Broad-Based Black Economic Empowerment Codes of Good Practice: Department of Trade and Industry briefing

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Trade and Industry

09 June 2015
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Department of Trade and Industry (DTI) said in 2013, ten years after the initial Act was promulgated, Parliament made some significant amendments to the Black Economic Empowerment (BEE) legislation. There had been a provision in the old Act that stated that public sector organs may apply the Codes of Good Practice. Many of the state owned companies and institutions did not follow the Codes of Good Practice because of that discretionary provision. Even the private sector did not see the necessity of getting a good score. The 2013 amendments took away the discretion and everybody should apply the Codes of Good Practice and the levers of the state were being used to drive transformation. Most importantly it now meant that qualification for preferential procurement would be measured on the basis of the scorecard.  

The Codes came into effect on 1 May 2015 and Phase 2 of the Codes was gazetted on 6 May 2015. There had been a major shift towards one part of the scorecard (almost 40 points) which was procurement and supplier development. The biggest obstacle facing black enterprises used to be access to capital, but that had been mediated somewhat and the biggest obstacle was now access to markets and the supply chains of companies.  The generic scorecard was aligned in accordance with government key priorities and had five elements.  All companies except for Micro-Exempted Enterprises (EMEs) would comply with all five elements and the Codes enhanced the recognition status of black owned EMEs and Qualifying Small Enterprises (QSEs). Employment Equity and Management Control had been merged into one element now termed Management Control; and Preferential Procurement and Enterprise Development merged into one element and would be known as Enterprise and Supplier Development. The Codes also introduced minimum requirements for priority elements such as Ownership, Skills Development, and Enterprise and Supplier Development. QSEs should comply with at least two of the priority elements. Ownership was compulsory and these small enterprises should then either comply with Enterprise and Supplier Development or Skills Development. Large entities should comply with all priority elements. Where EMEs did not meet the thresholds in priority elements, the overall score would be discounted one level down. An EME or QSE that was 100% owned by black people would qualify as a Level 1 contributor. An EME or QSE that was more than 50% owned by black people qualified as a Level 2 contributor; and there were no verification requirements for EMEs.

The Committee questioned the qualifications of the new qualifications and the annual turnovers of enterprises, especially as it related to the 2007 qualifications. Some Members seriously questioned the DTI’s target of having 25.1% black enterprise ownership by 2030 because it did not speak to the radical economic transformation that had been called for. The Committee urged the Department to take their communication and awareness campaigns to the grassroots companies to explain the Codes as well as the benefits small enterprises could access. Members enquired on the penalties for non-compliant companies and whether DTI had the capacity to enforce their interventions. A DA Member insisted that South Africa was still feeling and would continue to feel the impact of the “complete blunder the Department made in trying to clarify the Codes issued on 2 May 2015”. He also stated that the requirement within the Enterprise and Supplier Development element that that 50% of jobs created should be for black people would be problematic in terms of demographics in provinces like the Western Cape and KwaZulu-Natal.

Meeting report

The Chairperson noted that at some point there needed to be a discussion with DTI on The Companies and Intellectual Property Commission (CIPC) in terms of business rescue and the ‘resurrection’ of companies.

The agenda for the meeting was adopted.

The Amended B-BBEE Codes of Good Practice

Mr Lionel October, Director General, Department of Trade and Industry (DTI), said in 2013, ten years after the initial Act was promulgated, Parliament made some significant amendments to the Black Economic Empowerment (BEE) legislation. There had been a provision in the old Act that stated that public sector organs may apply the Codes of Good Practice. Many of the state owned companies and institutions did not follow the Codes of Good Practice because of that discretionary provision. Even the private sector did not see the necessity of getting a good score. The 2013 amendments took away the discretion and everybody should apply the Codes of Good Practice and the levers of the state were being used to drive transformation. Most importantly it now meant that qualification for preferential procurement would be measured on the basis of the scorecard.   Every organ of state and public entity should apply any relevant Code of Good Practice issued in terms of this Act in determining qualification criteria for the issuing of licences, concessions or other authorisations in respect of economic activity.  It should also be applied in developing criteria for entering into partnerships with the private sector and determining criteria for the awarding of incentives, grants and investment schemes in support of Broad-Based Black Economic Empowerment (B-BBEE).

