Broad-Based Black Economic Empowerment Amendment Bill: Department response to submissions; Department of Trade & Industry 3rd Quarter 2013 performance

Meeting report

Response to comments on B-BBEE Amendment Bill 2012
Submissions had been received from the Commission for Employment Equity, the Black Business Council, the South African Medical Device Industry Association (SAMDIA), Pholosang BEE Resolution Services (Pty) Ltd, the Association of BEE Verification Agencies, the Banking Association of South Africa (BASA), SADECO Quantum Consulting (Pty) Ltd, Telkom SA SOC Limited, Business Unity South Africa (BUSA), Solidarity Trade Union, the American Chamber of Commerce in South Africa, the South African National Accreditation System (SANAS), Vodacom, South African Women in Construction (SAWIC), the Casino Association of South Africa (CASA), the Construction Sector Charter Council, Rothschild, Black Management Forum (BMF), Peotona, Oceana, AQRate Verification Services and Aeon Investment Management.

Mr Lionel October, Director General of the dti, said that the Presidential Advisory Council had noted some weaknesses in the Bill which was why it was before the House. It had been introduced in 2011 and the Department had received public comment. The Amendment Bill aimed to align the Act with other legislation impacting on B-BBEE; establish the B-BBEE Commission to monitor and evaluate B-BBEE; deal with noncompliance and circumvention and give effect to government policy to reduce inequality and poverty and create employment. It was looking to complete the process and enact the Bill by July 2013.

Submissions were received around definitions of terms such as ‘BEE transaction’. He said that the definition had to be kept broad so that it was not limited to a passive ownership percentage held in a company.

Submissions were received on the confusion caused by SANAS being a BEE verifying agency. He said SANAS was only regarded as an interim measure. Ultimately the only verifying body would be Independent Regulatory Board for Auditors (IRBA) but this could only occur once amendments had been made to the Auditing Profession Act.

Submissions were received on the definition of black people, in particular the issue of South African Chinese who had taken the matter to court, as under apartheid they had been classified as coloured. He said the term Chinese would be inserted after Indians because the South African Chinese preferred that it be explicitly stated in the legislation.

Submissions were received on local content procurement and that the exclusion of white people with disabilities was discriminatory and that reference to local content procurement shifted the emphasis away from preferential procurement for enterprises owned or managed by black people. It had been requested that these should not be in the Act and should be dealt with in the Codes of Good Practice. The Department would remove it and specify it in the Codes. Ms Nomonde Mesatywa, Chief Director: B-BBEE, said there was no sub category for people with disabilities.

Submissions were received on fronting and on the need to clarify terms such as ‘knowingly’,’knows’ or ‘knowing’, with a number of submissions calling for fronting to be classified as fraud. The Department was of the opinion that it was sometimes difficult to establish intention and that the term fronting should be flexible enough to deal with the variety of ways that it could occur. The definition was intended to include cases where fraud was difficult to establish and the concept of fronting would not exclude the prosecution of offenders for fraud.

Submissions were received that references to land and infrastructure and Small Medium and Micro Enterprises (SMME) were inappropriate and clarity and further detail was requested on the manner in which objectives would be carried out. The Department felt that the objectives were appropriate and the provision was already in existing legislation. The Codes of Good Practice would elaborate how the objectives would be carried out.

Submissions were received that a trumping provision should be re-inserted in the Bill. Ms Mesatywa said ownership was not just about voting rights but was also about economic ownership. B-BBEE had to be positioned so that it influenced both elements.

Submissions were received on the fact that public entities could specify criteria in excess of those set out in the Codes which could lead to uncertainty. The Department felt that the Minister had the discretion to do so if there was a strategic rationale for it to be done and certain sectors such as aviation and defence would be given the leeway to set their own targets.

Submissions were received that enterprises operating across sectors should be clarified. Ms Mesatywa said that forum shopping was common. An enterprise should be measured in accordance with the requirements of each sector in which it operates.

Submissions were received that the rights of third parties might be affected where a public entity cancelled a contract because of BEE. The Department said normal legal recourse would take place under common law.

Submissions were received which questioned the trading entity model of the Commission and its independence from the dti. Mr October said it should be a trading entity within the dti so that an accounting officer could maintain oversight of the body and ensure that it carried out its mandate. In practice this was for purposes of administrative oversight.

