B-BBEE Codes of Good Practice: briefing; Trade Workshop Committee Report

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Trade and Industry

29 October 2013
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Committee received a presentation by the Director General of the Department of Trade and Industry on the B-BBEE Codes of Good Practice. The Codes had undergone a process of revision over the past year and received well over 500 submissions from the public. The final revised Codes were gazetted on 11 October  2013. The following were some of the changes:

▪ A reduction from seven elements on the scoreboard to only five: ownership, management control, skills development, enterprise and supplier development and socio-economic development
▪ All companies, with the exception of Exempted Micro Enterprises were required to comply with all five elements on the scorecard
▪ Emphasis on the scoreboard was placed on enterprise and supplier development as opposed to ownership
▪ Skills development expenditure was set at 6%
▪ 15% cap introduced for non-core training costs
▪  on-compliance led to a one level drop as opposed to the previous two level drop
Value Adding Supplier was replaced with Empowering Supplier (defined as: a B-BBEE compliant entity which can demonstrate that its production and/or value adding activities take place in the country).

Members’ concerns included the following:
▪ The exclusion of cooperatives from enterprises
▪ Onerous nature of the codes
▪ The analysis and inclusion of the public submissions
▪ The use of black as opposed to designated groups
▪ Individual implementation of B-BBEE
▪ Resemblance of legislation to a legal ideological social engineering
▪ Exclusion of state organs and public entities
▪ Existence of a Regulatory Impact Assessment
▪ New requirements for new entrants
▪ Differentiation between the percentage and the number for ownership
▪ Targets for involvement of broad-based groups
▪ Definition of new entrant should not mean t
hose with R49.9 million in equity
▪ Regular review of codes
▪ Increase in imports
▪ O
nly receiving two instead of six points for including new entrants

The Committee then deliberated on its second draft of the Committee Report. Issues such as agricultural trade, development approach, import substitution, export policies, South African productivity, trade relations with BRIC countries and intercontinental trade were raised during the deliberations.

Meeting report

The Chairperson emphasised the importance of this presentation given that the Codes of Good Practice were only recently gazetted.

B-BBEE Codes of Good Practice: briefing by Department of Trade and Industry (dti)
Mr Lionel October, dti Director General, reminded the Committee that on 5 October 2012, the Revised Codes were gazetted for 60 days for public comment. During that time period, 555 submissions were received and thoroughly analysed before the Codes were gazetted on 11 October 2013.

One of the changes in the revised codes was a reduction in the Generic Scorecard from seven elements to five in order to expand the economic base and in particular, the economic base of black entrepreneurs. Within the codes, all companies, with the exception of Exempted Micro Enterprises (EMEs) were required to comply with all five elements on the scorecard. This practice enhanced the recognition status of black owned EMEs and Qualifying Small Enterprises (QSE). The following were the five elements included: ownership; management control; skills development; enterprise and supplier development; socio-economic development. A chart in the document outlined the breakdown in points for each element.

Mr October explained that the most significant change on the scorecard was the combining of enterprise and supplier development with the highest portion of the score. This was done in order to transform the core of black-based empowerment. In terms of compliance, large entities were required to comply with all priority elements, while QSEs had to comply with at least two of the priority elements: ownership was compulsory and either enterprise and supplier development or skills development. Furthermore, he noted that another significant change was the result of not meeting the priority elements. Both large entities and QSE’s would drop one level if the requirements were not met; a change from a two level drop in the past.

Mr October discussed the difficulties that qualification requirements presented. He explained that EMEs and QSEs could be qualified as either a level one contributor or a level two contributor. Level one meant that the enterprise was 100% owned by black people and level two indicated that black people owned more than 50%. However, providing verification of such qualifications was proving to add an additional burden on EMEs and QSEs; as such, there were no verification requirements imposed on these enterprises. He explained that a sworn affidavit was sufficient and if one had falsely represented one's status, then the affidavit was null and it was considered a fraudulent act. He indicated that the burden of transformation and compliance thresholds should fall on the larger entities.