The Codes came into effect on 1 May 2015 and Phase 2 of the Codes was gazetted on 6 May 2015. Education campaigns for both phases were conducted with stakeholders since 2013. There had been a major shift towards one part of the scorecard (almost 40 points) which was procurement and supplier development. The biggest obstacle facing black enterprises used to be access to capital, but that had been mediated somewhat and the biggest obstacle was now access to markets and the supply chains of companies.  The focus was on skills development, job creation, localisation, supplier development and industrialisation. This new approach was having some very positive spin-offs and the Department had been meeting with companies like Barloworld and Bidvest who have arranged with US companies to start manufacturing equipment in South Africa.

Mr Takalani Tambani, Acting Chief Director: BEE Unit, DTI, said the generic scorecard was aligned in accordance with government key priorities and had five elements.  All companies except for Micro-Exempted Enterprises (EMEs) would comply with all five elements and the Codes enhanced the recognition status of black owned EMEs and Qualifying Small Enterprises (QSEs). Employment Equity and Management Control had been merged into one element now termed Management Control; and Preferential Procurement and Enterprise Development merged into one element and would be known as Enterprise and Supplier Development. The Codes also introduced minimum requirements for priority elements such as Ownership, Skills Development, and Enterprise and Supplier Development. QSEs should comply with at least two of the priority elements. Ownership was compulsory and these small enterprises should then either comply with Enterprise and Supplier Development or Skills Development. Large entities should comply with all priority elements. Where EMEs did not meet the thresholds in priority elements, the overall score would be discounted one level down. An EME or QSE that was 100% owned by black people would qualify as a Level 1 contributor. An EME or QSE that was more than 50% owned by black people qualified as a Level 2 contributor; and there were no verification requirements for EMEs.

Mr Tambani gave an overview of slide 11 which showed the revised statuses under the new Codes of Good Practice and the 2015 qualifications in relation to the 2007 qualifications. EMEs increased from R5 million to R10 million, QSEs now covered turnovers of R10 million to R50 million and large entities had annual turnovers of R50 million and above. In terms of the ownership element, the target was 25.1% and the 40% sub-minimum was applicable on net value. The merged Management Control included Senior Management, Middle Management and Junior Management from the Employment Equity Element. The compliance targets for Management Control were aligned with the Economically Active Population (EAP) targets as annually published by the Department of Labour and the measurement principle of EAP targets for operating enterprises had been introduced. The compliance target for skills development expenditure increased to 6% to cover both internal and external training expenditure. A 15% cap for non-core training costs such as accommodation had been introduced. The compliance targets were based on EAP targets for black people. The imports exclusion principle had been maintained with an overriding proviso that imports were not applicable in designated sectors. The “Value Adding Supplier” had been replaced with the “Empowering Supplier” definition and an Empowering Supplier wan the context of a B-BBEE compliant entity that could demonstrate that its production and/or value adding activities took place in the country. In terms of Enterprise and Supplier Development large companies should comply with at least three of the following criteria:

-25 % of cost of sales excluding labour cost and depreciation (unless in the service sector) must be spent in South Africa

-50% of jobs created must be for black people;

-Beneficiation of raw materials;

-Skills transfer; and

-85% labour costs in service industry.

QSEs should at least comply with one of the above-mentioned criteria and EMEs would be automatically recognised as Empowering Suppliers.

In conclusion, Mr Tambani gave an overview of the amended generic scorecard and the status of the various Sector Codes.

Discussion

The Chairperson referred to slide 11 and asked what sort of micro enterprise would have a turnover of R50 million.

Mr Tambani replied that the DTI engaged with the Department of Small Business Development (DSD) in terms of the alignment of the Codes. This annual turnover was aligned to the new definitions according to the Department of Small Business Development, because the old definitions were based on the 1996 strategy. Micro-enterprises might have a turnover of up to R10 million, but the value of a company’s assets could go up to R50 million. It provided a broader framework for sector charters.

