Broad-Based Black Economic Empowerment (B-BBEE) Act: proposed policy changes

Meeting report

Proposed policy changes to Broad-Based Black Economic Empowerment (B-BBEE) Act
Mr Lionel October, the dti Director-General, said that the Amendment Bill had been issued at the end of last year. It was opened for 60 days for comments, and this was now closed. They had received numerous valuable comments.

Black Economic Empowerment (BBE) came into operation in 2003, and since that time, the Broad-Based Black Economic Empowerment Advisory Council had assessed it and developed key recommendations on areas that needed refinement. The Amendment Bill was drafted in August 2011, presented to Cabinet on 16 November 2011, and approved for public comment and gazetted on 9 December 2011. He hoped that by May 2012, there was a formal introduction of the Amendment Bill into Parliament for open debate and discussion in public.

He said the reason that BEE was given to the dti was because it was a fundamentally economic issue. BBE must be linked to the overall transformation of the South African economy. It was about ‘de-racialisation’ and growth. A couple of reasons for slow growth in the country were low aggregate demand and a small middle class, creating a lack of consumers to help industries grow. South Africa also had a very small entrepreneurial base, so BBE created opportunities for entrepreneurs to create a larger black middle class. He indicated that South Africa was the same size as Malaysia in terms of population and income per capita, but South Africa was significantly more unequal according to the Gini Coefficient.

The main slow-growing sectors of BBE in South Africa were manufacturing, agriculture, and retail. Those sectors underperformed compared to the financial sector, the mining industry, the media industry and telecommunications. Their real aim was to bring rectifications to the Act in order to increase the pace of transformation and growth in the economy.

Ms Nomonde Mesatywa, dti Chief Director of B-BBEE, said that the Bill focused on three main pillars around the interventions that the B-BBEE Advisory Council recommended; tightening the areas pertaining to monitoring and evaluation, circumvention, compliance and regulation, and issues of alignment across the board. There had been some modest progress in terms of implementing the framework from 2007, but opportunistic tendencies slowed progress in terms of the legislation, with cutting of corners and circumvention. Issues of substantive application had not yet found expression and credible B-BBEE. There were also no punitive measures in the legislation.

The key principles of the Bill were to align the Act with other legislation impacting on B-BBEE and with the Codes and to elevate the general principles of the Codes including the concept of the balanced scorecard and definitions. It also needed to establish the B-BBEE Commission to create an institutional environment for monitoring and evaluation of B-BBEE, provide for the regulation of the verification industry by Independent Regulatory Board of Auditors (IRBA), deal with non-compliance and circumvention by introducing offences and penalties, and trump provision by making the B-BBEE Act to be the overarching framework that pronounces on issues of transformation.

One key challenge was the non-alignment of key pieces of legislation and other policy instruments to B-BBEE policy, which thus led to non-coherence when it came to application accross government, such as with the procurement and granting of licences. The proposed amendment was ‘Policy Alignment and Harmonisation’. It aligned the B-BBEE primary legislation to other policy instruments, the status of the Codes was enhanced to ensure compliance by all public entities and strengthen Section 10, which dealt with economic activities. It also made the B-BBEE Act the overarching framework for B-BBEE.

Another key challenge was the non-monitoring and supervision of compliance with the B-BBEE Act and the Codes both within the public and the private sectors leading to the inappropriate implementation and circumvention of the objectives of the Act. The proposed solution was to establish a BEE Commission to deal with complaints concerning B-BBEE transactions and other matters related thereto, including oversight, supervision, and promotion to the adherence to the Act, the promotion of advocacy and educational programmes on B-BBEE and access to opportunities, and receiving and investigating complaints on B-BBEE.

The function of the Commission was to strengthen and foster collaboration between the public and the private sector in order to promote and safeguard the objectives of B-BBEE, keep a register of all B-BBEE transactions above the threshold to be determined, and analyse reports concerning B-BBEE from organs of the state.

A challenge was the non-regulated BEE Verification Industry, leading to opportunistic tendencies and lack of accountability. The proposed solution was to extend the mandate of the Independent Regulatory Board for Auditors as the institution with the responsibility for registering and regulating Verification Professionals. Verification was a vital component of B-BBEE compliance and this industry needed to be regulated in order to ensure credibility and accountability.

Fronting, or the circumvention of the B-BBEE Codes, was an additional problem. The sophistication of fronting practices had necessitated the need to amend the legislation and to strengthen enforcement in this area. No effective sanctions existed in the current Act to deal with the misrepresentation of the B-BBEE Status of Measured Entities. The proposed solutions were the inclusion of specific statutory offences involving fronting and other forms of fraudulent misrepresentation of empowerment status, the specification of penalties and blacklisting of entities or management, the empowerment of the Special Investigating Unit to investigate all offences involving fronting and corruption with regard to application of the Act, and the collaboration between the dti and the National Treasury.

