BBBEE Commission establishment; Trade and Industry BRRR

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Trade and Industry

21 October 2016
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

2016 Budget Review & Recommendations Reports – BRRR

The Department of Trade and Industry presented the progress report on the establishment of the B-BBEE Commission. The Commission commenced operations effectively from the 1 April 2016 with 14 staff members sourced from within the Department of Trade and Industry. The Commission was operating within the allocated budget of the Department and was in the process of getting its own office space.

The Commission had as at 30 September 2016 received 134 complaints of which 84% were on fronting practices. The Commission held information sessions in Gauteng, the Western Cape, KwaZulu-Natal and North West provinces and there had been announcements in the print and social media.

Black people continued to face challenges in accessing finance for B-BBEE transactions. Entities financed deals and repayment was expected from dividends. Shareholders’’ contracts placed onerous conditions linked to funding. Funding was linked to market access and entry barriers that must be addressed.

The abuse in B-BBEE arrangements included the creation of opportunistic intermediaries, joint ventures and partnerships, willing ‘frontees’ with passive shareholding with financial benefit, corporate governance and minority shareholders’ rights not respected, and definition of “black person” recognising black foreign nationals incorrectly. There was a need to speed up alignment of internal procurement with B-BBEE requirements and state and public entities have responded slowly to the letters sent to the. B-BBEE must be a priority for all government entities and departments.

Members asked questions about the extent the Chamber of Commerce was assisting the Commission with fronting; the socio-economic development of industries which required 1% of entities’ net profit going towards industries and whether big retailers and private sector companies did actually adhere to this considering the fact that a company like Sasol’s 1% was in the billions, and wanted to know how they verified that this amount went towards black people and not sponsoring sports teams; how people who were found guilty of fronting were dealt with when it was found that they were continuing with the fronting practice; the sub-contracting of companies which were not compliant; the number of examples that were seen of state owned entities not complying with the legislation which was often to the detriment of small businesses in particular; the bewildering number of sector charters being sent out which went way beyond what the legislation said; was it that there were no black suppliers to do business with Volkswagen or that it was reluctant to do business with black suppliers?

Meeting report

After apologies had been read the Chairperson asked the Committee Secretary to find out about the whereabouts of Mr Shivambu (EFF) who had not been attending committee meetings.

Briefing by the B-BBEE Commission
Ms Zodwa Ntuli, the Acting Commissioner, B-BBEE Commission, outlined the mandate of the Commission, and gave an overview of what B-BBEE was about. The elements of B-BBEE were ownership, management control, skills development, supplier and enterprise development and socio-economic development.  The Minister had approved the strategic and annual performance plan of the Commission.

Measured entities were classified as Exempted Micro Enterprise (EME) which required no verification and had an annual turnover of between zero and R10 million, Qualifying Small Enterprise (QSE) which had an annual turnover of above R10 million but below R50 million and only requires a sworn affidavit, and Large Enterprises which had a turnover of above R50 million and must comply fully with the score card.

She touched on the powers of the Minister in terms of the B-BBEE Act, and said that the institutional frameworks aligned to the Act include the Magistrates Courts, the Companies Tribunal, Sector Councils, Verification Professional Regulator, the B-BBEE Commission, and the B-BBEE Advisory Council.

Fronting had become more complex because it had taken the form of employee share schemes which did not actually benefit the employees because they were not shareholders and that was why when they resigned, they left without anything. This was not to say that there were no good deals out there, but more still needed to be done to address the complex fronting practices that were taking place.

Ms Ntuli defined fronting as a transaction or arrangement or conduct or acts that directly or indirectly frustrated or undermined the achievement of objectives or the implementation of any provision. This included inhibiting or discouraging participation in core activities, economic benefits not flowing to black people in the ratio applicable, and bringing one black person on board for the purpose of achieving high level status.