Mr October provided an overview of the final revised codes. Within the ownership element, 25.1% of the ownership target remained unchanged and there was a 40% sub-minimum on net value retained. The key driver of true ownership was in the hands of black people and it was important to measure economic interest on an annual basis. As for the element on management control, it was aligned with the Employee Assistance Programme targets as was annually published by the Department of Labour. Within the skills development element, the target for skills development expenditure was maintained at 6% and it applied to both internal and external training expenditure. There was also a 15% cap introduced for non-core training costs such as accommodation. International training was recognised under this element as long as they met the requirements set by the South African Qualifications Authority. Within the enterprise and supplier development element, the imports exclusion principle was maintained; however, there was an overriding proviso that imports were not applicable in Designated Sectors. Furthermore, Value Adding Supplier was replaced with Empowering Supplier, which was defined as follows: A B-BBEE compliant entity which can demonstrate that its production and/or value adding activities take place in the country. Within this element, large enterprises had to comply with at least three of the following criteria:
- 25% of cost of sales excluding labour costs and depreciation must be spent in RSA
- 50% of jobs created must be for black people
- Beneficiation of raw materials
- Skills transfer

Mr October noted that as a way forward, the dti was to continue engaging in the second phase of the Refinement of the Codes during the transitional period. This second phase was to focus on the following areas/statements:
- Statement 103: Equity Equivalent Investment Programme
- Statement 003: Charter and Sector Codes
- Statement 004: Scorecards for Specialised Enterprises
- Qualifying Small Enterprise Scorecard.

Discussion
Mr X Mabasa (ANC) commented that Parliament did not have the luxury of continually amending Acts and as such, amendments had to be done in a sustainable manner. He stated that he was making this comments because B-BBEE spoke of SMEs, QSEs and micro enterprises, all of which were essentially SMMEs. He argued that previously one used only the terms SMMEs and cooperative. He asked that B-BBEE use the terms, SMMEs and cooperatives.

Mr October replied that cooperatives are included in all the definitions of an enterprise.

The Chairperson commented that cooperatives were not necessarily small.

Mr A Alberts (FF+) asked how many of the submissions requested changes as a result of the onerous nature of the codes. He questioned how many of the submissions were addressed and accommodated in the Codes. On the topic of race, he asked why the Code only referred to Blacks and not designated groups. How was it ensured that each individual employed themselves implemented B-BBEE. Also, why was a company that was 100% black owned, not required to fulfill all of the elements on the scorecard? Lastly, how were bad practices rectified?

Mr October replied that with regards to the analysis of the public submissions, there was a team working on each and every one of the submissions and changes were made where there were a large number of people commenting in the same manner. As for the issue of including black people and not designated groups, the definition of black used in the codes included Africans, Coloureds and Indians.

Mr G McIntosh (COPE) commented that the Codes were already gazetted with the President’s signature and therefore this was merely a presentation to provide information and clarity, as the Committee could not make changes. He stated this legislation resembled legal ideological social engineering, which he had a strong distaste for. Despite that, he argued that if economic growth was to take place, this form of social engineering could be digested. He asked why were state organs and public entities as shareholders, excluded because in his view, if they were public entities and state organs then they were black, as it was a majority black government. He commended section 2.1 of the gazetted codes, which stated that substance took precedence over legal form.

Mr October replied on the issue of legal ideology, that the only way to get rid of social engineering was through reverse engineering. On the topic of state organs and public entities, there was no change to the original codes and they were always excluded. The reason was very simple, as it was to change economic behaviour and get people to do business with black people. Also, as a democratic government, there cannot be a colour attached to it.

Dr W James (DA) asked if a Regulatory Impact Assessment (RIA) had been conducted and if so, he requested a copy of the assessment. Secondly, he was worried about the changes to the threshold and the qualifications. He asked the dti to explain the changes made to the process of dealing with a new entrant and why these changes were made.

Mr D Swanepoel (ANC) asked if there was a differentiation between the percentage and the number with regards to ownership. Secondly, was there any control mechanisms built in to ensure that enterprises continued good practice after they were given a contract?

Mr October replied that enterprises were required to annually update their scorecards in order to ensure that they were continuously on par.

Mr B Radebe (ANC) thanked the Department for their presentation and their work at the B-BBEE Summit. On legal ideological social engineering, he wanted to acknowledge once and for all that apartheid was a social engineering project and in order to mutualise it, you have to reverse it. The strong emphasis in the scorecard on enterprise and supplier development was of extreme importance in order to provide black people with a chance to compete in the economy.

