Codes of Good Practice for Broad–Based Black Economic Empowerment: Workshop 1

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
15 August 2007
CODES OF GOOD PRACTICE FOR BROAD–BASED BLACK ECONOMIC EMPOWERMENT: WORKSHOP 1

Chairperson: Mr B Martins (ANC)

Documents handed out:
Introduction and implementation on the Codes of Good Practice (COGP) for Broad- Based Black Economic Empowerment
Framework for measuring Broad-Based Black Economic Empowerment
COGP for Ownership
COGP for Human Resource Development
Wayforward : Progress and report on Key Projects
Background to, Intention and Application of the Codes of Good Practice
COGP : Interpretive Guide(June 2007)
Guidelines on Complex Structures & Transactions, and Fronting (Previously Statement 002)

Audio recording of meeting

SUMMARY
 
The Department of Trade and Industry gave a presentation on the Codes of Good Practice for Broad-Based Black Economic Empowerment. The purpose of the Codes was to promote black ownership as well as other aspects such as procurement, enterprise development, employment equity and skills development, in order to transform and deracialise the economy. The framework established by the Broad Based Black Economic Empowerment Act created incentives for businesses to transform their operations, and the Codes supported it by addressing fronting and providing a set of criteria that encouraged participation. It was noted that there was a need for the private sector to become more actively involved in the broad based empowermentQuestions from Members focused on the suggestions that penalties be imposed, greater synergy between the economic structure and the political structure, difficulties in promoting broad based ownership, the possibility of labour unions becoming more active in checking broad based empowerment, the danger of crony capitalism and the necessity of marketing to small businesses.

The Department then gave a further presentation on the institutional mechanisms and the framework for measuring broad-based black economic empowerment, indicating that there was an emphasis of substance over form, and setting out in detail the seven core elements on the scorecard, including the inclusion of 40 to 50% black women and a further 2% to 3% weighting for specifically named groups. There should be alignment of key principles and definitions throughout all sector charters. Certain categories of institutions had their own specific scorecards. Members focused on the definitions, the problems of fronting, the distinction between skills development and these levies, and the legal status of the Codes.

A final presentation explained the general principles for measuring ownership in terms of the Codes and explained the position of multinational companies. Members were concerned that insufficient consideration seemed to have been given, in the Codes, to co-operatives and asked that this be addressed by the Department. 

MINUTES
Broad Based Black Economic Empowerment (BBBEE) Codes of Good Practice (COGP): Department of Trade and Industry (dti) Briefing
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 Lionel October, Deputy Director-General: Enterprise and Industry Development, Department of Trade and Industry, noted that the Codes of Good Practice (COGP) supporting Broad Based Black Economic Empowerment had been gazetted in the first week of February 2007. He stated that the main problem in the past with Black Economic Empowerment (BEE) was that it followed a narrow base, only focused on ownership. The purpose of the new broad based Black Economic Empowerment (BBBEE) Codes was to promote not only black ownership, but also other elements which included procurement, enterprise development, employment equity and skills development in order to transform and de-racialise the economy. Many companies were starting to comply with ownership but were still neglecting the other elements of BBBEE. Broad based empowerment was promoted with a strong emphasis on women and new entrants into the economy. The Codes were very specific and indicated exactly how BEE points would be scored.

Mr October indicated that dti had delineated enterprise development and preferential procurement as important elements of BEE, and the objective was for large companies to bring black entrepreneurs into their supply chain, thereby building other businesses.

Criticisms had been voiced that transformation was too slow, and that the private sector was not complying as it should with the principle nor the practise of BEE. Mr October said that BEE was a voluntary process but that there was pressure to make the legislation more punitive through the introduction of fines.

Ms Nomonde Mesatywa, Acting Chief Director, BEE Unit, dti, gave a background to the Codes of Good Practice (COGP). In the public sector there was a legal onus on organs of state and public entities to apply the Codes. They were subordinate legislation and therefore did not override existing legislation. The framework established by the BBBEE Act created a set of incentives for businesses to transform their operations in order to promote black economic empowerment.  A business that did not transform its operations in terms of the Codes would be at a severe disadvantage when seeking to do business with organs of the state and public entities. She noted that all government policies that sought to promote BEE needed to be aligned with the BBBEE COGP. Definitions should be correct, and consistent application of the core principles of BBBEE was crucial. Certain Charters had already been gazetted for sectors of industry, including the Financial Services Charter, the Construction Charter and the Property Charter, while others were  still in development.

In terms of verification dti had developed the accreditation standards and a verification methodology. Dti appointed a committee, comprised of various associations from business, along with some consultants, to develop a verification methodology. Identification and vetting of potential BBBEE Advisory Council Members has taken place. Marketing and communication of the BBBEE COGP was being undertaken, with specific emphasis on educating and training procurement officers and supply chain managers.