The introduced definition of B-BBEE fronting was ‘a practice, scheme, transaction, arrangement or conduct that directly, indirectly, or potentially undermined, frustrated, impeded, prejudiced, or retarded the achievement of the objectives of the Act of the implementations of provisions of the Act’. It was proposed that offences were introduced for the provision of false information or misrepresentation of information to Verification Professionals. There were to be penalties for providing false information or misrepresentation of information relevant to assessing the B-BBEE status of a Measured Entity to any organ of state or public entity. Failure by a B-BBEE Verification Professional or other official of an organ of state or public entity to report offences to an appropriate law enforcement agency was also an offence.

The penalties for fronting were a fine or imprisonment for a period not exceeding 10 years, 10%, or both for a fine or imprisonment, and a fine or imprisonment for a period not exceeding 12 months or both for a fine or imprisonment. In the case of enterprises, the penalties were a fine of 10% of the enterprises’ annual turnover. Any person or entity convicted of an offence was banned from contracting or transacting any business with any organ of state or public entity and was to be entered into the Register of Tender Defaulters. Any contract or authorisation awarded on account of false information furnished by or on behalf of an enterprise in respect on its B-BBEE status could be cancelled at the sole discretion of an organ of state or public entity.

Another challenge was the lack of proper implementation by government departments and public entities. The proposed solution was to strengthen, monitor, and evaluate B-BBEE, as well as have organs of state, public entities, and other enterprises prepare B-BBEE plans and to report on compliance with such plans. All spheres of government and public entities were also to submit regular reports on their compliance to B-BBEE annually. Heads of Department and Chief Executive Officers of public entities were obligated to report on the implementation of B-BBEE and to participate in the Ministries/Departments Performance Agreements. The private sector was to include B-BBEE reporting in the Sustainability Reports.

In terms of the way forward, the dti was currently consolidating all the comments received from the public commentary process. A total of 45 submissions were received on the Amendment Bill. The general response on the Bill was supportive of the proposed amendments. In March 2012, the dti would report back to the Cabinet and then introduce the Bill into Parliament.

Mr October said that they would shortly be releasing the amended Codes of Practice which were not in the main legislation. The main thrust of these were to shift the emphasis of BEE to procurement and enterprise development. The amendments maintained the main architecture of the original legislation. The targets also remained the same.

Discussion
Ms B Abrahams (DA – Gauteng) asked about fronting in joint ventures.

Mr K Sinclair (COPE – Northern Cape) said he understood the dynamics of the middle class and agreed with the dti’s point, but added that there were other ways to deal with the economy. However, this could be discussed another time.

Mr Sinclair raised the issue of red tape in South Africa, and asked if the Amendment Bill created more red tape. In principle, the amendments were good, but if they increased red tape, the dti needed to look at that.

Ms E Van Lingen (DA – Eastern Cape) said that she wanted to see the 45 comments. There were actually 900 comments, but so many were similar that they were categorised and grouped.

In terms of the definition of ‘black’ people’, she mentioned that the Chinese were considered ‘black’.

She said that the Amendment Bill created a lot of layers of people who must supervise, hence increasing the red tape and administration, which made it difficult to create businesses.

The Chairperson mentioned that there had been a court ruling about Chinese being considered ‘black’.

On page 8, section 9, there was a deliberate use of the work ‘may’. Why did it not say ‘must’?

He also asked how the penalties and blacklisting would work.

With regards to implementation and the BBE issue, he remembered that there was a Cabinet memo in 2002. It said that no government department or agencies should use non-graded establishments, but that had not happened to date. He asked how that should be fixed.

He asked the dti to send the Committee a copy of the submissions.

He was pleased that the issue of fronting was covered, but it was a complex issue and it was not easy to deal with. It would widen the gap more, and he asked how that was going to be dealt with. There was no timeframe to move away from the ‘26%’ target.

On the issue of implementing the Act, he wanted to know if there was capacity and enough resources to ensure success.

Ms Van Lingen asked if the amended Codes of Practice would come out at the same time as the Bill was enacted.

The Chairperson emphasised the need to stress ‘control’, not ‘ownership’.

Mr October said that in general, the dti completely supported Joint Ventures. The problem was fronting, which was not currently illegal.

Concerning the increase in red tape, he said that the dti tried to prevent creating another layer of bureaucracy, which was why the Act was entirely voluntary. Businesses were allowed to use their own auditors to complete the BBE scorecard. The Small, Medium and Micro Enterprises (SMMEs) with less than R5 million turnover, were excluded from the Act. The limit would possibly be extended to less than R10 million turnover, in order to put the burden on those ‘businesses with big enough shoulders’.

As for the definition of ‘black’ people, Mr October said they had defined it broadly to include Africans, Coloureds and Indians. The Chinese had argued that they were ‘black’ as well, and he said that those who were indigenous to South Africa were considered so.

He said that the targets were very low, and this matter was discussed thoroughly in Cabinet. They decided to maintain the current targets because they wanted to emphasise management, enterprise development and procurement. It was not like in Malaysia and other countries where ownership was emphasised. South Africa wanted deep transformation and broad-based empowerment. If the target was 25% ownership of the economy, the critical mass was reached and BEE could self-sustain.

Mr Sipho Zikode, dti Deputy Director-General: Empowerment Enterprise Development Division, maintained that implementation of the Amendment Bill worked hand-in-hand with other government programmes.