Penalties for contravention of the Act included cancellation of contracts or awards, exclusion from doing business with government for up to ten years, a fine of up to 10% entity turnover or as may be determined by the courts for natural persons, imprisonment of natural persons for up to ten years for involvement and up to 12 months for other offences and inclusion in the Tender Defaulters’ Register of National Treasury.

The processes offered by the Commission were the lodging of a complaint on a B-BBEE7 form, which could take up to 12 months to investigate. The path of alternative dispute resolution may be taken and findings and recommendations would be given. The Commission also offered an advisory opinion, which was an explanatory note on the procedure issued. It was non-binding and based on a set of facts and could be given within 30 days. The registrations of major B-BBEE transactions based on threshold were done and a certificate of registration was issued within ten days. Feedback on merit was given within 90 days. Compliance reports were also done by the Commission and reports given within 90 days. A written clarification on the general interpretation and application of B-BBEE was issued within five days.

The Compassion had programmes on compliance, investigations and enforcement, research, analysis and reporting and relationship building and stakeholder relations.

Ms Nontokozo Nokhwali-Mboyi, Operations Director: B-BBEE Commission, dti, presented on the operations of the Commission. The Commission commenced operations effectively from 1 April 2016 within the Department and had 14 staff members. The Department of Trade and Industry was still in the process of securing office space for its operation.

B-BBEE Regulations were issued in terms of Section 14(1) of the B-BBEE Act by the Minister on 6 June 2016 following a 30-day public commentary period. The Commission was implementing both its compliance and enforcement strategies simultaneously, and operated within the allocated budget of the Department but exercised independent decision making within its mandate.

In line with Section 13F of the Act, the following initiatives have been implemented as at 30 September 2016;

  • 134 complaints received in terms of Section 13F (1) (c), with 112 which represent 84% of the complaints specifically pertaining to fronting. A pre-screening was done on the complaints.
  • The 112 fronting complaints related to conduct of the measured entity while 12 of the complaints related to conduct of verification professionals. In the 112 fronting cases, illegal conduct by verification professionals was alleged and investigated parallel to fronting.
  • The sectors of transport (23%), mining (15%) and construction (9%) had the highest number of complaints.
  • 22 letters were issued to verification professionals and accounting officers regarding alleged unacceptable practices
  • Six letters were issued to professional bodies to which verification professionals were affiliated
  • Five Black Industrialist Scheme applications from the Department of Trade and Industry were reviewed for possible fronting relating to ownership structures and operational involvement
  • Two “possible’ major B-BBEE transactions in terms of Section 13F(1)(f) were under consideration
  • Practice Guide on Third Party Procurement, Practice Guide on Certificates for Exempted Micro Enterprises, Practice Note on the Procedure for Requesting Advisory Opinions and 14 Advisory Opinions and 136 Written Clarifications were issued to direct the effective implementation of the B-BBEE Act
  • Eight Compliance Reports received in terms of Section 13G of the Act were being assessed
  • Letters had been issued to National Directors-General and heads of public entities for effective implementation of Section 10 and other provisions
  • Three Instructions were issued regarding practices or conducts that appeared to undermine the Act. These were the cancellation of the Fronting Seminar Axidex and Innoven consulting companies where a public apology was issued and delegates were refunded, cancellation of information session by Net Value Holdings and a notice was sent to delegates and a public statement issued, and a public retraction of misleading statement by Association of B-BBEE Professionals
  • Seven information sessions in terms of Section 13F(1)(e) of the Act were held in Gauteng, the Western Cape, North West and Kwa-Zulu Natal provinces
  • Four presentations to the Department of Communications Transformation Media Colloquium, ENS Africa Seminar, Association of Certified Fraud Examiners, EconoBEE and Aqrate
  • 120 meetings held with clients and stakeholders on B-BBEE. This included advisory meetings on proposed transaction, complaints meetings of which 16 were held
  • An information session with gambling CEO’s Forum in nine provinces which included the National Gambling Board
  • Two presentations to the Presidential B-BBEE Advisory Council on activities at the B-BBEE Commission
  • Four written submissions were made in respect of the Draft Preferential Procurement Policy Framework Act (PPPFA), Concept of the Proposed Implementing Agent, Short Term Funding for Higher Education, Once Empowered Always Empowered
  • Communication and information dissemination through the media; SABC TV and Radio, ANN7, Power FM, eNCA, Kaya FM and various print and electronic media