Mr Z Wayile (ANC) commented that all laws remain contested by certain people based on their interests, and those interests were ideological in nature. The suppression and exploitation of the people had been political, social and ideological and the government could not shy away from the responsibility of reversing those injustices of more than 300 years. He asked if there was any ongoing relationship and strategy building between the dti and the Department of Labour?

Mr G Hill-Lewis (DA) stated that in general, everyone agreed on two broad goals within the dti. First was to broaden the participation of black South Africans in the economy and secondly, put simply, was to get South Africa to produce more products. He argued that there were some aspects in the codes that worked against achieving these two broad goals. The targets for the involvement of broad-based groups dropped from 10% to 2%. The sensible action was to increase the incentives for the involvement of broad-based groups; however, these codes decreased the incentives. Secondly, he was greatly concerned with the definition of new entrant, as the total value was increased from R20 000 000 to R50 000 000. If the intention was to increase participation in the economy, then it did not make sense to continue to incentivise those who already held equity up to R49.9 million. Rather, it would make sense to reduce the threshold in order to provide incentive for brand new entrants. He did, however, support the decision to exclude public shareholders and organs of state, as they were the biggest shareholders in the economy. Furthermore, the old codes included a review that was to take place in 2017 but this review was deleted in the revised codes. He asked the Department to explain why the review was deleted, as in his opinion a review was a healthy and necessary mechanism that should be held on a regular basis to review the efficacy of the policy. Moving on to the commonly agreed goal of industrialisation, he questioned the exclusion of public sector procurements. He was concerned that the provisions would lead to an increase in imports rather than local production. Lastly, he showed concern about the skills development spending that was upped from 3% to 6%. He argued that most manufacturers in South Africa were barely making any income profit and such an increase in their costs was a huge burden on companies in the current economic environment.

Mr October replied that the revised codes aimed to create as broad a base of shareholders as possible. It was important that this did not equate creating a black entrepreneurial class and one must not confuse the two objectives. This was especially why the focus of the scorecard was on enterprise and supplier development as opposed to ownership. As for the review period, it was practice to review legislation every five years. As for the 6% spend on skills development, this was based on a scorecard process where each enterprise was compared to others and it was precisely to create a competitive environment. The more skills development done, the higher the enterprise scored on that element and while it was not an absolute requirement, it was to the benefit of the enterprise.

Mr Sipho Zikode, DDG: Broadening Participation, replied that with regards to new entrants, the increase to R50 million was done in order to ensure that more and more black people could be included in the B-BBEE in the years to come with the status and benefits of a new entrant.

 The Chairperson asked Members if they were convinced that these provisions were not in place to exclude people on any basis.

Mr Hill-Lewis agreed that the ultimate goal was to have a whole black entrepreneurial class but when an enterprise only received two points for including new entrants, then it was working against that objective. The definition of what a new entrant was should be to incentivise start-up entrepreneurs, not those with R49.9 million in equity.

Dr James asked how can the Committee see how much of the public submissions were taken into account and how much was left out. Were the decisions publicly available? As for race classification, there was a major issue at hand. The definitions included were using categories that were defined under apartheid with several different categories. The question here was that if there was ever a dispute over what racial category an individual belonged to, then how would that dispute be resolved? And what about those groups that did not fit within the apartheid categories?

Mr October replied about racial classification, stating that it was an issue that did not belong in the discussion on the Codes. It was a matter that was relevant to the main Act from where the definitions were derived. In working on the Codes, the team could not change any of the definitions.

Mr Alberts also requested to have access to the submissions made by the public. As for the EMEs, there was an unintended consequence that large companies did not want to contract with any white companies in order to receive the highest points possible. He was concerned that a company that was 100% black was exempt from certain development recquirements, whereas a company that was 100% white did not have the same exemptions. He argued that work had to be done to ensure that perverse impacts were resolved.

Mr October replied that the comment on the exclusion of white companies was factually incorrect because black companies were still excluded from the bulk of government contracts, which was why there was a push for radical changes to the Preferential Procurement Act. It was important to note that the target for ownership was only 25%, which was significantly low in comparison to other countries with targets of over 50%. This was also especially high given the fact that the population was 80% black. He stated that the focus was not on ownership because even if ownership was changed in the economy, it did not mean that it would be a more prosperous society. Rather, growing the number of entrepreneurs was the way to do it, which was why 75% of the points were non-ownership points.

