Broad-based Black Economic Empowerment Amendment Bill [B42-2012]: briefing by the dti; ‘Cheese Agreement' between SA & European Union

Meeting report

Briefing by the Department of Trade and Industry (DTI) on the Broad-based Black Economic Empowerment Amendment Bill [B42-2012]

Mr Lionel October, Director-General, DTI presented the introduction and background to the Bill to the Committee (see attached document).

The Presidential Advisory Council on Black Economic Empowerment had recommended the amendment of the current legislative framework to address issues concerning circumvention, regulatory mechanisms and compliance as well as the alignment of the legislation to the applicable codes of good practice (issued in 2007), other laws impacting on Broad-based Black Economic Empowerment (B-BBEE) and the applicable policy instruments.  The proposed amendments were intended to allow more effective monitoring, evaluation and reporting; strengthening access to procurement opportunities and funding and increasing technical and implementation capacity in the verification industry.

A list of the organisations consulted by the DTI was included.  The draft Bill was published for public comment in December 2011.  More than 500 submissions were received.  The majority of the comment received was broadly supportive of the Bill.  The draft Bill was changed after considering comments concerning the terminology used for certain key definitions; the application of the codes of good practice to organs of State and public entities; the detailed specification of the powers of the proposed Broad-based Black Economic Empowerment Commission (the ‘B-BBEE Commission’) and the provisions dealing with penalties and offences.

The objects of the Bill included the alignment of the principal Act with other legislation and the codes of good practice; the establishment of the B-BBEE Commission; dealing with instances of circumvention and non-compliance and giving effect to Government policy aimed at reducing inequality, defeating poverty and creating employment.  The B-BBEE Commission would be established within the DTI but would function as an independent entity.

Ms Nomonde Mesatywa, Chief Director: Black Economic Empowerment, DTI summarised the material amendments included in the Bill.  Details were provided of the proposed amendments to eleven definitions included in the legislation; the provisions dealing with the alignment of the Act with the codes of good practice; the establishment of and the powers and functions of the B-BBEE Commission; the provisions concerning offences, penalties and prohibitions; the introduction of the concept of B-BBEE Verification Professionals and the powers of the Minister of Trade and Industry to make regulations and to issue guidelines and practice notes.

Mr October advised that the intention was that the B-BBEE audit was included in the usual annual audit process of organisations.  The necessary provision needed to be made in the Independent Regulatory Board for Auditors (IRBA) Act.  The guidance of the Committee on this point was welcomed.  He pointed out that the legislation made no provision for imposing legal penalties if companies chose not to apply B-BBEE.  The proposed punitive measures were only applicable in instances of deliberate misrepresentation and fraud.

Discussion
The Chairperson thanked the Department for the briefing.

Mr W James (DA) remarked that the proposed amendments were in response to the history of ‘asset stripping’ in South Africa and were supported by the Democratic Alliance.  However, the DA had reservations about the extension of the powers of the Minister and the racial basis of the legislation.  The party would prefer that a class-based approach was followed.  He asked what the cost was to business to implement the legislation, if the implementation cost had been calculated or if the Department had any plans to calculate the cost.

Mr G Macintosh (COPE) observed that the legislation was controversial and was similar to the old apartheid legislation endeavouring social engineering rather than promoting the affirmative action (“regstellende aksie” in Afrikaans) that was intended and desired.

Mr M Oriani-Ambrosini (IFP) recalled that Parliament effectively gave the Minister and the DTI carte blanche ten years ago to formulate the BEE legislation without providing any clear guidance.  The proposed amendments were intended to improve the implementation of B-BBEE but it was important to understand the experience since the Act came into effect ten years ago.  The IFP had commissioned an independent researcher to investigate the implementation of BEE and the report would be made available to the DTI.  The current BEE system did not allow a white person to do business with Government if the value of the contract was more than R5 million.  He asked what the Constitutional and moral reasons were to prevent a certain category of the population from doing business with its own government.  The Government had signed agreements undertaking not to treat foreign entities less favourably than South African entities.  However, the legislation favoured a sector of the population and he wanted to know if the international agreements were being violated as a result.

Mr B Radebe (ANC) pointed out that the background to the legislation was the historical situation where the black population was discriminated against and seeked to redress the past evils of apartheid.  The legislation should be seen in the light of what would benefit the country.  He referred to a Court ruling that South Africans of Chinese extraction had been discriminated against in the past and had to be included in the category of disadvantaged persons.  The definition of “black people” did not include Chinese but the legislation should give effect to the Court ruling.  He asked if the DTI had consulted with local government entities, where much procurement took place.  He asked if the maximum penalty of ten years imprisonment or a fine was sufficient deterrent for the abuse of the system.  In other countries the penalty could be the closing down of the company if the organisation did something that was harmful to the economy.  He asked if the Department had consulted with the Registrar of Companies.