Submissions were received over concerns over the Commission’s accountability to the Minister and the tenure of the Commissioner and Deputy Commissioner. The Department said it strove to strike a balance between the need to hold the Commissioner accountable for his/her performance and the need to ensure the Commissioner was not subject to political interference.

Submissions were received that the phrase “money received from any other source” in subsection (1)(b) be clarified. The Department said that this was a catchall phrase to account for funds received from a source other than Parliament.

Submissions were received that provision be made for an Annual Report to track the Commission’s progress. The Department said the Commission would be subject to the reporting requirements of the Public Finance Management Act (PFMA).

Submissions were received that the extended reporting requirements would impose undue administrative burdens on affected entities. The Department felt that it was not a further burden as it would concern government, public entities, JSE listed companies and SETAs.

Concerns had been raised over the extent of the Commission’s powers and there was uncertainty over the procedure to be followed in conducting its investigations. The Department felt that the Commission’s powers were not that extensive when compared to other similar bodies and that the Commission itself could determine the procedures it would follow.

Concerns had been raised over the Commissions power to disclose confidential information. The Department said that Section 13L and 13M aimed to safeguard confidential information. The Commission was only entitled to disclose confidential information in specified circumstances under section 13N(2) and that this proviso would not apply were the information was declared confidential under section 13L.

Concerns had been raised around creating criminal liability for negligent conduct and around fines which may be imposed under the Act. Some submissions supported a set fine of 10% of annual turnover while others felt the penalty provisions were too onerous. The Department said that a courtroom would determine an appropriate penalty and that a minimum rather than a maximum sentence be prescribed to deter fronting and strengthen compliance.

Discussion
Mr Mackintosh (COPE) asked if the Department had consulted on the constitutionality of the Bill. He said the Bill severely discriminated against whites and was extremely patronising of black South Africans and handed huge responsibility to the Commissioner. He wanted the Department to get a legal opinion on the constitutionality of the Bill and on giving the Minister such wide powers.

Mr W James (DA) said that strong action should be taken against fronting and the Codes of Good Practice had to be determined on all the elements of BEE.

Mr X Mabasa (ANC) asked what input had been sought from SMMEs and cooperatives. He asked Mr Mckintosh to elaborate on how the Bill severely discriminated against whites as he felt that there would be an element of bias but not of severe discrimination. He said white people should lead the campaign for BEE.

Ms S van der Merwe (ANC) said that the Department should try to avoid the duplication of administrative costs and that there was a need to motivate society on the need for the transformation of society.

Mr B Radebe (ANC) said he supported the notion of a trading entity.

Mr Selau (ANC) said that the Bill had to make it clear that the reference to the disadvantaged South African Chinese referred to the Chinese who were in South Africa at that specific time.

Mr October said the State law Advisors had already given an explicit opinion that it was constitutional and adhered to clause 9(2) of the Bill of Rights. On the discretionary powers of the Minister, he said the intention was for the Commission to monitor and evaluate and be of an advisory nature and for the Minister to be able to act swiftly, were the Commission not to carry out its mandate. The Commission would not adjudicate fronting, that would be adjudicated by the courts. It was a body to promote BEE and the Commissioners powers would be appropriate to that objective. The Department needed to look at how they craft a definition as an Act must be clear who it applies to and that as odious as it would be would have to refer to the old population registration act terms. The Department was very comfortable in maintaining the definition in the 2003 Act. When the Chinese Community took a matter to the equity court, the Chinese defined the community they were talking about, including the numbers involved. It referred to a very specific community that had been discriminated against. He said the Department did have extensive roadshows and workshops but acknowledged that SMMEs, traders and hawkers had to benefit from BEE and shifted the emphasis in the Codes to procurement in an attempt to bring in the informal sector into the economy. On whether BEE was detrimental to one race group, he said it could be a win-win model of inclusive industrialisation, unlike the 60’s in South Africa where there was an industrial plan for only one population group. Malaysia had used this strategy in its Bhumiputra plan to go from an Organisation for Economic Co-operation and Development (OECD) country to a fully developed country where everyone benefited. The Department would ensure that there was the necessary alignment between the Act and other necessary legislation.

Mr Mackintosh asked if the Department had applied its mind to the inclusion of a sunset clause.

Mr James said he was uncomfortable with the government definition of race in the scorecard, he felt it was a blunt instrument.

Mr October said that one could not talk of a sunset clause before there was a sunrise, once black entrepreneurs had become part of the mainstream economy which was when in any case a sunset clause would not be needed. It had taken Malaysia 20 years and it was now a normal society.

