Black Economic Empowerment Strategy: briefing by Department

Meeting report

Presentation by Department of Trade and Industry
South Africa's Economic Transformation: A Strategy for Broad-Based Black Economic Empowerment

SUMMARY
The Department outlined the BEE Strategy's transformation imperatives, the initiatives introduced since 1994, the principles of the broad-based economic empowerment strategy, the "balanced scorecard" and the financing of the Strategy.

During the discussion, Members raised the following issues: the Department's plans to ensure the growth and skills development needed for the Strategy to succeed, how to ensure that it is broad-based, the special focus placed on women, compliance issues, the equity ownership threshold, National Empowerment Fund capability, the Industrial Development Corporation and the banks, how the Strategy plans to finance BEE companies and the financing instruments to be used.

In his conclusion, the Committee Chairperson noted that all Members seem to support the BEE Strategy, but do believe that it needs more work. The Department has to look at the institutional arrangements, the financing aspect, the capacity of the institutions to give effect to the BEE Strategy, as well as the various areas of ambiguity in the BEE Strategy.

MINUTES
Announcements
The Chair noted that it was unlikely that the Committee will process any more Bills before the April recess.

On 16 April the Committee will be given an initial briefing on the ratification of the South African Customs Union (SACU) Agreement. An advertisement will be placed inviting public comment on that agreement.

The draft committee report on the hearings held on spending institutions has been finalised and will be made available to Members. Their written comments on the report should be submitted by the end of the week, so that the report can be formally adopted next week.

The advertisements for submissions on the National Small Business Amendment Bill and the Liquor Bill have already been placed, and the submissions will be dealt with after the April recess.

Prof B Turok (ANC) noted that at past hearings, the Committee has always been addressed by established or large businesses. He said that the Committee has to be more proactive and ensure that not only the large corporations make submissions on the National Small Business Amendment Bill.

BEE Strategy briefing by Department
Mr Lionel October, Deputy Director-General: Enterprise Industry Development Division, stated that this strategy is a product of a process of serious consultation with all the interested parties, and it has been discussed at Cabinet Lekgotla and NEDLAC level. He conducted the presentation (see document), which provided an overview of the BEE Strategy, its transformation imperative, the Department's Black Economic Empowerment (BEE) initiatives since 1994, the industry-specific BEE indicators and targets, the basic principles of the Broad-Based BEE Strategy, its policy instruments and the balanced scorecard, its financing and the implications of the BEE Strategy for the sector.

He made additional remarks on the following slides:
Industry Specific Indicators & Targets
Good governance should be an additional point on the slide, because it is also important in ensuring a successful BEE Strategy.

A "Balanced Scorecard"
The role of large corporations in the "preferential procurement" issue is important to the success of the BEE Strategy. These large companies have a significant degree of leverage in the industry, and the Department is saying that they have to use this leverage to promote black entrepreneurship.

The scorecard currently indicates that compliance with the BEE Strategy can be weighted as follows: direct empowerment, comprising equity ownership and management, is at 30%, the Human Resource Development (HRD) and employment equity score is at 30%. The indirect empowerment score, comprising preferential procurement and enterprise development, is weighted at 30% and the residual components to be determined by the sector are weighted at 10%.

Financing BEE
A portion of the "R10b" indicated will be allocated to the National Empowerment Fund (NEF) as well.

Instruments
Although the Black Economic Empowerment Advisory Council (BEEAC) is a statutory body, it would not have the power to make regulations.

Discussion
Mr C Lowe (DP) asked the Department to explain how it plans to secure the growth and skills development needed for the BEE Strategy to succeed. Can the Department deliver on the management of this process?

Mr October responded that growth is the most important aspect because it is a necessary condition for BEE. Growth also means that the incomes of individuals will increase, and it expands the production base of the economy by introducing new entrepreneurs.

Mr P Nefolovhodwe (AZAPO) asked whether the new BEE Strategy will ensure that companies do not merely put up a "black face" for their business, who then actually ends up servicing the capitalisation debt.

Mr October replied that even though significant progress has been made since 1994 in effecting BEE, there are still many BEE companies that are unsustainable. Many are also currently in debt. Government is trying not to dictate to the market, but it is taking steps to ensure BEE finance by injecting funds into the market for BEE.