Mr G Selau (ANC) wanted more information on the B-BBEE Commission, for example the size, composition, functions and powers and how the entity would fit within the structure of the DTI.  It would appear that much needed to be done by the Commission and he wondered if it would be as effective as envisaged.  He was not sure if the offences should be more fully described in the legislation as this could result in loopholes allowing unforeseen offences to slip through.  He asked if the DTI could determine a term of imprisonment, which was the prerogative of the Department of Justice and Constitutional Development.

Mr October responded that Members’ comments had been noted.  He expected that there would be extensive engagement with the Committee on the issues raised during the processing of the Bill.  The South African system was flexible and less imposing that that applicable in countries such as Malaysia and China.  For example, any foreign company wishing to do business in China was required to enter into a joint venture with a local company.  In South Africa, a system of equity equivalents was applicable where a foreign-owned company was unable to sell shares to South African partners.  The Preferential Procurement Act allowed for a system of preferred suppliers to be used to provide goods and services and to increase the points awarded on the B-BBEE scorecard.  The issue of whether or not preferences to black-owned businesses disenfranchised whites was covered by provisions in the Constitution and the Preferential Procurement Act was already in place.  He asked if it was possible to implement economic transformation without legislation that favoured a disadvantaged sector of society.  South Africa decided to follow a more moderate route towards the creation of a de-racialised economy.  He agreed that the inclusion of racial-based definitions was contentious but it was necessary to ensure that it was clear in legislation that definitions were clearly understood and unambiguous.  There were a number of population groups included in the definition of ‘coloured’, including Chinese and Asians.  The definitions in the Bill conformed to the definitions used in other laws.  B-BBEE was applicable to all companies but foreign companies enjoyed a preferential option that was not available to local companies.  The international agreements not to discriminate against foreign companies were not violated.  The DTI did consult with the South African Local Government Association (SALGA) and the Bill would be processed by the National Council of Provinces (NCOP).

Mr Sipho Zikode, Deputy Director-General: Empowerment and Enterprise Development, DTI advised that a separate, more detailed briefing on the B-BBEE Commission would be made to the Committee.  The additional powers granted to the Minister were in accordance with the recommendation of the Presidential Advisory Council.  The Bill made provision for a maximum penalty but the actual penalty would be imposed by the Court.

Mr October added that the Bill attempted to put a more effective mechanism in place to implement the legislation.  The underlying concerns were the underperformance of the economy, the unemployment rate of 25% and the low level of adding value to South African products.  The business/entrepreneurial and middle classes were relatively small in South Africa and a substantial proportion of the population was unskilled and unemployed, resulting in an unequal society.  It must be noted that Brazil and Malaysia had unemployment rates of 6% and 2% respectively.  The focus was on creating economic opportunities for black enterprises, thereby addressing the country’s economic challenges.

Mr Oriani-Ambrosini cautioned the Committee to consider the responses regarding the situation in other countries in context.  The affirmative action policies in Malaysia benefited the majority of the population.  He was not satisfied with the response to his question about preventing a member of the white population from doing business with Government.  He found the response to his question about violation of international agreements to be naïve and wanted a respected international legal expert or academic institution outside South Africa to evaluate the matter.

The Chairperson observed that the concerns raised by Members were better addressed during the deliberations on the Bill as more time was required to discuss the various issues.  The Committee would establish a sub-committee to deal with the Bill and will ensure that adequate time was made available for further discussion.  If necessary, the Committee would engage expert external consultants to provide the necessary input.

Mr October advised that a regulatory impact assessment had been done.  Various studies on the cost of implementation of B-BBEE legislation had been done and the findings varied widely.  The proposed amendments did not introduce new empowerment threshold or changed the percentage targets.  The obligations of companies were not changed and it was doubtful that the changed legislation would add to the cost to business.  He pointed out that no case had ever been brought against South Africa for having a B-BBEE Act or a Preferential Procurement Act in place.  The proposed amendments were attempting to improve the existing legislation.  The Court would determine the penalty on a case-by-case basis.  The Bill merely specified the maximum penalty applicable.

The Chairperson requested Members to prepare for subsequent deliberations on the Bill.  The sub-committee would be chaired by Mr Radebe.  The thanked the participants for their input.