Mr Radebe commented that several of the comments raised in this discussion were covered during the Summit on B-BBEE. He asked the Department when that report would be ready.

Mr Hill-Lewis asked for companies whose financial year did not start before 2014, when would their first assessment take place?

Mr Zikode replied that the codes would kick in on October 2014 and the first assessment would take place in October 2015, which was a 12-month backward review.

Committee Report on Trade Workshop
The Chairperson led the Committee through the report page by page to ensure that all the issues were addressed and that all was accurate. The following were the topics raised in the deliberations.

On the issue of agriculture trade, Mr Radebe requested that the percentages should be accompanied with the actual numbers, as it would portray a much clearer picture of the numbers.

Mr McIntosh commented that historically, South Africa had received the least amount of global assistance for agricultural products. This has blatantly led to a trade imbalance and therefore he agreed with Mr Radebe that the numbers had to be in the report.

The Chairperson asked if ‘development approach’ was the correct terminology.

Mr Radebe commented that the Committee had previously agreed that they were adopting a development approach to trade policy to promote industrialisation.

Dr James said that he had no idea what ‘development approach to trade reforms in line with IPAP’ meant.

Mr Radebe replied that this entailed that the application of tariffs would be done in a matter that would stimulate the manufacturing within the country.

Dr James stated that this was essentially import substitution by using tariffs, which was a form of protectionism.

Mr October stated that while the wording by Dr James was not elegant, it was correct. Import substitution was the model used by all countries to build domestic industries. All countries had higher tariffs on finished products and almost zero tariffs on raw materials. South Africa’s farmers needed more protection in this regard.

Dr James commented that Treasury’s approach to this matter was job-creating growth or in other words trade that was linked to job-creation. Their approach was not related to development aspects.

The Chairperson argued that that statement was not true and advised Dr James to read through the report completed by the Minister of Finance, which had used the term developmental.

Mr Hill-Lewis questioned a statement in the report and asked what export-driven policies had not proven to be successful in growing the economies of developing countries?

Mr October commented that this most likely in reference to the export of raw materials because any trade was good so long as it was value-added products.

The Chairperson asked Ms Margot Herling, the Content Advisor, to review this statement.

Mr Swanepoel asked what was actually happening to productivity in South Africa. Was it improving or was it worsening? How can South Africa compete with other markets with regards to productivity?

Mr October replied that it was agreed that there was a constant need to increase productivity; but the issue was that there was a constant accusation that productivity in South Africa was lacking. This accusation was simply not true, as South Africa’s companies had been able to produce at a world-class level.

Mr Hill-Lewis agreed with the DG but argued that it was also true that across all sectors, wage growth had been higher than productivity.

Mr Swanepoel responded that companies have always raised productivity as the major problem.

The Chairperson noted that the main issue was non-tariff barriers. She asked the DG to comment on the new generation issues.

Mr October clarified that the dti position was that the emphasis in negotiations should be kept on development issues rather than shift the focus to new generation issues.

Mr Hill-Lewis stated that the problem with that was that the new generation issues were often used as a veiled form of protectionism against developing countries and therefore South Africa should not ignore these issues such as climate change.

The Chairperson asked Ms Herling to clarify who was saying what in the next draft. She requested that the DG review the report with the Department and perhaps come back with comments.

Mr Hill-Lewis raised intercontinental trade and stated in his travel experiences, South African products dominated in African countries.

Mr October commented that other countries were lacking the infrastructure to export to South Africa in return.

The Chairperson raised the matter that South Africa had a consistent trade deficit with the BRIC countries every year for more than a decade as a result of imports growing faster than exports. In particular, the issue was the trade deficit with China. She asked the DG if that issue had been resolved.

Mr October replied that there was a technical group currently analysing the statistics because China was arguing that the deficit was in favour of South Africa but South Africa was saying it was in favour of China.

The Chairperson requested that each Member go over the report on their time and come back with any necessary comments. She again requested that the dti also look over the report.

The meeting was adjourned. 

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