Black Economic Empowerment, scorecard compliance & local procurement: Empowerdex briefing, Committee's 3rd term programme.

Economic Development

06 August 2012
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

Empowerdex briefed the Committee on Black Economic Empowerment (BEE), local procurement and compliance with the BEE scorecard. It said that there had been an increased focus on local procurement in the last six to nine months, following the emphasis placed on this in the New Growth Path and the Local Procurement Accord of October 2011, and that many infrastructure projects were driving the concept. The current SABS technical standard for calculating local procurement was insufficient and needed to be improved. In addition, the current Broad-Based Black Economic Empowerment (B-BBEE) regulations did not promote local procurement directly.

A snapshot of performance on B-BBEE for the top 100 performers on the Johannesburg Stock Exchange showed 80% compliance on ownership, although Empowerdex’s own calculations, which excluded black ownership through pension-fund mandated investments, put the actual black ownership figure at around 8% to 12%. Average compliance of the companies was 75.38%, and the weakest compliance was found in human-resources issues, with the best in socio-economic development indicators. Local procurement was measured using the Total Measurable Procurement Spend of a company, which acted as a baseline. Black owned suppliers and black women owned suppliers accounted for three and two points respectively, making up a total of five out of the 20 points available for procurement. Empowerdex said, however, that it was difficult to measure the impact of B-BBEE compliance on economic development, because of insufficient date from smaller and unlisted businesses. There were incentives for local procurement, and benefits attached to assisting suppliers, so B-BBEE was having a positive effect on local procurement. However, there was no correlation between the improved scorecards and the level of economic growth. Another challenge was the difficulty in detecting and proving fronting, and lack of willingness to report it. The level of black-owned businesses was good, but black women-owned businesses showed slower growth.

Empowerdex concluded that B-BBEE had not alleviated poverty, although the socio economic aspect did provide charitable support. The job creation figures were not comparable to the economic growth of the country, which suggested that the scorecard drove compliance rather than performance and that there was too much focus on the ownership element of the scorecard. It recommended that whilst ownership should remain on the score card, it should be related to procurement to improve the sustainability and productive capacity of a company. Focus should be placed on skills development, local content procurement and enterprise development.

Members asked how the scores of local government were measured, and why salaries and taxes were regarded as deductible when calculating the Total Measurable Procurement Spend. They commented that on the one hand compliance was too complicated because of the number of factors to be taken into account, yet on the other hand was too simple if it was not impacting positively on poverty alleviation and job creation. They asked what was meant by “local content”, and were concerned with how fronting could be addressed, in order to better determine the success or failure of B-BBEE, as well as to what extent B-BBEE was the catalyst for fronting. They asked how far B-BBEE had stimulated skills development, whether it had achieved any integration of rural and urban, formal and informal business, and if the scorecard addressed those with disabilities, as well as for more details on joint ventures.

The Committee’s draft third term programme was tabled. The Chairperson expressed concern, and would take up with the Minister, the third request for a postponement of its presentation from the Small Enterprise Finance Agency.

Meeting report

Empowerdex Briefing on Black Economic Empowerment, scorecard compliance & local procurement
Mr Duncan De Groot, Regional Executive, Empowerdex, presented a report noting that there had been an increased focus on local procurement in the last six to nine months, following the emphasis placed on such procurement in the New Growth Path (NGP) and the Local Procurement Accord of October 2011. The South African Bureau of Standards (SABS) had developed a technical standard on the calculation of local content, and many infrastructure projects were driving the concept. However, in the Renewable Energy Independent Power Producers (IPP) programme, there were still challenges in measurement. In addition the current Broad-Based Black Economic Empowerment (B-BBEE) regulations did not promote local procurement directly.

Mr de Groot said Empowerdex had been measuring B-BBEE for the last ten years. In 2012, a snapshot of performance for the top 100 performers on the Johannesburg Stock Exchange showed that, as far as ownership was concerned, there was 80% compliance. Empowerdex’s own calculations placed actual black ownership in the region of 8% to 12%, if black ownership through pension fund mandated investments was excluded. The average compliance of the companies was 75.38%. The weakest areas for compliance were those related to human resources; namely, management, employment equity and skills. The compliance in relation to socio-economic development was the best, because this area was the easiest to implement. Local procurement was measured using the total spend of a company, less deductions for capital and operational expenditure, direct imports and a range of other deductions, to find the Total Measurable Procurement Spend, which acted as a baseline. This was further divided into sub-categories. Black owned suppliers and black women-owned suppliers accounted for three and two points respectively, making up a total of five out of the 20 points available for procurement.

It was difficult to measure the impact of B-BBEE compliance on economic development, because, whilst data was available from large corporations who were highly focussed on being compliant, there was not enough data available from smaller and unlisted businesses.

Local procurement was encouraged through the points system as there was an incentive. If a supplier’s enterprise was assisted and developed, a company would get an enhanced benefit. There had been an increase in procurement locally, as evidenced by an improvement in rating applications from underlying suppliers. This showed that B-BBEE was having an effect. However, there was no correlation between the improved scorecards and the underlying levels of economic growth.

Fronting was difficult to detect, as it could take place in the form of sub-contracting to non-BEE compliant companies. There was a lack of will to report fronting, as it was a serious allegation and was not easy to prove.

Sector charters were sent to the Department of Trade and Industry (dti), who then ensured that the charters were within the guidelines and gazetted them. The sector codes closely followed the codes of good practice. They were adjusted to give recognition and a true measure of the gender split, but otherwise there were very few real differences between the sector codes, except that the construction sector gave focus to enterprise development and mentorship. The Information and Computer Technology, Property, Chartered Accountancy, Transport, Forestry, Construction and Tourism Sector Codes had all been gazetted, and the Financial, Agriculture and Marketing, Advertising and Communication Sector Charters had been gazetted. There was limited data on the performance of the sectors, as they were relatively new.