Ms Mesatywa said that positive obligations were placed on the Minister to act in the Amendment Bill.

Mr Sinclair asked if there was a window period or if the Bill was retrospective. He also asked about the procedure of the Act. Would there be public hearings in the provinces? He commented that he wanted to see a time where the colour of skin was not the determining factor in terms of who you were and where you were.

The Chairperson raised the issue of blacklisting. He pushed for the review of blacklisting and amnesty for blacklisted people. He said that there should be another punitive measure. If amnesty was given to people, their lives would change.

Mr October said that with regards to credit blacklisting, the dti received a report from National Credit Regulator, and the Minister asked that they give a presentation. After the report, the Committee could engage, talk about amnesty and open the discussion.

In the Amendment Bill, blacklisting mostly referred to blacklisting companies that had defrauded the state so that they could no longer conduct business.

The Chairperson asked why fraud offences were not criminalised.

Mr October said that under ‘fronting’, they would be criminal offences.

Ms Van Lingen wanted to know which part of the Commission was going to work on the criminalisation of fraud offences. The cases were often dismissed and the criminal case never came up. The issue should not only be discussed in this Act, but in other Acts as well.

Mr October agreed and said that the definitions of ‘fronting’ and the penalties for it were to be explicitly defined so that when courts were dealing with such cases, they had a piece of legislation that made it a crime. He added that past practices would not be criminalised, but there would be a window period to clean up legal agreements and stop any ‘fronting’ practices.

He hoped that this was the last amendment to the Act, and a non-racial economy developed in South Africa. However, the problem was not going to go away if it was not dealt with properly with clear rules. In South Africa, there was a strong culture of compliance, and even though compliance was voluntary, it was treated as if it was mandatory. He wanted South Africa to be in the same position as Malaysia.

The Chairperson mentioned that it was good that SMMEs were excluded, and hoped that this assisted them to be successful.

The meeting was adjourned.

Appendix:

Call for Comment: B-BBEE Amendment Draft Bill
The Department of Trade and Industry has published the B-BBEE Amendment Draft Bill for public comment.
Salient features of the proposed Bill have been kindly summarised by Gavin Lecvenstein of EconoBEE (www.EconoBEE. co.za /  Tel 011 483 1190):

In many instances the Bill expands on issues that were already included, but issues clarifications. 
The definition of Broad-Based Black Economic Empowerment has been expanded to mean the sustainable economic empowerment of all black people - in particular women, workers, youth, people with disabilities and people living in rural areas, through diverse but integrated socio-economic strategies. Note the use of the word “sustainable”.  

There is more emphasis on local content, as there is in the new regulations of the PPPFA.  
Fronting is clearly defined and fronting practices are now punishable by penalties of up to 10 years in prison, or up to 10% of an enterprise’s annual turnover. Some of the areas around fronting practice include setting up B-BBEE transactions that do not benefit black people. It could involve an agreement with another enterprise where there are significant limitations on what the company can do.  

The Bill establishes a BEE Commission whose job is to monitor compliance, fronting, interpretations, as well as promote adherence to the act and advocacy of BEE.  

The Bill defines a B-BBEE Verification Professional as being a person registered by the verification agency regulator or SANAS. This implies that verification analysts will themselves be accredited in some way. Recently the minister announced details of BEE Management course offered by Wits University and UNISA. 
In a clarification the Bill states that enterprises in a sector in which sector codes have been gazetted may only be measured for compliance in accordance with that sector code. 
Monitoring, Evaluation and Reporting:

Listed companies are required to submit reports on their compliance to the BEE Commission. 
The SETAS must report on skills development spend and programmes to the BEE Commission.  
An area that was previously neglected: government’s own compliance with the codes, has been addressed.  

-                   All organs of state, state owned enterprises and all spheres of government must report on their compliance with B-BBEE in their audited annual reports and financial statements. Section 10 of the old act has been expanded to require all organs of state to take into account and apply the codes for all dealings with private enterprise. Previously the act stated “where possible, apply the codes”. Now every sphere of government has to apply the codes. This has already started with the reconciliation of the PPPFA with B-BBEE. It does mean that every organisation that wishes to do business with government, or obtain licenses or other concessions must submit details of the compliance, ie a valid B-BBEE certificate.  

-                   What is interesting is that the mining charter of the mining act is now in conflict with the B-BBEE Act.  
-                   Interestingly section 23 of the proposed act states that other than the constitution, this act will prevail in any conflict with any other act which could imply that the mining act is about to change. However section 12 allows the minister to permit organs of state to determine their own transformation policies if they meet the requirements of the B-BBEE strategy. 

Regarding verification, IRBA (Independent Regulatory Body for Auditors) will regulate B-BBEE Verification Professionals.  

The Bill gives the minister the opportunity of issuing regulations, guidelines and practice notes. This will help in giving guidance for compliance and interpretations and various aspects of the codes. 
Comments can be emailed to Xolisile Zondo at [email protected] or [email protected] by no later than 8 February 2012

Enquiries tel Xolisile Zondo: 012 394 1609/1971