He said Government was not incentivising race categories, the definitions were only being used for legal purposes. He suggested that the issue of race, apart from the Chinese issue, not be revisited and that the emphasis be shifted to how to create economic opportunities as the narrow entrepreneurial base was what was holding the country back.

Adv Hermann Smuts, State Law Advisor, said that the Amendment Bill was constitutional and that this was reflected in the Preamble to the Act.

Adv Desiree Swartz, Senior State Law Adviser: Office of the Chief State Law Adviser, said that it would have a closer look at the Department’s responses.

Ms Mesatywa said that the presentation was a working document and the final report would be made available the following day.

3^rd Quarter Report of the dti
Mr October said the report focused on the key achievements and include unaudited figures for the fourth quarter.

Strategic Goal 1
Four new sector designation templates have been added, namely solar water heater components, electrical cable products, valves and actuators. It had facilitated the set up and launched of the assembly of small scale milling equipment which would allow the maize price for households to be reduced by 20%. There would be a formal presentation on Special Economic Zones (SEZ) on the coming Friday.

The Manufacturing Competitiveness Enhancement Program (MCEP) which had been in effect since May 2012 had approved R1b in grants to 189 companies and allowed 33,551 jobs to be retained. Business Process Services had attracted a group of major multinationals to the country and 70 films had been approved. There had been 12 applications for the R10b 12i Tax Allowance Incentive program and the Department was on track to spend the entire allocation.

Strategic Goal 2
The Tripartite Free Trade area in Africa was at the stage where negotiations had been agreed and the focus was now on tariff exchange. The expanded market would expose South African products to 600m people. The BRICS initiative had been finalised in Durban the previous month and the debate had shifted from the quantity of trade in commodity goods to the promotion of value added products. India, China and Russia have agreed to buy more of these types of goods. Trade and Investment South Africa (TISA) were active and had had the biggest stand at the Zimbabwe trade fair. The Zimbabwe economy had grown 7 to 8% per annum. The Department had launched a national Export Development Program for new exporters. The Export Marketing and Investment Assistance (EMIA) scheme had assisted over 1000 enterprises.

Strategic Goal 3
The Cooperatives Amendment Bill would only be adopted the following month by the National Council of Provinces (NCOP). It had launched Aquaculture Development and Enhancement Program (ADEP) as it wanted to expand the 1% share of the African production. It had hosted the first International Small Business Congress to be hosted in Africa. The Small Enterprise Development Agency (SEDA) had launched 10 new business incubators and 31 new projects by the Isivande Women’s Fund had been approved. 1213 enterprises had been approved by the Black Business Supplier Development Program and 314 by the Cooperatives Incentive Scheme. It wanted to finalise the informal sector strategy and the challenge was to bring township businesses into the mainstream economy. The enterprise incentive program had assisted a number of small companies with a 30% grant to build factories.

Strategic Goal 4
The draft Bill on Business Reform Registration and the draft Bill for Licensing of the Businesses Act had been developed and a Regulatory Impact Assessment on the National Credit Act and the Business Review Act had been completed.

Strategic Goal 5
The vacancy rate had decreased from double digits to 8.04%. The Department’s employment of the disabled stood at 2.7% of its workforce and women comprised 42.9% of senior management. Creditors were being paid in 30 days and it had done awareness programs via publications, multimedia campaigns and events and outreach initiatives. It had also held the first SA Premier Business Awards.

The addition of the MECP had seen an increase of the Department’s budget by R1b and the variance to the budget stood at 3.57% under expenditure. This was partly due to the long process to create a post which was dependent on the Public Service. The Department was in the process of instituting an Integrated Electronic Management System (IEMS) for all incentive schemes and the awarding of a tender was underway. Not all the monies of this project had been spent but it would be spent in the coming two months. The Companies Tribunal was a new body and had underspent on its budget. Only R40m of a budgeted R50m to the Richards Bay Industrial Development Zone Company had been spent. While there had been over or under expenditure on budget items as at the third quarter, all projects were still within budget.

The unaudited results as at the fourth quarter reflected a budget variance of 1.8% under spending. There could however still be payments made to DIRCO and R120m for the General Export incentive Scheme debts which legal opinion said should be written off. This would lead to an even lower variance. The Department would request a rollover of R17m for the IEMS.