Mr Nefolovhodwe asked how the new BEE Strategy plans to address the requirement that new businesses show collateral before it can access financing. This requirement seems to exclude all those entrepreneurs who do not have collateral.

Mr October responded that Khula Enterprise Finance Ltd secures a guarantee for financing for black economic empowerment companies, and the formal banking sector will then provide the actual loan. The State has to play a direct role in the retail aspect. If South Africa had a different type of economy it would have been possible to simply leave the entire financing mechanism to the private sector, but this is not possible in the current economy.

Mr Nefolovhodwe asked whether the new BEE Strategy will ensure that the "trickle down effect" of the past will not be promoted.

Mr October replied that the "trickle down" effect is based on the assumption that it is the market that sets the pace for transformation and national growth for all South Africans. Yet government is saying that it has to introduce targeted BEE strategies, which indicates that the markets alone are not providing for transformation and ensuring BEE. There is thus the need to introduce this specific BEE Strategy.

Mr Nefolovhodwe asked for clarity on the yardstick for decreasing inequalities in the business sector.

Mr October responded that the Gini co-efficient is usually used, but a unique yardstick will be developed for the BEE Strategy. This yardstick would include the creation of general equality within the market over time, as well as raising the lower income groups from poverty. The aim is thus to raise the overall medium within the sector. The United Nations has devised a number of indices that it uses as a yardstick, and perhaps these could be included in the BEE Strategy.

Ms September noted that the presentation makes no mention of the special focus placed on women in the BEE Strategy.

Mr October replied that extending BEE to women is a key aspect of the Strategy.

Ms Philisiwe Buthelezi, Chief Director: BEE Division, added that when one unpacks the Scorecard, one would find that specific focus is placed on empowering black women. For example, the equity ownership component would look at the number of women that share in the economic benefits, and the skills development category under the HRD component will look at the percentage of the budget allocated to the empowerment of women via skills training. Similarly, the enterprise development category under the indirect empowerment component will consider the extent of the investment in empowerment enterprises owned by black women. The reality of the matter is that all this only comes out at sector level.

Prof Turok stated that this is an inadequate response. This is not a residual category that can be addressed by simply adjusting the numbers. It is an important socio-economic structural issue that has to be addressed by the BEE Strategy.

Mr October responded that the Department accepts that this is a structural problem in the economy. It will be addressed specifically.

Ms September suggested that the BEE Strategy has to include a section on enforcement, because this cannot be dealt with by the BEEAC. Secondly, could the BEE tendering process be explained, because it is not explained in the presentation.

Mr October replied that government will set out conditions and requirements that will have to be met by any business submitting tenders for government contracts. Businesses that do not comply with the BEE Strategy requirements in these conditions will simply not be eligible for the award of the specific government tender. Government has tried to ensure BEE compliance via the Employment Equity legislation by requiring companies to submit Employment Equity Plans. There has now been a shift away from the use of government's economic power to a partnership with the industry, and voluntary compliance is preferred to enforcement, as such.

The Chair stated that for the BEE Strategy to succeed it is not so important that Black Economic Empowerment (BEE) companies have a major shareholding in banks, for example. It is much more important that the banks actually finance BEE companies. He thus asked the Department to convince him that the weighting in the scorecard sufficiently addresses the Broad-Based BEE Strategy.

Mr October responded that a distinction has to be made between weightings and targets. The weightings are for government to give signals to the market for its compliance with BEE initiatives. Even if companies conform and are 100% BEE owned, it does not mean that they are in the clear. They also have to comply with the HRD and skills development requirements, which are as important as the equity ownership component.

Ms N Sono (DP) asked how the Support Programme for Industrial Innovation (SPII) would secure finance for black economic empowerment companies.

Mr October replied that SPII awards a grant to companies for technological innovation projects. A somewhat small amount of R80m has been set aside for black economic empowerment companies engaged in such projects.

Ms Sono asked for the requirements to be elected to the BEE Task Team. She suggested that Parliament would be best placed to identify those who should serve on that Task Team.

