Broad-Based Black Economic Empowerment Amendment Bill: public hearings (day 1)

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Trade and Industry

07 March 2013
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Committee heard submissions from the Commission for Employment Equity, the Black Business Council, the South African Medical Device Industry Association, Pholosang BEE Resolution Services (Pty) Ltd and the Association of BEE Verification Agencies on the Broad-Based Black Economic Empowerment Amendment Bill.  The organisations generally supported the Bill.

The Commission for Employment Equity recommended that the Broad-Based Black Economic Empowerment Act superseded all other legislation and that all other legislation was aligned with the Act.  The word “black” should be inserted before all references to other categories of people.  The South African National Accreditation Society should not be the only entity responsible for the approval of Verification Professional Regulators.  No Government entity should be exempted from the legislation.  The powers granted to the Broad-Based Black Economic Empowerment Commission should be strengthened.  The penalty provisions in the Bill should be the minimum penalty for transgressions and the Court should be allowed discretion to impose stiffer sentences.  All entities doing business with Government to be subjected to the monitoring, evaluation and reporting provisions, regardless of the size of the enterprise or whether the company was listed on the Johannesburg Stock Exchange.  The sectoral charters and codes and the framework should be reconsidered.  The Department of Trade and Industry should make more extensive use of the reports submitted by companies each year.  Closer liaison between the Department and the Department of Labour was necessary.

The Black Business Council pointed out that the South African economy continued to be dominated by white-owned businesses.  The Council conceded that black economic empowerment measures had not been successful but disagreed that the policy should be scrapped.  The submission dispelled some myths and misconceptions around black economic empowerment.  The Act should supersede all other legislation and should overrule sector codes where the code was the result of collusion by the major players in the sector.  The proposed legislation would spell out more clearly what the legal requirements were for doing business in South Africa.  The Act should be applicable to all State entities and private companies doing business with Government.  Effective verification and monitoring mechanisms needed to be in place.  The South African National Accreditation Society should not be the entity responsible for accreditation.  Minimum standards should be set for the sector codes.  The Commission should be established as an independent entity and operate outside the ambit of the Department.

The South African Medical Device Industry Association was concerned that its currently compliant members would lose their BEE status under the Bill.  The provisions in the Bill made it more difficult for companies to become compliant.  The definition of ‘broad-based black economic empowerment’ was too narrow and did not encourage better performance.  The proposed legislation could be a disincentive for companies to become compliant.  The Bill was not the appropriate place to deal with local content criteria.  The provisions regarding the Ministerial determination were too vague and allowed for powers that were potentially unlawful.  The members of the association were relatively small enterprises but the new codes would not give recognition for the highly specialised skills development and training programmes being given.

Pholosang BEE Resolution Services (Pty) Ltd provided a range of BEE-related services to companies, including assistance to black shareholders who had been defrauded through fronting and other unethical practices.  The submission highlighted some of the fraudulent practices companies engaged in to be considered to be BEE compliant.  Pholosang suggested improvements to the proposed provisions concerning the role of State-owned enterprises; reporting; name-and-shame provisions; prescription and oversight (in particular, the establishment of a special division in the law enforcement agencies to investigate transgressions).  The Bill should provide for transitional arrangements until the Commission was fully functional.

The Association of BEE Verification Agencies suggested that the Minister issued practice notes to clarify the regulations and guidelines on the codes.  The Commission should take a more pro-active approach to the implementation of the codes.  Suggestions concerning the practical implementation of the proposed legislation included the regulation of Approved BEE Auditors; the application of the sector codes by Group Companies and the specification of qualification criteria for procurement by organs of State and public entities.  The definition of ‘black people’ should include South African citizens of Chinese descent in accordance with a 2008 Court order.

The Member of the Committee representing the Inkatha Freedom Party queried the method to be used to ascertain if a person was black in the absence of a population register that did not include racial classification.  Members from opposition parties questioned the premise of favouring the black sector of the population over the other race groups.  A copy of the document containing the data on the percentage black ownership of equities listed on the Johannesburg Stock Exchange was requested.  Other questions from the Members of the Committee were to obtain clarity on the content of the submissions.

Meeting report

The Committee noted the apologies of Adv A Alberts (FF+), Mr N Gcwabaza (ANC), Dr W James (DA) and Mr G Selau (ANC).