In terms of Equity Equivalents (EE) it was indicated that an EE Secretariat and Committee had been established. There was still some concern was that para-statals were not giving due recognition to the principle of equity equivalents, such as Telkom’s insistence on ownership)

Dti would establish a publicly accessible central database containing the information underlying each Accredited Verification Certificate. The database would provide a self – assessment tool for calculating the BBBEE score.

Fronting was identified as a serious problem and appropriate measures would need to be considered in order to address its impact. It was suggested that fronting should be aligned with existing legislation on fraud and a technical committee would deal with the process of having it legislated as a prosecutable offence, through amendment of the Act.

Mr October concluded that the focus should not only be on the public sector, but there should be active steps to change behaviour in the private sector to ensure that transformation took place throughout all areas of the economy and not, as was currently the case, only in those sectors close to government or which relied on government for contracts, such as mining and the financial sector. Retail and export manufacturing remained slow to change and the dti would appreciate guidance from the Committee. Multi Choice and Naspers had shown encouraging initiatives such as an issue of shares to black South Africans, and MTN and the chemical and retail sectors had also shown encouraging signs. Although there was some progress many companies still seemed to regard themselves as not needing to address black empowerment.

Discussion
Professor B Turok (ANC) said that the empowerment situation could not continue as at present. Greater synergy between the economic structure and the political structure was required. The economy remained under the same control as in the past. The private sector was not investing to the level that it should, and that there was resistance to get involved in the transformation of the economy. He warned against over-regulation and complication through penalties, as they would also entail the need for monitoring and compliance measures, which in turn would create bureaucratic problems. Ownership data was comparatively easy to find, by access to share registers, but findings on broad based ownership presented more difficulties. He suggested that unions should become more active and report whether firms were compliant. Civil society and the public should also take responsibility. Prof Turok suggested that the Committee should have a meeting with various stakeholders to discuss BBBEE, so that parliament should play a leading role in ensuring that compliance was led by the public.

Prof Turok also raised the issue of crony capitalism related to procurement. He said there was a need to be alert to dangers in procurement policies, which favoured some sectors over others.

Mr L Labuschagne (DA) suggested that an emphasis on total public transparency would be one of the best methods to overcome crony capitalism in Preferential Procurement Policy. He said that small white businesses would struggle under preferential procurement policies.

Ms Mesatywa responded that all small business which qualified as exempted micro enterprises were considered to be level 4 BEE contributors. She said that on that level the Codes did not differentiate in terms of racial composition.

Mr Labuschagne also said that there must be adequate marketing to the person on the street who owned a small business. Mr Labuschagne also said that marketing should target officials at lower levels who may not understand the import of the policies.

Ms Mesatywa agreed that marketing and communication were very important and that dti were targeting people at ground level.

Mr Labuschagne noted that he and others had experienced problems with the dti call centre, and called for a dedicated section that could deal with queries from small businesses.

Mr S Rasmeni (ANC) asked how it would be possible to determine whether a company was compliant with the Codes if there were not yet verification systems in place and agencies were not yet accredited.

Mr Rasmeni also suggested that there was a viewpoint that Codes of themselves were not a panacea for BBBEE, and asked what would be the other elements for promoting it. He indicated that the private sector had to buy in to and apply what government had put in place.

Mr Rasmeni also noted the emergence of co-operatives and asked how companies could be linked to registered co-operatives, which, when formed by black groups, were the real BBBEE groups.

Ms Mesatywa suggested that his questions would be answered in the later presentation giving details on the Codes.

Mr S Njikelana (ANC) proposed that the dti formalise its proposals on the manufacturing sector and the possible penalties in writing, to ensure follow up by the Committee. (in terms of the manufacturing sector and penalties) presented to the Committee by putting it in writing to ensure future follow-up.

Mr Rasmeni said he was pleased to see that marketing and communication was extended to small enterprises, which would help to avoid fronting, and urged that the marketing and communication should be addressed in the short as well as long term.

Institutional Mechanisms and Scorecards for Codes of Good Practice: dti briefing
Ms Mesatywa focused on institutional mechanisms and the framework of measurement for the  COGP for BBBEE. She briefly described the institutional framework and the broad based beneficiary base. The Code was structured following the logical flow of the BEE scorecard, and was similar to the Generally Accepted Accounting Practice. Generic and sector-specific BEE Scorecards were envisaged. BBBEE was measured based on seven core elements: ownership, management, employment equity, skills development, preferential procurement, enterprise development and socio-economic development. Weighting and compliance targets for companies were determined in terms of these elements. Customers and companies in the public and private sectors would prefer to interact with others with higher BBBEE status for their own BBBEE recognition. Specialised enterprises falling within the categories of companies limited by guarantee, higher education institutions, non profit organisations, public entities, public benefit schemes, and section 21 companies would have a different scorecard.