Interventions to address the AG audit findings.
The Auditor General had given the Department an unqualified audit with matters of emphasis. The Department had moved from quarterly statements to monthly statements in an attempt to prevent material misstatements. Procurement staff would be going on refresher courses and the necessary delegation of powers to approve deviations had been signed off to prevent irregular expenditure. All staff had to obtain approval for remunerative work done outside of the public service. Divisions now conducted monthly asset verifications and the Department as a whole would do biannual verifications. A formal policy on overtime had been adopted and was being implemented.

Key challenges for the Department was the economic slowdown in traditional markets which, with the exception of Germany, stood at pre 2009 figures; managing expenditure incurred by other government institutions on behalf of the dti, for example the Department of Public Service and Administration (DPSA) for vacancies or State Information Technology Agency (SITA) for IT related matters; managing external risks, for example electricity blackouts for which it had established an emergency team; rolling out the dti programs to the second economy and oversight over 14 public entities of which about four had major governance problems.

Discussion
Ms van Der Merwe asked if the value added products had been identified.

Mr Radebe asked what was being done about rural and township development. What was the provincial spread of the Black Business Supplier Development Program? He said government was not working smartly if it took 12 months to fill a post

Mr Mabaso said not impacting on rural areas would impact on redressing inequalities in South Africa. He asked what interaction the Department had with the Department of Higher Education. He asked for more detail on the Department’s strategy to improve trading as the country was not trading at the level it should be.

Mr N Gcwabaza (ANC) asked about eradicating the Department's vacancy rate. What level of success had been enjoyed by the 1084 exporters assisted by the Department?

The Chairperson asked what kind of assistance was given to the exporters.

Mr October said the Department would focus on small scale milling and had a contract with Foundation for African Business and Consumer Services (FABCOS) for the roll out of orders with local retailers. This was a new opportunity. Regarding BRICS, he said it was based on the list of top ten value added products already identified by the Department. It had sent two trade missions which had resulted in R400m in sales. The Department would now be bringing missions to South Africa later in the year from China. A new market was citrus exports to Russia and agri products from South Africa now comprised 12% of Russian imports. Exports to China's comprised mainly wine and the Department had developed a list of the top ten investment projects it would like them to invest in.

The Department hoped to introduce a range of interventions but needed the right range of products, such as tractors and boats for small-scale fishing. It was working toward the presence of business advisors in the townships and rural areas who could assist business with the paperwork involved. He said the delay in filling the CFO’s post was because the post had been raised to the level of DDG to attract skilled professionals. He said the Department had run successful programs in conjunction with the Department of Higher Education using the SETA skills fund to train 3000 people in the Manyatela Program for business process services skills training. The Department was willing to engage on whether it had the balance right in terms of the country’s trade development, now that the manufacturing industry had been stabilised and new markets had to be established in countries such as Zimbabwe, Angola and Ethiopia. South Africa was expanding its foreign offices in Indonesia, Turkey and the Gulf states and it was working on expanding the Export Developers Program to expand the base of exporters. In the EMIA program it helped companies display their goods at exhibitions and helped them undertake new market research and assisted export councils. After every mission companies gave feedback to TISA on the orders it had secured.

The Chairperson wanted clarification on the red flags of the CIPCO dashboard and the issue of a lack of compliance from some of the entities. What mechanism had been used to bring under expenditure down to below 2% after it had been anticipated to be much greater?

Mr Kumaran Naidoo, dti Group CFO, said that noncompliance was noncompliance of external companies and dealt with matters such as absence of tax clearance certificates and invoices being incorrect or insufficient documentation being provided. In the Companies Tribunals case, it was a new entity and a range of issues had to be put in place first before money could be transferred to them. With regard to the National Consumer Commission, he said met with them on a weekly basis to ensure that all systems were in place. All incentive scheme monies were ring fenced and the Department had to go to Treasury for virements if it wanted to move money around.

Mr Shabeer Khan, dti CFO, said that with respect to under expenditure, the Department had had meetings with the different divisions and had put processes in place to monitor expenditure throughout the year.

Ms Jodi Scholtz, Group COO, said that with regard to compliance issues amongst the dti’s agencies, the
Minister had deployed the Group CFO and the Group COO’s office and bodies such as the internal audit teams and the secondment of individuals to the agencies to interact with them so that they were able to comply with requirements.

Ms Sarah Choane, DDG: Group Support Services, said that it planned to increase the percentage disabled employed by the Department. The vacancy rate had decreased notwithstanding the establishment of new posts. It sought to bring the vacancy rate to below 5% and it was retaining 96% of its staff.

The meeting was adjourned.