Submission from the Commission for Employment Equity
Dr Loyiso Mbabane, Chairperson of the Commission for Employment Equity presented the submission to the Committee (see attached documents).

The Commission suggested that all other pieces of legislation were aligned with the Black Economic Empowerment (BEE) legislation. The Commission supported the definition of “black people” in the Bill but suggested that the word “black” was inserted before all references to other categories of people to ensure that there was no room for the misinterpretation of the intention of the Bill.  The Commission disagreed that the South African National Accreditation Society (SANAS) should not be the only entity tasked with the approval of Verification Professional Regulators.

The Commission recommended that the Broad-Based Black Economic Empowerment Act (BBBEE Act) was established as the primary legislation and superseded any other Act, Charter or Code in black empowerment matters.  The Commission disagreed that any exemption was granted to any organ of State.  The Commission advocated the strengthening of the powers granted to the BBBEE Commission.

The Commission supported the proposed penalty provisions but suggested that the penalty described was the minimum and that the Court was allowed the discretion to increase the penalty.  All entities doing business with Government to be subjected to the monitoring, evaluation and reporting provisions, regardless of the size of the enterprise or whether the company was listed on the Johannesburg Stock Exchange (JSE).  The Commission did not consider charters and codes to be effective in promoting BEE and suggested that this framework was reconsidered.  Scorecards did not necessarily ensure that true back empowerment was achieved and it was suggested that the Department of Trade and Industry (DTI) made more extensive use of the thousands of reports submitted by companies each year.  The Commission suggested closer liaison between the DTI and the Department of Labour (DOL).

Discussion
Mr M Oriani-Ambrosini (IFP) had submitted legal opinion to the Committee on the question of the legality of the favouring of one racial group over another.  His questions were based on the premise of the legal definition of ‘black people’.  He asked how it was determined whether a person belonged to a certain racial group.  The Commission for Employment Equity dealt with the concept of equity, which differed from the concept of equality.  He asked at what point the preference for one race group became a hindrance to another group.  He wanted to know what the moral and historical basis was for denying a person from one race group the same benefits as a person from another group, who had a similar background and the same opportunities.

Mr G McIntosh (COPE) asked for more clarity on the Commission’s position concerning the provisions in the Bill establishing the BBBEE Commission; the penalties for making transgressions a criminal offence and imposing penalties and the increased powers granted to the Minister.

Mr B Radebe (ANC) asked if the BBBEE Commission established by the Bill was considered to be an adequate measure to ensure empowerment.  The focus in other countries was on skills development.  He asked if the Commission considered the proposed penalties to be effective.  He said that a country could not be stable unless the majority was economically empowered as well.

Dr Mbabane responded that the Constitution made provision for the empowerment of black people.  The intention of the empowerment legislation was to address the wrongs of the past and the black population was favoured because this segment of the population was the most adversely affected group.  The Commission for Employment Equity supported the establishment of the BBBEE Commission.  The Commissioner should be granted more extensive powers, rather than the Minister.  It was pointless to pass legislation if the BBBEE Commissioner did not have the power to ensure that the law was implemented.  The skills development levy of 1% of turnover had generated billions of Rands for the Sector Education and Training Authorities (SETA’s) but the SETA’s had failed to utilise the funds effectively.  The question was on how the skills levy funds could be used more effectively to drive the transformation process.  The penalty provision in the Bill (i.e. a fine of 10% of turnover) was a good start but the penalties should be the minimum sanction and the Court should be allowed the discretion to impose a heavier penalty on a case-by-case basis.

Mr Oriani-Ambrosini insisted that the failure to respond to his questions was duly noted by the Committee.

Submission from the Black Business Council (BBC)
Mr Xolani Qubeka, Chief Executive Officer, BBC and Mr Peter Temane, Chairperson of the South African Mining Development Association (SAMDA, a member of the BBC) presented the submission to the Committee (see attached documents).

The submission included the background to the BBC and an overview of the current realities of the South African economy.  The economy was still dominated by white-owned businesses, with less than 2% of the companies listed on the JSE being black-owned.  The white-owned sector continued to benefit from the bulk of public spending and exercised significant power in the economy.  Although the black majority had the political power, this had not resulted in significant economic benefits to this sector.

The submission summarised the myths (negative sentiments) about BBBEE.  The Council disagreed with the calls for BEE to be scrapped.  Small and medium-sized enterprises (SMME’s) had less resources available than larger companies to promote corruptive practices.  The large companies doing business with Government went to some lengths to offer seats on their Boards to prominent Government officials.