A key principle for the COGP would be substance over form, with BBBEE to be measured and reported according to economic reality rather than legal form. In terms of the parity principle in the COGP, 40-50% recognition should be given to black women and 2% to 3% to black designated groups, including people with disabilities, black youth, black people living in rural areas as well as black unemployed people. A 12-month transitional period was allowed for conversion from a narrow-based to scorecard approach, with mechanisms to be provided for facilitating the adoption of the scorecard in reporting and decision-making. The alignment of key principles and definitions throughout all sector Charters with the Codes was encouraged.

Discussion
Mr Labuschagne asked if black people included Nigerians, Angolans and Mozambicans, at the expense of South Africans.

Mr October said that the issue was very contentious, and there was also debate whether Chinese nationals were classed as black. He indicated that dti attempted to keep categories as simple as possible by identifying black people as people who were not white. He also indicated that the beneficiaries would be South African citizens. Mr October mentioned that there were also formerly migrant workers from Lesotho, Swaziland and Botswana who had, like South African nationals, suffered under apartheid.

Mr Labuschagne also asked if it was theoretically possible for a company to be 100 % black owned, but not technically qualify under the scorecard. He noted that there seemed to be some anomalies on the scorecard recognition of procurement.

Mr Labuschagne further referred to the issue of fronting and said that if a company loaned money to buy shares, the borrower would still have to pay back, with conditions attached. He asked if  such loans could be considered fronting, or if the real circumstances would be assessed in each instance.

Ms Mesatywa said that the substance of matters would be considered, and this would include whether there was real benefit to black shareholders, whether they voted on decisions and gave direction on the running of the company.

Mr Labuschagne asked if the 40 to 50 % enhancement for women only referred to ownership or also to the other elements.

Ms Janeez Hafizulla, Deputy Director, Black Economic Empowerment, dti, said that within each of the scorecards at least 40 to 50 % of black women needed to be included. The ownership scorecard also gave enhanced recognition to black women and black males.

Mr Labuschagne asked if certain sectors, due to their peculiarity in business could develop a Code that could give them full BBBEE points, although technically they might not score the same on the scorecard.

Ms Hafizulla said that the Charters needed to adapt to the key principles of the COGP. She indicated that if transformation within a sector would be enhanced by changing the weighting, then that would be allowed, given the peculiarities within certain sectors. Due diligence would be done to determine the effect in a sector in terms of transformation.

Mr Rasmeni referred to skills development that was mentioned as one of the elements of BBBEE. He indicated that dti mentioned 3% of the payroll and asked how it related to the skills development levy of 1%. Mr Rasmeni asked if 3% would be taken from the payroll in order to train people.

Ms Hazifulla said that the 3% was over and above the 1% of the skills development levy.
She confirmed that 3% of total payroll was required in terms of the COGP.

Mr Rasmeni asked for clarification on what a company should do for enterprise development.

Ms Hafizulla said that enterprise development would be further explained in another presentation.

Mr Rasmeni also asked what measures could be taken by government to deal with fronting.

Mr Njikelana wanted further clarification on how the Charter operated.

Ms Mesatywa said that Section 12 empowered the Minister to gazette a Charter if he was satisfied that there was sufficient consultation and that the Charter advanced the objectives of BBBEE. The charter was not legally binding but stipulated intent. Companies would then have to move through a process whereby targets, principles and weightings were aligned with the Codes in order to have approval gazetted in terms of Section 9. Once gazetted under Section 9, the Charters would become legally binding. There were no legally binding charters as yet, as this process had not yet been completed.

Ownership aspects of the Codes: dti Briefing
Ms Hafizulla explained the general principles for measuring ownership in terms of the COGP. The overall objective was to increase the number of black people that managed, owned and controlled enterprises and productive assets. Ownership was measured against entitlement to both voting rights and economic interest. Specific guidelines were developed to guide BBBEE programmes of multinationals, which included guidelines for equity equivalent programmes. Multinationals were able to claim ownership points on the scorecard based on their equity equivalent programmes. Real BBBEE benefit was measured by tracing ownership to the ultimate natural person to prevent dilution in a pyramid holding structure.

Discussion
Mr Njikelana referred to the specialised enterprises and asked if there were any way of ensuring that such enterprises did not abuse exemptions.

Mr Njikelana wanted further clarification on shareholder activism.

Mr Rasmeni said that it seemed as if little value was placed on the importance of co-operatives.

Mr October conceded that maybe there had not been sufficient import attached to co-operatives within the BBBEE strategy. However, the issue would be examined to determine how they could be further advanced.

The Chairperson asked dti to consider the entire policy issues around cooperatives, not only in this limited sense. The Committee had raised the issue before and would like to have feedback on how cooperatives were being dealt with comprehensively in the Department.

The meeting was adjourned.