Mr October responded that Minister Erwin will be announcing this soon. The team will consist mainly of members of the Black Economic Empowerment Commission (BEECom), BEE technicians and academics as well as black and white businesses. The Task Team is however only an interim group, and the final council will be set up at a later date.

[PMG Ed note: Minister Erwin appointed Cyril Ramaphosa, Derek Cooper, Saki Macozoma, Patrice Motsepe, Gloria Serobe, Danisa Baloyi, Buhle Mthethwa, Vuyo Jack, Ronnie Ntuli, Loyiso Mbabane, Imogen Mkhize, Alan Hirsch, Philisiwe Buthelezi and Lionel October.]

Mr D Lockey (ANC) noted on a lighter note that BEE is like beauty: it is in the eye of the beholder. He proposed that the Industrial Development Corporation (IDC) instead be responsible for financing BEE initiatives, because it has a much better track record than the NEF. The NEF has serious institutional capacity problems, and is not delivering on its mandate.

Ms September asked whether the Department is engaged in discussions with National Treasury on the issue on providing empowerment businesses with access to finance.

Mr October responded that the IDC's primary function is industry development, and it cannot be allowed to lose focus of this function. The NEF has to be capacitated in the same way so that it can focus on its primary mandate, which is funding empowerment. Ms Buthelezi added that the Department realises that the NEF has not achieved its objectives. Two problem areas have been identified: firstly, its value proposition. This seeks to identify the kind of financing structures that have to be put in place to assess whether the NEF can address problems facing BEE. The problem is that the Department is not sure that the NEF can. It is for this reason that this matter is being raised with National Treasury and the financing institutions in the private sector, to see whether the NEF can be capacitated in this way. The second is capacitating the NEF to actually deal with BEE issues. This differs from the first problem in that the first deals only with the instruments used to finance BEE.

A new Board has been put in place, and the Director-General is currently the Chair. It was decided that the Board has to be established before advice can be offered to the private sector. The National Treasury also indicated that it would not allocate the R10b until all the issues surrounding the NEF are resolved.

Mr Lockey stated that the weighting for equity ownership on the scorecard is very low, and will create serious problems.

Ms Sono stated that the BEE Strategy has to focus on "broadening the cake from the grassroots level to the top structures" so that black economic empowerment companies are ensured access to financing.

Mr October replied to these comments by stating that companies and sectors can still set their targets that would regulate their behaviour, but a broad-based BEE economy is ultimately needed. The reality of the matter is that all market economies do have a concentrated, small group of companies that wield most of the power in the sector, and South Africa is no different. The key problem in the South African economy is the inequalities that exist in the sector and the low spending power of individuals.

Prof Turok stated that the BEE Strategy has to clearly spell out exactly how it will drive BEE from below. It is only when this is done that its aim to decrease the income inequalities will look real.

Mr October responded that this point is taken.

Dr R Rhoda (NNP) asked whether the BEE Strategy will ensure that BEE companies are not established by the large corporations only to be purposely "sunk", and thereby ensuring that they retain their monopoly over the market.

Ms Buthelezi responded that the Department cannot ensure that this type of practice will stop, but the BEE Strategy will put measures in place aimed at preventing this. A due diligence exercise will also be conducted on black economic empowerment companies seeking finance, to ensure that it is a going concern.

Prof S Ripinga (ANC) asked if any international experience has been consulted on means to ensure that indigenous people are involved in the BEE Strategy.

Mr October replied that South Africa has the benefit of being able to analyse the experiences of other jurisdictions. Such analysis has shown that Malaysia, for example, has imposed deliberate BEE methods. Its government imposed formal requirements that companies be owned by a set percentage of local citizens. Yet these strict enforced BEE measures have actually increased the inequalities. It appears that the problem with inequalities can only be properly addressed by entering into partnership with the private sector. Imposing BEE measures via legislation is not the answer.

Prof Ripinga asked for clarity on the details involved in actually funding black economic empowerment companies, because the presentation "does not contain any flesh" on this.

Mr Lowe asked how exactly the BEE Strategy will find the finances to make sure it delivers on all the "statements of intent" in the Strategy.