The Council conceded that little progress had been made in transformation of the economy since 1994 but was of the opinion that the enactment of the BBBEE Amendment Bill would benefit the process.  One of the key issues concerning the Bill was the status of the BBBEE Act.  The Act should supersede all other legislation.  The Act should overrule sector codes where the code was the result of collusion by the major players in the sector.  The proposed legislation would spell out more clearly what the legal requirements were for doing business in South Africa, as was the case of the ‘indigenisation policy’ imposed in Zimbabwe.  The legislation should be applicable to all State entities and private companies doing business with Government must be compliant.  Other comment concerned the need for effective verification and the monitoring of compliance.  The Council was opposed to SANAS being the body responsible for BBBEE accreditation.  Minimum standards should be set for the sector codes and the BBBEE Commission should be established as an independent entity that operated outside the ambit of the DTI.

Submission from the South African Medical Device Industry Association (SAMED)
Ms Tanya Vogt, Chief Operating Officer, SAMED presented the submission to the Committee (see attached documents).

The submission included the background to SAMED and the challenges faced by the sector.  The medical devices industry was currently unregulated and most medical equipment was imported due to the lack of local manufacturing capacity. 

SAMED supported the BBBEE Amendment Bill but was concerned that members of the Association who were currently compliant would lose their status and become non-compliant.  The provisions in the Bill made it more difficult for companies to become compliant.  The definition of BBBEE was too narrow and did not encourage better performance.  The proposed legislation could be a disincentive for seeking BBBEE compliance.  SAMED members supported the development of the local manufacturing sector but felt that BBBEE legislation was not appropriate for dealing with local content criteria.  The provisions regarding the Ministerial determination were too vague and allowed for powers that were potentially unlawful.  Most SAMED members were relatively small enterprises but the new codes would not give recognition for the highly specialised skills development and training programmes being given.

Discussion
Mr McIntosh remarked that the Committee had not yet seen the new codes but was required to process the legislation that set out the boundaries for the codes.  He asked SAMED if the proposed legislation would be a disincentive for foreign suppliers of medical equipment to do business in South Africa.  He asked the BCC to clarify the comment “so-called World Cup”.  He wondered why many Chinese, Somali and Ethiopian traders operated in virtually every town in the country and managed to make a living.  He listed a number of prominent black businessmen and black-owned businesses and asked why it was necessary to have BBBEE legislation for the majority of the population.

Mr X Mabasa (ANC) asked SAMED what their suggestions were for improving the proposed legislation.  He asked the BCC to comment on the reasons for the failure of the previous broad-based black empowerment legislation.

Mr Radebe asked the BCC if the Bill went far enough to stop the practice of fronting.  He asked if the black sector of the population had the necessary skills to take advantage of the empowerment legislation.  He asked what lessons could be learned from countries such as Brazil and Malaysia, which had managed to implement successful transformation policies.  He noted that SAMED was an association of various enterprises involved in the importation of medical equipment.  He pointed out that trade policies were in place and foreign companies needed to comply with South African legal requirements.

Ms S Van der Merwe (ANC) suggested that the DTI provided a more detailed explanation of what was meant by section 6 of the Bill, which dealt with the exemption of public entities.  Current legislation did not deal with fronting and other criminal activities and it was necessary to ensure that such detrimental acts were declared illegal and dealt with.  The issue of the codes needed further discussion.  She agreed with Dr Mbabane that the sector charters had not been effective but pointed out that a charter was merely a social framework and not legislation.  However, as a social framework, a charter should be functional and effective.  All sectors in addition to NEDLAC, the State and Labour should work together and comply with the law in order to make BEE effective.  The majority of Members of Parliament supported the proposed legislation.

Mr G Hill-Lewis (DA) asked the BCC on what the statement that only 2% of the companies listed on the JSE was black-owned was based.