Briefing by the Department of Trade and Industry on the ‘Cheese Agreement’
Mr October explained that the agricultural industry in South Africa was completely deregulated and all subsidies to farmers were withdrawn in 1996.  The Trade Development and Cooperation Agreement (TDCA) implemented in January 2000 governed the trade relationship between South Africa and the EU.  The free trade agreement with the European Union (EU) had been beneficial to South Africa.  Certain changes were made to the TDCA concerning the export of cheese to South Africa, which needed to be ratified by Parliament.

Mr Victor Mashabela, Chief Director: Bilateral Trade Relations, DTI presented the briefing to the Committee (see attached document).

The briefing included an overview of the background to the ‘cheese issue’ and the challenges experienced over the previous 12 years.  The agreement required that no export subsidies were allowed for cheese exported to South Africa by EU member countries.  However, the EU continued to provide subsidies for three categories of cheese (Cheddar, Gouda and processed cheese) exported to South Africa and originally erroneously listed under the TDCA.  South Africa could not impose the tariff rate quota for these cheeses and imposed customs duties on the cheeses instead.  After protracted negotiations, an agreement was finally reached and signed in 2009.  The agreement was implemented on 1 April 2010.

Mr October explained that certain key items (for example clothing) were excluded from the exclusion list for liberisation in the TDCA.  It was unfair of the EU to allow a subsidy for the cheese exported to South Africa.  The revised agreement leveled the playing field.  He asked the Committee to endorse the agreement and recommend ratification by Parliament.

Discussion
Mr Macintosh wanted to know what had caused the delay in referring the matter to Parliament since the agreement was signed in 2009.  He noted that the loss of revenue amounted to R76 million in customs duty and R10 million in VAT, which were substantial amounts.

Mr G Hill-Lewis (DA) noted that the agreement did not cover producers and asked what prevented the EU from shifting the subsidy from the exporters to the producers.

Mr Selau asked if any other dairy products were affected.  He asked what agreements were in place with other countries exporting dairy products to South Africa (for example New Zealand).

Ms S Van der Merwe (ANC) asked what prevented the EU from reneging on the agreement in future.

The Chairperson asked if the Southern African Customs Union (SACU) should have been consulted.

Mr October explained that the tariff quota was removed when the agreement was entered into.  The EU had reneged on the agreement and revenue was lost because the tariff was not re-introduced.  It would take years before all the subsidies allowed in the EU were removed and a common agriculture policy was in place.  Producers received generous export subsidies from the EU.  South Africa could levy a tariff on subsidised agricultural products imported from the EU.  The agreement was mutually beneficial to the parties and allowed South Africa to improve its own production.  The agreement was finalised in 2008 and could be implemented before formal ratification.

Mr Mashabela said that the violation of the agreement by the EU became a source of tension between the parties.  The matter was brought to the attention of the DTI by the Customs division of the South African Revenue Services (SARS).  The legal opinion obtained by the DTI was that the agreement was formally ratified by Parliament because of the loss of revenue.  The agreement was between South Africa and the EU and excluded other countries, such as New Zealand.  The delay in referring the matter to Parliament was caused by a lack of capacity in the Department.

Ms Emily Mphahlele. Director: European Organisations, DTI added that further delays were caused because of the necessity to consult with other Departments and Government entities (listed in the briefing document).  The DTI was reliant on SARS Customs to ensure that imported goods complied with the relevant agreements.  The agreement was between South Africa and the EU and did not affect SACU or the SADC countries.

Mr Mashabela explained that the SACU Economic Partnership Agreement (EPA) was another matter entirely and did not impact on bilateral agreements between South Africa and the EU.

Mr October added that the trade relationship between South Africa and the EU was governed by the TDCA.  South Africa was excluded from the trade chapters of the Cotonou Partnership Agreement between the African, Caribbean and Pacific countries and the European Union and had to enter into reciprocal agreements with the EU.  SACU had identified vulnerable areas requiring protection, for example Botswana beef production.  If there was any impact on SACU member countries, the necessary consultation would be undertaken by South Africa.  In the case of the cheese agreement, there was no impact on the SACU member countries.

Mr Hill-Lewis observed that a reduction in the price of the product would result in an increase in VAT revenue because of the boost in demand.

Mr October agreed with Mr Hill-Lewis.

Mr Selau asked if the tariff quota was currently applied.

Mr October replied that the agreement was finalised and implemented on 1 April 2010.  Operators that paid normal customs duties between 2009 and April 2010 were not reimbursed but were entitled to a refund of the tariffs paid after April 2010.

The Chairperson presented the Committee report recommending the ratification of the ‘cheese agreement’.  Mr Macintosh moved for the adoption of the report.  The motion was seconded by Ms Van der Merwe.

The meeting was adjourned.