Mr D Macpherson (DA) said South Africa was still feeling and would continue to feel the impact of the complete blunder the Department made in trying to clarify the Codes issued on 2 May 2015. He was still unsure how it happened and who pushed for it and what the consequences for that decision would be. The communication of the Department continued to be poor around BEE and he asked what was being done to improve communication to small and medium enterprises. He wanted to know what engagements were being held with small and medium enterprises on the way forward. One of the biggest challenges was that BEE remained a tool for “narrow-based” empowerment as opposed to true broad-based empowerment. The supplier aspect of the new Codes could be a way to truly broaden empowerment. There was a massive disconnect between financing and B-BBEE, especially in terms of financing for small and medium enterprises. He referred to Enterprise and Supplier Development and the criteria that 50% of jobs created must be for black people. He asked whether that determination was made against national or provincial demographics. It became problematic in provinces like the Western Cape that had a high Coloured population and KwaZulu-Natal with a high Indian population.

Mr October replied that the Minister had indicated before the Committee that legal certainty had been achieved and it had been gazetted and well received by all the private sector players. It clarified that the ownership card remained unchanged and full points would be awarded for narrow-based and broad-based and the status quo prevailed. DTI fully retracted the notice and it had been publically explained. Obviously those companies who had accounting officers and legal advisers were fully up to date and this was clear based on the transactions that could be observed. The Department would be accelerating the process to get more information to grassroots level. Teams had been going out to provinces to take companies through the Codes and to clarify the ownership scorecard. There had been no mala fides with this issue, because the Department had been trying to introduce the hybrid model. One of the most effective transactions was Standard Bank which just celebrated the tenth anniversary of that transaction. The transaction was structured in such a way that 40% of the shares went to staff, 40% went to business owners and 20% went to community trusts. The detail of the provision had massive unintended consequences and the decision was made to leave it as a discretionary provision. It was up to the sector to decide what to do and no caps would be introduced. Financing was still the biggest challenge and it would be dealt with under separate measures such as the Black Industrialist Development Programme. In terms of the BEE definition, Coloureds and Indians fell under the definition of ‘black’.

Mr Liso Steto, Director: BEE Policy Unit replied that within the enterprise and supplier development element a full ray of options were given for entities to establish relationships with small businesses in terms of accessing financing and markets.

Mr A Williams (ANC) asked what would happen to non-compliant public sector entities and how the Department had determined these non-compliant entities. He further asked whether the Codes specified “South African black owned”, because it could also refer to black foreign owners in terms of enterprise ownership. He referred to the DTI’s target of 25.1% black ownership and asked if the target was not in effect 74.9% white ownership of businesses in South Africa. He noted it had taken 21 years of not even reaching 25.1% black ownership and asked how long it would take to get to 50.1% black ownership. It really amounted to 1% transformation per annum. He asked why the target was so low.

Mr October replied that the DTI would be monitoring non-compliance closely. The bulk of procurement came from some of the biggest big state owned entities where 89%/90% of government procurement was done through entities such as Eskom, the Passenger Rail Agency of South Africa (PRASA), PetroSA and  Transnet. A forum on state owned enterprises had been established which would be used to monitor compliance. He confirmed that BEE only applied to South African citizens. The 25.1% target might seem low in relation to the population, but it was precisely in reply to those attacking the BEE policy as a radical measure. It was a gradual and pragmatic programme with a fairly low target, but the Department aimed to mobilise private sector behaviour to achieve the target. It was matter for debate whether it was an appropriate target, but it would be achieved by 2030. Once that target had been achieved, a critical mass of black industrialists, entrepreneurs and ownership in the economy appropriate to the South African demographics would be produced.

Mr N Koornhof (ANC) asked for more clarification on family trusts as it related to compliance. He asked what the consequences would be if targets were not met by the deadline and would existing B-BBEE transactions be affected by the new Codes.

Mr October clarified that it only referred to black owned family trusts, because of the rules and criteria set for the recognition of family trusts to participate in these deals. Ideally the beneficiaries of these trusts would also be black. 

Mr October replied that the old BEE transactions provoked lively debate. People were assessed and verified at a point in time and the verification agency would assess what the current black ownership was.  There had only been an exemption in terms of the financial sector charter. The financial sector was a special sector because of its broad systemic role and risks to the economy. Special provisions had to be made and their ownership target was only 10% direct ownership and 15% indirect ownership.