Ms Buthelezi responded to these questions by stating that this is so because the BEE Strategy is still a work in progress, and it is a very complex strategy. The Department and National Treasury only looked at it for the first time about three weeks ago. Perhaps the Department, National Treasury and the representatives from the private sector could be requested to address this Committee during the second session on Parliament to discuss exactly how black economic empowerment companies will be financed.

Ms B Ntuli (ANC) asked what is meant by "financing instruments that are appropriate". Would the existing instruments be used or would new instruments be created?

Mr October responded that the number of the Department's funds will be increased. There will also be "set asides" that will act as access points for new black economic empowerment companies. The Department is currently looking at a new incentive programme. One such programme is the Black Business Supplier Development Programme (BBSDP), which deals with those black economic empowerment companies that are tendering for government contracts. The Department will be able to spell out these programmes more clearly during Parliament's second session.

Ms Buthelezi added that the Department's research has shown that many of its funding structures are no longer appropriate, as their gearing ratios are very high. Due to this problem the economy currently exhibits a 2% BEE representivity, as opposed to 8% in 1996. Something is clearly wrong with the financial model. This has to be looked at.

Prof Turok stated that the definition of "black" in the BEE Strategy is problematic, and has to be looked into.

Mr October replied that this matter was raised by Cabinet. He was of the opinion that the current "blurring of racial categories" is healthy, because it shows progress in the democracy. The term "black" has been defined in the Black Economic Empowerment Bill, and is the same definition used in the Employment Equity Act.

Mr N Duma (ANC) asked how the BEE Strategy will assist in providing skills development and thus in building a developmental state.

Mr October responded that the Department acknowledges that there is a skills development problem. One of the primary causes of the current structural problems is the very low investment placed in HRD by the previous government. It is for this reason that HRD has been emphasised in the BEE Strategy.

Mr S Rasmeni (ANC) asked for clarity on the role of the banks in financing BEE. She said that government has to ensure that they are committed to BEE.

Mr October replied that the State will increase its role in providing finance for black economic empowerment companies and small enterprises. The mining sector has set aside R100b for financing of black economic empowerment companies in that sector. The financial services sector has only set aside R10b, and the financing will largely be provided by the banks. The financial services sector charter will spell out the role of that industry, and the Department does consult with it regularly as this process goes forth.

Government has to find a way to get maximum use from is limited resources. The IDC, with its R28b asset base, will play an important role. Government is currently looking into expanding the IDC's role by lowering its current 10% own equity threshold that the black economic empowerment company has to provide in order to receive funding. The IDC's loan finance, venture capital etc. provisions will also be increased. The alignment of the IDC with the NEF will also be addressed, and the IDC will be allocated a portion of the R10b. It has to be remembered that the NEF was to receive most of its finances from the restructuring of state-owned assets. As this process has not fully taken place as planned, the NEF has not receive all the funds anticipated. This will also have to be looked into.

The following questions do not appear to have been answered by the Department in their block responses to rounds of questions:
- Ms September noted that the Department of Public Service and Administration is currently busy with legislation on preferential procurement. Does the Department envisage that any key changes will have to be made to that legislation in view of the new BEE Strategy?
- Prof Ripinga asked for details on the co-ordination mechanisms aimed at ensuring the sustainability of the BEE Strategy. Secondly, a coherent policy is needed for the BEE charters of the different sectors. If a uniform approach is not adopted "things will just go on as usual", as was the case under voluntary compliance. Thirdly, the definition of "black economic empowerment" has to include entrepreneurship and any enterprise development.
- Prof Turok stated that the definition of BEE has to be tightened up and clearly spelt out, because several different interpretations are currently possible.
- Ms Ntuli asked who will bear the commercial risk for black economic empowerment companies.
- Ms J Moloi (ANC) asked whether the BEE Strategy has the capacity to assist black South Africans that want to enter the market, and not only those that are already active.

In conclusion, the Chair noted that all Members seem to support the BEE Strategy, but do believe that it needs more work. The Department has to look at the institutional arrangements, the financing aspect, the capacity of the institutions to give effect to the BEE Strategy, as well as the various areas of ambiguity in the BEE Strategy.

The meeting was adjourned.

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
9 April 2003
BLACK ECONOMIC EMPOWERMENT STRATEGY: BRIEFING BY DEPARTMENT

Chairperson:

Dr R Davies (ANC)

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