The Minister was authorised by Section 9 to approve and gazette sector codes, which should recognise the dynamics and unique features of the sector. Sector codes should drive transformation and be aligned to the B-BBEE Act. It was illegal to use generic codes if the entity operated in a sector with an approved sector code. Sector codes must not allow for points to be awarded for normal course activities contrary to objectives. There was a need to expedite the finalisation of sector codes that were pending to create certainty and consistency.

The B-BBEE Commission would raise objection with the Minister on inconsistent sector codes.

Black people continued to face challenges in accessing finance for B-BBEE transactions. Entities financed deals and repayment was expected from dividends. Shareholders’’ contracts placed onerous conditions linked to funding. Funding was linked to market access and entry barriers that must be addressed.

Challenges relating to government implementation included lack of adherence to Sections 9 and 10 of the Act including request for deviation, exemptions and permission to exceed. Lack of monitoring of contracts, awards, licences for compliance with B-BBEE commitments made. There was little to no due diligence performed within organisations which led to fraudulent claims and misrepresentation. There was slow progress in setting transparent high level requirements for B-BBEE and non-compliant entities still awarded government work. There was a need to speed up alignment of internal procurement with B-BBEE requirements and state and public entities have responded slowly to the letters sent to the. B-BBEE must be a priority for all government entities and departments.

The abuse in B-BBEE arrangements included the creation of opportunistic intermediaries, joint ventures and partnerships, willing ‘frontees’ with passive shareholding with financial benefit, corporate governance and minority shareholders’ rights not respected, and definition of “black person” recognising black foreign nationals incorrectly.

Discussion
Mr A Williams (ANC) welcomed the presentation. He asked about the 84% of complaints representing fronting and wanted to know to what extent the Chamber of Commerce was assisting the Commission with fronting; the socio-economic development of industries which required 1% of entities’ net profit going towards industries and whether big retailers and private sector companies did actually adhere to this considering the fact that a company like Sasol’s 1% was in the billions, and wanted to know how they verified that this amount went towards black people and not sponsoring sports teams; how people who were found guilty of fronting were dealt with when it was found that they were continuing with the fronting practice; the sub-contracting of companies which were not compliant

Mr G Hill-Lewis (DA) said that he was concerned with the number of examples that were seen of state owned entities not complying with the legislation which was often to the detriment of small businesses in particular; and the bewildering number of sector charters being sent out which went way beyond what the legislation said. The purpose of the trumping clause was to create a sense of certainty in the market and a sense of compliance clarity. The sector charters differed from one another and also differed from the codes, and created confusion and uncertainty about what must be complied with. They undid the good work that had been done because they were not drafted by BEE specialists. There was not enough coordination taking place. There was a lot of hesitation to adhere to the once empowered always empowered because it had the potential to result in owners becoming minority shareholders in their own businesses.

Mr N Koornhof (ANC) said the once empowered was problematic because as the shares exchanged ownership it affected the status of the company. Many years ago, there were trusts formed where employees became beneficiaries and certificates issued to them, however if you left the company you were considered a bad leaver and after 12 years you left with nothing. Was there recourse for such employees? The CEO of Volkswagen was noted saying that the company would never reach Level 3 status because they had not found black suppliers to do business with.

Ms P Mantashe (ANC) asked whether it was because there were no black suppliers to do business with Volkswagen or that it was reluctant to do business with black suppliers? She had been looking around for many BEE deals that had trusts and verification should be done on the investment companies of trade unions. What did the members benefit from the scheme? She wanted to know whether the Commission was going to stay in its offices in Pretoria and service all provinces and if they would manage in the provinces to ensure the implementation of the Act. What was the capacity of the Commission in terms of warm bodies?