Ms P Mantashe (ANC) asked whether the Department engaged with smaller businesses on the ground through awareness campaigns.

Mr October replied that the Department understood that it was time to go to the provinces and local level to explain how BEE worked and what the benefits for small enterprises were. It was also one of the reasons there was so much emphasis on the supplier and procurement from big enterprises to create a link to those big enterprises. Micro enterprises had been marginalised and should be integrated into the formal economy.

Mr Steto said it became clear through communication with small businesses at the grassroots level that partnerships with state owned entities, provincial departments and municipalities were desirable. When they did have advocacy, communication or awareness drives with their suppliers the Department partnered and talked the suppliers on both BEE and other requirements they might have. There had been value and success through surveys that had been done with these recipients. The South African Broadcasting Commission (SABC) had called in all its suppliers and the Department had talked with even the smallest suppliers on their BEE requirements and the changes in the Codes. The Department also intended to intensify the work with the CIPC where companies, upon registration or filing of annual returns, had the opportunity to be verified which was a free service. This attempted to deal with the instances where people had been grossly overcharged for BEE services.

The Chairperson asked for clarification on the qualification and verification process because there were some concerns raised earlier. She asked what the relationship between the verification agencies and the Auditors Association was.

Mr Steto replied that an assurance service was needed to implement BEE properly. The South African National Accreditation System (SANAS) had set the standards in terms of who got to do the verification. There were 57 verification agencies that had footprints across the country. To enhance these services about 299 approved and registered professional auditors rendered the same services. The focus of these auditors would be on qualifying small enterprises (turnover of R10 million or more).

Mr Williams said he did not get a response to the recourse that would be taken against the non-compliant public entities. If the target was 25.1% black ownership by 2030, he said the DTI’s target in effect was 74.9% white ownership in 36 years of democracy. This was not radical economic transformation if it took 36 years to transfer 25.1% of the economy into the hands of black people and the DTI should revise this target.

Mr October replied that in assessing who had been doing BEE and who had not, strong advances in the finance and IT sectors had been noticed, but the lowest levels of transformation was in the manufacturing, retail and agricultural sectors. It was a bit of an embarrassment to DTI that the sector that was given R7 billion annually (manufacturing sector) was doing the least for BEE. For the past three years the Department had been communicating that companies needed to be level four to qualify for incentives. The Manufacturing Competitive Enhancement Programme (MCEP) indicated that companies were given four years to get to level four and this time frame had since been reduced to two years effective 1 May 2015. The Department had also been having meetings with the German Chamber of Commerce. Germany was the country’s biggest investor and 40% of South Africa’s GDP was produced by foreign companies. German companies dominated the automotive industry and they developed a supplier enterprise fund. The German model of co-determination would be followed and it included workers and staff in terms of BEE ownership and to bring in black suppliers to provide them with trailing, mentorship and financing. Considering the BEE strategy, the Department balanced growth and empowerment. The strategic goal was towards full employment and the economy needed to grow massively to achieve that goal. 

Mr Macpherson asked who at the end of the day was responsible for the clarification of the Codes, whether it had been sanctioned by the Minister and what action would be taken against whoever was responsible. The example of the Black Industrialist Development Programme for BEE financing was a very poor example, because it only benefited 100 industrialists. Broad-based empowerment needed to include more than 100 people and he reminded the Committee that a recommendation in the Budget Report of the Committee was for an assurance that the Venture Capital Fund should be pursued for the purpose of granting access to funds at a cheaper rate. He asked how the parameters were negotiated within each sector charter.

The Chairperson replied that the Minister had addressed this matter before the Committee. The Minister acknowledged that he made a mistake and he had taken the necessary action as speedily as possible to correct this. Mr Macpherson questioned the Minister on this very same issue and he had been had been very frank, transparent and open in his responses.