Mr Oriani-Ambrosini said that the failure to respond to his earlier question indicated contempt for Parliament.  South Africa no longer had a population register that classified persons by race and the problem was exactly how it could be proven that a person was black.  The BCC submission had acknowledged that BEE had been a failure bus as yet a national debate on what the social contract should be had not been held.  He agreed that BEE would work if opportunities were given to the previously disadvantaged sector of society but the question was whether resources or opportunity should be given.  The objective of BEE was to uplift the disadvantaged black population out of poverty but it was not clear whether the aim was to uplift all poor people out of poverty or to create a wealthy upper or middle class.  He had requested the DTI to commission legal opinion on whether or not the Bill violated international trade agreements.  Many foreign companies supplied products and services to South Africa and the trade agreements were clear that local suppliers could not be given preference over foreigh suppliers.

Mr Qubeka agreed that there were some successful black businessmen in South Africa but the overall percentage was small.  The issue was on how available resources could be mobilised to ensure that more black industrialists, manufacturers and entrepreneurs would be established.  The fortunes of certain black businessmen were built on acquiring stakes in white-owned companies.  Shopping malls in black townships encouraged black entrepreneurship and certain white-owned retailers were tenants in these malls.

Mr Temane pointed out that countries such as Brazil and Malaysia had not had laws that excluded certain races from economic activity, unlike the case in South Africa.  It was necessary to protect the black majority by means of legislation because of the disadvantage that was suffered by this sector of society in the past.  The previously disadvantaged sector was not interested in being treated equally.  The statistic that only 2% of the net equity on the JSE was black-owned was as per the data released by the JSE.  He warned of the dire threat to the country if measures were not put in place to increase the participation of the black population in the economy of the country.

Mr Marlon Burgess, Chairperson, SAMED summarised his background.  He had experience of establishing a successful BEE company that employed 50 people under black middle management.  BEE could work if it was properly implemented but the Bill made it onerous for companies to comply, which defeated the object.

Ms Vogt advised that the submission from SAMED included suggestions on how compliance could be improved.  The legislation needed to be flexible and be able to accommodate the differences between industries.  The medical devices industry invested a lot of time, energy and money on training but the new codes gave no recognition for this.

Dr Mbabane said that the lack of a racial classification system was not the concern of the Bill.  A person could simply declare himself to be black, which was the subject of another debate.  He questioned the logic of a country that was run by the black majority but 75% of the economy was under control of the white minority.  He pointed out that there were Chinese traders operating in Brazil and Malaysia as well.  The Bill was about the empowerment of the previously disadvantaged black sector of society.

The Chairperson remarked that the Constitution included a Bill of Rights.  It was necessary to contextualise and acknowledge the history of the country and to get past it.  There was a need for legislation to address the empowerment of the black population as the failure to do so would result in dire consequences for the country.  It was clear that the current legislation did not achieve the objectives that had been set.  It was necessary to establish the reasons why the sectoral charters were ineffective; address the misalignment of related legislation and how to develop capacity to ensure that the economy grew.  The submissions expressed divergent views on large companies that did or did not do business with the State.  The recognition of skills training activities should be considered as improved skills levels were essential for successful transformation.  South Africa was a nation comprised of many race groups but it could not be denied that one group had been denied the opportunities given to other groups.

Mr Hill-Lewis asked for a copy of the JSE report referred to in the BCC submission.

Submission from Pholosang BEE Resolution Services (Pty) Ltd
Ms Christine Qunta, Executive Chairperson, Pholosang presented the submission to the Committee (see attached documents).

Pholosang was a multi-disciplinary consultancy company that focused on BEE and provided legal, business, forensic accounting and company secretarial services to client organisations.  The company also assisted black shareholders who had been defrauded through fronting and other unethical practices.  Pholosang planned a series of workshops during 2013 on BEE legislation, the codes of best practice and corporate governance.

Pholosang believed that the Bill addressed most of the current nefarious practices companies engaged in with regard to BEE but suggested areas where the proposed legislation could be improved.  Provision should be made to allow the BBBEE Commission to apply an inquisitorial method of adjudication.  Details were given of sophisticated schemes devised by companies to circumvent BEE legislation.  The financial losses suffered by the black empowerment component could be substantial.  Other areas where the Bill could be improved were the role of State-owned enterprises; reporting; name-and-shame provisions; prescription and oversight (in particular, the establishment of a special division in the law enforcement agencies to investigate transgressions).  The Bill should include transitional arrangements that would be applicable until the BBBEE Commission was fully functional.

Submission from the Association of BEE Verification Agencies (ABVA)
Mr Eric Ackroyd, Technical Director, ABVA presented the submission to the Committee (see attached document).

