mr October said that DTI aimed to direct private sector support to government-identified programmes which targeted black communities.

Qualifying Small Enterprises Scorecard
Ms Hafizulla noted that q
ualifying small enterprises were those with a turnover of between R5 million and R35 million. Micro Enterprises with annual revenue below R5 million were exempted from the Codes. Using a system of weightings and targets, small enterprises could express their BEE Contribution as a score out of 100 points. Small enterprises needed to choose only four out of the seven elements on the scorecard.

Mr October said that the rationale for exempting small companies with a turnover of less than 5 million was to enable them to benefit. Both white and black small businesses should benefit from the COGP and not be burdened by it. Larger small business was allowed some flexibility.

Discussion
Mr Rasmeni asked how big companies would know which were the qualifying smaller businesses they were supposed to work with. The DTI would be able to identify qualifying small enterprises whereas big companies might not know. Fronting could result if information were not disseminated to the private sector.

Ms Mesatywa replied that that DTI would market and communicate to various stakeholders including those at grassroots level. Within government the B-BBEE strategy linked in with other programmes such as the small enterprise development strategy and there was engagement with other government departments.

Prof Turok said that for socio-economic development, private enterprises not only needed to have a holistic approach but their contributions needed to link into a national socio-economic programme. Private sector contributions should be relevant and integrated.

Ms Mesatywa replied that if corporations target specific socio-economic programmes they should do it within the context of existing government programmes like the Urban Renewal and Integrated Renewal Plans.

Mr October suggested to the Committee that it might be an appropriate time to have a public hearing and ask both the public and the private sector what they did in terms of B-BBEE and what they intended to do. Leading players like Telkom, Eskom and Transnet from the state enterprises should be invited as well as government departments and leading stakeholders from the private sector.

Mr Martins, Prof Turok, Mr Rasmeni, Mr Njikelana and Dr Rabie supported the DTI proposal and said that there should be public hearings based on the volume of public response to the B-BBEE COGP. All relevant stakeholders should be invited in order to get feedback and hear about unintended consequences. The Committee would determine a mutually suitable date for the public hearings. Before the public hearings were held, the Committee requested that there be a follow-up session with the DTI.

The meeting was adjourned.

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