Mr October replied that the Ministry and the Department was responsible. The proposal of the hybrid model and the capping came up during the consultation process. The Minister indicated that it could work for future transactions, but the implication was that many companies doing full broad-based empowerment would have been excluded from getting full points in perpetuity. The Minister then withdrew the proposal after understanding the full implications. This needed to be put to rest because the Department was focusing on its communication strategy to explain that absolute legal certainty had been established. All the Development Finance Institutions (DFIs) had committed to contribute to the Black Industrialist Development Programme. The Small Enterprise Finance Agency (SEFA) committed R100 million and while the 100 industrialists were the final target, thousands of companies would be helped through financing. The hope was that out of the thousands of companies, 100 industrialists would emerge as the new future black industrialists. The Black Industrialist Development Programme was key to the Department’s philosophy of inclusive industrialisation and BEE.

Mr Tambani replied that there were four important areas in the alignment of the sector charters were the principles, definition, weighting and the charters. Essentially it meant in the development of Sector Codes the definition of a “black person” should be the same across all the charters, as well as the definition and understanding of the principles of transformation, inclusive growth and ownership. The principles should be maintained through the sector charters and deviations had only been allowed in the weightings. Sector Charters could, through justifications and empirical evidence, increase or decrease weightings. Once the alignment was done, the sector would present the Codes to the Minister as a proposal to be gazetted. The Sector Charters would be finalised by 31 October 2015.

Mr M Kalako (ANC) said it was agreed that there should be more focus on small and medium enterprises, because it was the section of the economy struggling with growth the most. He asked how the Department of Small Business Development was featured in all of this. He referred to Mr Williams’ concern on the 25.1% target and said that although he agreed that there was nothing radical about the target, but rather a normal process in addressing the wrongs of the past. The focus on small and medium enterprises should be intensified to avoid what happened in the mining sector where the 26% ownership target had also not been met. If state owned entities were not compliant it would not be fair to blame the private sector for not complying. DTI should be empowered to intervene even in the awarding of tenders by big state owned entities if there were issues of non-compliance. People had not really been benefiting through these community trusts with no monitoring mechanisms to ensure the money was used to the benefits of workers and communities. He asked what measures DTI had put in place to ensure compliance. It could not be disputed that the Department had done a lot and invested a lot into the empowerment programmes, but enforcement of these interventions seemed to a problem.

Mr October agreed that it was not radical transformation, but rather normalisation. The depth of the exclusion was unique, because there was no other country where so many people had been excluded for such a long time. Colonialism lasted over 300 years and it would not be overcome in such a short period of time. The BEE Commission’s primary job would be to look at enforcement by both state owned entities and the private sector and also look at complaints of non-implementation, fronting and abuse of the scorecards.

The Chairperson said it had been questioned, when the BEE legislation was before the Committee, when this country would be transformed and when the Constitution would be implemented in this regard. Clause 9 of the Constitution referred to the need to not unfairly discriminate on any grounds and this had been welcomed at the time. This needed to be taken into account holistically, because the intention had always been to redress the discrimination. She asked for clarification on internal and external training and also on what was meant with the statement: “value adding supplier replaced with empowering supplier”.

Mr Tambani replied that in this context internal training meant those employed by the company and external training referred to the training of unemployed people

Ms P Mantashe asked whether non-compliant companies had been penalised.

Mr October said the structure of the BEE strategy did not allow for punitive penalties. Companies had to comply to qualify for government procurement and licensing and companies not achieving level four BEE would not be able to access any incentives. Penalties would only be imposed under the fronting provision.

Adv A Alberts (FF+) asked whether the Department envisaged making amendments to the Companies Act because it might be needed considering the uniqueness of the German model.

Mr October confirmed that there were provisions of the Companies Act that would need to be looked at.

The Chairperson urged the Department to closely monitor the verification process to ensure the validity of the process. She asked South Africa’s Special Envoy on the African Growth and Opportunity Act (AGOA) Ambassador, Mr Faizel Ismail to comment on the progress that had been made in this regard.

Ambassador Ismail replied that an agreement reached between the US and South African chicken producers had paved the way for numerous local export industries to continue to enjoy the trade preferences provided by AGOA. The agreement would secure the continued participation of South Africa in the re-authorised 2015 AGOA which was being extended by the US Congress for a further 10 years. Numerous products such as cars, base metals, chemicals, citrus, wines and macadamia nuts, among others, would continue to enjoy AGOA preferences and would also be able to invest and expand the opportunities in the US market.

 The Chairperson thanked everyone and the meeting was adjourned.

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