The submission included the background to ABVA.  Comment on the Bill was focused on the alignment of the mechanisms and criteria intended to achieve the objectives of the BBBEE Act and the implementation of these mechanisms and criteria.

ABVA suggested that the Minister issued practice notes to clarify the regulations and guidelines on the BBBEE codes.  The establishment of the BBBEE Commission was welcomed but it was suggested that a more pro-active approach was taken to the implementation of the codes.  Comment on the practical implementation of BBBEE included the regulation of Approved BEE Auditors; the application of the sector codes by Group Companies and the specification of qualification criteria for procurement by organs of State and public entities.  The definition of ‘black people’ to include South African citizens of Chinese descent in accordance with the Court Order issued on 18 June 2008.

Discussion
Mr McIntosh asked if there should be a minimum percentage of white ownership in a black-owned business.  He asked that the BEE status was of an enterprise that had been awarded a contract by a State-owned enterprise but where the black partner had pulled out of the business within a short period of time.  Fronting was a fraudulent practice and he wondered if it was better to deal with such instances as simply a case of fraud.  Government entities could only lease premises from a black-owned business but there were many examples of nefarious practices in the leasing of premises to the State.  He found the submissions made by Pholosang and by ABVA of value.  He agreed with Mr Oriani-Ambrosini that the issue of establishing who was legally black was important.

Mr Radebe observed that the Special Investigation Unit (SIU) undertook investigations into allegations of fraudulent BEE practices.  He asked if the establishment of another special investigation unit would result in duplication.  He asked if the Regulations issued in terms of the Bill would be adequate for dealing with transitional arrangements.

Mr Oriani-Ambrosini wondered why companies resorted to fronting.  A company was not legally obliged to be BEE compliant but if it was not, it was unlikely to be awarded lucrative contracts.  It was necessary to clarify exactly what was expected from companies.  For example, if companies were expected to transfer a portion of its shareholding to black partners for free, consideration could be given to using the National Empowerment Fund to pay compensation.  To date, BEE had not been effective, despite the incentives that were offered.  The issue of how it could be established that a person was black was a matter of enforcement and eliminating the potential for the abuse of the system.  He wanted to know how it could be established that a company was legally black.

Ms Qunta was of the opinion that a black partner in a BEE compliant company should be allowed to exit the company or dispose of his shareholding.  However, the white partner could have a problem with meeting the compliance requirements if the black partner left before the end of the contract.  She was not sure if Mr McIntosh’s question concerning the percentage of white ownership of a black-owned company was facetious.  In her opinion, South Africa should be beyond the need for redress by means of legislation but further debate on the need to address the iniquities of the past was pointless.  Certain initiatives had been successful but others had failed.  It was necessary to undertake an assessment of the effectiveness of the various initiatives and to take corrective action for those that had failed.  BBBEE legislation was the only leverage the State had for forcing the private sector to become involved in black empowerment.  She agreed that fronting was fraud and a civil crime.  The victims of fronting wanted the fraudsters brought to book and held accountable.  There was no harm in including common law provisions in the Bill as there was a tendency to avoid prosecuting complaints of fronting in accordance with the Companies’ Act.  The investigation of complaints of fronting required a high level of specialist knowledge and skill and it was necessary to strengthen the capacity of the South African Police Service in this regard.  The charge needed to be laid at the local SAPS office in the first instance.  Transitional arrangements could be dealt with adequately in the Regulations.  The total white population was 9% and the total white male population was 5%.  It was unrealistic to expect an economy to be powered on such a small percentage of the population.  It was essential that the skills base was broadened as it was an economic imperative to increase the number of taxpayers, earners and spenders of money.

Mr Ackroyd said that BEE transactions were supposed to be for the mutual benefit of all concerned.  It was necessary to develop the right spirit and attitude towards BEE.  The spirit of black economic empowerment went beyond the codes, which was all about numbers.

Dr Mbabane said that there was a difference between the legal status of South African Chinese as black and indigenous black Africans.  BEE was about more than the percentage of shares owned by black people.  Black people had to actively participate in the business and be in a position to build a legacy.

The Chairperson thanked the stakeholders for their submissions and invited the representatives to attend the remainder of the public hearing process.  All the submissions agreed that it was necessary to establish an effective BBBEE Commission, to address the abuse of the system and to provide for a quicker and more cost-effective mechanism to deal with complaints than legal action in the Courts.

The meeting was adjourned.


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