Mr B Mkongi (ANC) said it would be proper for the Committee to congratulate the Commission for the good work they have done in a short space of time. The report presented contained recommendations that were made to them at the beginning of the year and they were already being implemented. He was concerned about the emerging trends that were linked to the legislation drafted which helped people to corrupt the system. It was important to address the issue because people developed new tactics and strategies to avoid penalties and render the law null and void. What was the proposal to address this? How did we deal with the people who engaged in voluntary fronting? Why was it difficult for government to implement laws that they themselves made? Were inter-departmental committees established and what were their outcomes? Was the Commission prepared to give annual reports on the transformation strategy in the country?

Mr Hill-Lewis spoke about the employee share schemes and the abuse that took place there. There must be a way to figure out how these schemes could be utilised, a model should be drawn up to guide the implementation to structure deals.

Ms Mantashe asked what the consequences would be for those that were found to have contravened the Act.

Mr Mkongi spoke about the ambiguity around share ownership and beneficiary needs to be addressed. What progress had been made on the amendments and new codes? How could tokenism be monitored?

The Chairperson asked how many of the letters were sent out and what the significance was; what was the negotiable transition period for change of ownership and deals?

Ms Ntuli requested Mr Steto to address some of the issues related to policy.

Mr Liso Steto, Acting Chief Director: BEE Policy, Department of Trade and Industry, said it was important to respond to the issue of prevention of fronting. Compliance by State Owned Enterprises was important from a policy perspective and the Presidential BEE Advisory Council, and as soon as yesterday a session was held where all the State-Owned Entities had been called following the letters that had been sent to them to try and find out the issues and challenges and how far they were with implementing the policy and obtaining their own verification certificate. A lot of discussions had taken place and they said that they were implementing the policy but faced limitations in as far as preferential procurement. The entities had established units to deal with this but progress had been slow and the Commission had been working with them closely to ensure progress. The proposal to create a template for broad-based share schemes was taken and within a month there would be a practice guideline that would look at the various guidelines that would lead to people looking at ideal models, what should not be done and frequently asked questions. The sale of shares back to black hands was what the Commission had been promoting. The issue of trusts would be looked into. The automotive sector was very important and a level of compliance was expected although in the limited scope of a limited number of suppliers. The trend in the industry was currently level 8, and the incubator programmes were yielding fruits although the initiatives in the industry took longer than the other industries. The issue of sector codes was important and there was recognition that within specific sectors so the Department set generic codes to ensure that all stakeholders participated in the process of setting up a process to engage and guide them.

Mr Sphamandla Kumkani, Director: Investigations and Enforcement, BBBEE Commission, responded to the question about the consequences of people who engaged in fronting by saying that there were penalties as contained in the presentation, which included black listing by National Treasury and cancellation of contracts. The Commission received a lot of complaints around the employee schemes and this showed that the model being used was faulty and required work and that it was only one party that dictated the contractual arrangements.

Ms Ntuli responded by saying that the role of the Chamber of Commerce was that the business community had been requesting meetings and there was value in the sessions and there was consensus about what B-BBEE was about and the level of compliance. The opportunity of the Committee was that there would be reports submitted and from those the Commission would be able to assess the progress and target the areas which were lagging behind and be able to come up with effective implementations.

Not much had been happening and this was because after passing the amendments the Department had been busy finalising the sector codes. This meant that now moving forward was when a proper assessment of progress could be made. The companies that were getting work and sub-contracting to non-compliant companies would face the same consequences. There were some sectors where this had become so prevalent it had become a practice.

The Commission was happy with the sector codes progress although there were efforts to undermine the Act and its provisions. The Once empowered matter should not be dealt with based on the current situation but must be dealt with in alignment with the Act moving forward. The Commission would provide written responses on the specific questions that require detailed responses.

The meeting was adjourned.

 

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