The success of B-BBEE was that it had created a larger middle class and brought more people into the formal sector of the economy. There was increased diversity in the workplace and the level of junior management compliance was high. There was an incentive to create initiatives to support small businesses. This could be ascribed to internally-driven compliance of businesses seeking a competitive advantage, and then demanding certification from suppliers. The level of black-owned businesses was good but the level of black women-owned businesses was only increasing slowly.

There was no indication that B-BBEE had alleviated poverty, although the socio economic aspect did provide charitable support. The job creation figures were not comparable to the economic growth of the country, which suggested that the scorecard drove compliance rather than performance, and that there was too much focus on the ownership element of the scorecard. Empowerdex recommended that ownership should remain on the scorecard but should be utilised in the procurement element, to improve the sustainability and productive capacity of a company.

Empowerdex recommended that the three elements on which there should be a focus should be skills development, local content procurement and enterprise development. In relation to enterprise development, the focus needed to shift from providing monetary assistance to assisting an enterprise in job creation, productivity, sustainability and local content production. The current SABS technical standard for calculating local procurement was insufficient and needed to be improved.

Discussion
Mr H Hoosen (ID) asked how the scores of local government were measured.

Mr de Groot responded that local procurement was exclusive of state owned entities, but that local governments were getting rated according to a special scorecard, and therefore would not be excluded.

Mr Hoosen asked why salaries and taxes were regarded as deductible when calculating the Total Measurable Procurement Spend.

Mr de Groot explained that the reason for the exclusion of salaries, imports and taxes was that employees and exporters could not be asked to produce a BEE certificate. However, the evaluation of a supplier did include measuring the salary bill.

Ms S van Der Merwe (ANC) commented that compliance was too complicated, because of the numbers of areas in which compliance was required, yet at the same time was too simple in that B-BBEE did not appear to have impacted upon poverty alleviation and job creation, the primary reasons why it was implemented in the first place.

Mr de Groot responded that B-BBEE was complex for larger organisations. The comment that it was simple was not in fact such a bad thing. Many socio economic development initiatives were as simple as writing out a cheque for a charitable organisation. He said the real question was whether the socio–economic developments were doing what they were supposed to do, as the codes did not measure the effects, but only measured compliance. B-BBEE measurements also only measured only a one year horizon and maybe it should include a focus on sustainability. He said companies in industry were in agreement with the way B-BBEE was being measured, but he questioned whether it was being measured in the right way as companies wanted the B-BBEE certificate to do business with government or for a competitive business advantage, yet there should be an increased focus on the development of businesses.

The Chairperson commented that B-BBEE was an intervention designed to bring the disadvantaged to participate in the economy and reverse the effects of the apartheid system.

Ms van der Merwe said it was it was worrying that compliance and not performance, was driving behaviour.

Mr M Hlengwa (IFP) asked how far B-BBEE had stimulated skills development.

Mr N Gcwabaza (ANC) asked whether B-BBEE led to the employment of new personnel from school or college graduates. He also asked what percentage of Gross Domestic Product could be attributed to B-BBEE.

Mr de Groot  said skills development was the worst performing element, although there had been an improvement in the learnership category. He said small businesses were not compelled to give their B-BBEE score. He agreed that the way in which the scores were measured drove compliance rather than assistance.
He said assistance was given to enterprise development beneficiaries and that investment in them was rare. Enterprise development initiatives were any initiative which would assist in the operations or finance of an enterprise outside of normal business practice. He stressed that cash flow was very important for small businesses.

Ms van der Merwe asked if local content was defined in the code as “made in South Africa” or in the local area
Mr de Groot responded that local content was seen as anything produced within South Africa.

Mr X Mabasa (ANC)asked how rural/urban businesses and formal/informal businesses were integrated.

Mr de Groot said there was no differentiation between rural and urban or formal and informal sectors of the economy, but that there were designated groups, although this was seldom used.

Mr Hlengwa asked how the high levels of fronting could be dealt with, so as to best gauge the success or failure of B-BBEE.

Mr X Mabasa (ANC) wondered if the current systems were able to detect fronting, and whether sanctions were in place.

Mr K Mubu (DA) asked to what extent B-BBEE was the catalyst for fronting and tendering.

Mr de Groot asserted that the main challenge around fronting was verification of the authenticity of shareholder agreements and of a company’s registration documents. Empowerdex did interviews with shareholders to determine if the shareholder was the beneficial owner. The problem occurred further down the supply chain, where companies might not be B-BBEE compliant, and therefore the companies that received the tender might not be the ones who actually carried it out. Empowerdex did not have all the data and this issue was complex and difficult to highlight. Fronting was a grave allegation and needed to be fully proved as it had serious consequences. The Department of Trade and Industry regulations stipulated that the onus was on verification agents to report fronting, failing which charges could be laid. All agencies followed set guidelines to determine fronting. He said he could not comment on corruption in tendering.

Mr Mabasa asked if people with disabilities were covered by the scorecard.

The Chairperson asked about joint ventures.

Mr De Groot replied that Empowerdex was seeing an increase in joint ventures being established for specific projects.

Other business: Committee’s Third Term Programme
The Chairperson tabled a draft Third Term Programme, but said it was subject to changes made to the Parliamentary programme.

The Committee Secretary reported that the Small Enterprise Finance Agency (SEFA), which was scheduled to appear on 28 August, had asked for a postponement to 11 September.

The Chairperson said that this was the third time that SEFA had asked for a postponement to table its strategic plan and she would be bringing it to the attention of the Minister.

The meeting was adjourned.

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