Poultry Industry: public hearings; BBBEE Commission Annual Performance Plan

Meeting report

The Chairperson noted that the final appointment of the BBBEE Commissioner will be resolved soon. She acknowledged the absence of Shoprite-Checkers, Pick and Pay, Spar, and Woolworths that were invited but only forwarded written submissions to the Committee.

Poultry Industry: submission by European Union (EU) Delegation to South Africa 
Ms Dessislava Choumelova, Trade and Economic Counsellor: EU Delegation to South Africa, noted that 2017 marks 10 years of EU-SA strategic partnership and South Africa is EU’s largest trading partner in Africa. As regards EU-SA trade relationship, overall trade balance is almost neutral which implies a positive development given SA’s trade deficit with the EU in the previous six years. Whilst SA is ranked the 14th import partner and 18th export partner of the EU, imports into the EU have grown over the years. The trade balance in agriculture depicted a trade surplus for SA which contributes to positive results in the SA current account. EU poultry exports to South Africa increased from 131 832 tonnes in 2012 to 270 215 in 2016 and total exports increased from 1.43 million tonnes in 2012 to 1.61 million tonnes in 2016. EU poultry imports into South Africa sharply decreased since December 2016, overall EU imports share in domestic SA poultry consumption has not exceeded 10% in 2016 and according to Country Bird, imports account for 26% of SA poultry consumption. The consumption of white meat is expected to expand by 34% by 2023 and domestic supply is insufficient. Frozen bone-in chicken cut EU imports into SA which are being replaced by USA and Brazil imports. EU imports have been  mostly from the United Kingdom and Netherlands whilst frozen bone-in chicken cut imports into SA by non-EU are mostly from the United States and Brazil.

She said that the majority of poultry industry challenges are not peculiar to South Africa. Common challenges in the poultry market include high and volatile feed costs, changing demand patterns, and need to adapt the value chains to fit new market reality and to optimize efficiency of the whole value chain. The challenges peculiar to South African poultry industry include the costs of electricity, fluctuating Rand, and oligopolistic character of the national market with vertical integration with an inherent interest to maintain profit margins and resist change. It was affirmed that all poultry producers in the EU adapt to demand and strive to sell to markets where they can maximize price for the same product. As per the optimization of individual chicken cuts, 23% of EU chicken consumers prefer chicken breast, 36% prefer leg quarters, 31% of the chicken relates to by-products, chicken head is used for pet meal food whilst the remaining 8% is sold in the local EU market, with chicken feet exported to Hong Kong.

Trade measures by the Department of Trade and Industry (DTI) include anti-dumping duties on companies from Denmark, Netherlands, and UK; a provisional safeguard duty of 13.9% under the Economic Partnership Agreement (EPA), and ongoing ITAC investigation. EU poultry imported into SA is of the same quality as that sold in the EU as EU food law and regulations impose high standards. EU prices are consistently above those of other big importers like US and Brazil, and the EU does not subsidize either production or exports. Poultry imports into the EU from Brazil reduced from 570 574 in 2012 to 502 805 in 2017.

The Department of Agriculture Forestry and Fisheries (DAFF) letter requesting market access for SA poultry was received on 11 April 2017 and there are no market barriers for SA due to duty free and quota-free importation under the EPA. It was noted that there are challenges with SA laboratories and officials control system as there is a serious veterinary understaffing which was raised back in 2007/08 audits and the SA poultry challenges were obviated by the temporary raise in imports in 2016.

Animal Feed Manufacturers Association (AFMA) on SA Poultry Crisis
Mr De Wet Boshoff, Executive Director: AFMA, said AFMA produced 95% of formal feed in 2015/16 financial year and feed sales during the same period depicted 46% feed for broilers, 18% for beef and sheep, 15% for layers, 14% for dairy, 5% for pig, and 2% for others. 4.7 million tonnes of maize was utilized by the population whilst 5.5 million tonnes was utilized for animal feed. As per national feed volumes, AFMA members produced 62% of the total feed volume, SA feedlots produced 19%, pig producers produced 5%, dairy farmers produced 9%, whilst other manufacturers produced 5%. Reports indicate that South Africa does not currently produce enough soya bean meal (SBM) and the situation was aggravated by the drought. SA will import between 600 000 and 800 000 tonnes to meet its SBM demands. It was reported that South Africans pay more for maize than the United States and the EU citizens. As per the price comparison of maize and soya bean meal (SBM), SBM is priced higher than maize per tonne and broiler diet is comprised of 62% maize and 24.3% SBM. Regardless of the high prices of maize and SBM in SA, it was noted that South Africa remains competitive in the international market. Production projections indicate that South Africa would be able to meet its future demands of both maize and SBM. Yield per commodity reflects that South Africa has a low yield SBM. The feed cost and price comparison depicted Italy, Spain, and Turkey pay the highest feed cost per tonne. The increase of poultry imports into South Africa culminated in a decrease in AFMA broiler feed sales, unused maize and SBM, and job losses.

Discussion
Mr A Williams (ANC) asked AFMA about the countries that are accused of dumping as it was indicated in AFMA’s report that the broiler industry is negatively impacted by dumping.

Mr G Hill-Lewis (DA) disagreed with the claim that the EU does not currently offer financial support for poultry production. There is a vast misinterpretation and misrepresentation of facts which makes it difficult to engage in a well-informed argument. The EU offers hundreds of millions of Euros to agricultural producers of all sorts which includes poultry producers. He highlighted discrepancies between AFMA’s report and SAPA’s report in a previous engagement with the Committee. SAPA claimed that enough soya could not be sourced in the country to supply the local industry whilst AFMA indicates that there is a surplus of soya in the country due to importation. If it was true that jobs in maize milling will be lost due to imports in the chicken industry, it would have been reflected under maize surpluses which can be exported to SADC countries and other parts of the globe where the maize would be utilised as poultry feed. However, there have not been any maize surpluses in the previous years.

Mr N Koornhof (ANC) said South Africa is not on the list of poultry imports to the EU and SAPA informed the Committee in previous engagements that South Africa is not a big exporter of poultry. He asked if there is a market for South African poultry products in the EU when SA commences exportation. He asked AFMA if the high cost of maize in South Africa when compared to the United States and the EU is due to subsidies directly paid by the government in other countries. He asked if AFMA has made any representations to the poultry industry for local producers to grow the market locally and internationally and commence exporting their products.

Ms P Mantashe (ANC) asked about the factors limiting the increase in local production of soya bean since its cost of production is cheaper than maize. She asked why there are job losses in AFMA.

Ms S Van Schalkwyk (ANC) asked about the supporting data and proof to substantiate the claim that job losses in AFMA were incited by drought and dumping and some form of comparative study to depict how drought versus dumping affects job losses. She asked if there is any data available to emphasize how mechanisation in the industry impacts job losses.

The Chairperson commented that as regards the feed cost and price comparison presented, some of the countries highlighted are part of the EU and their costs are evenly distributed. She asked how the cost of exporting chicken to South Africa is computed. The Chairperson said after perusing the cost of exporting chicken to SA, it would be difficult to export from the EU except if there is some form of financial support or the sales of waste products such as chicken bone is utilized in financially supporting export of chicken from the EU. The Committee has been reliably informed by different stakeholders in the country that local producers are not capable of competing with prices of imported products. She added that the challenges with AFMA are not entirely affiliated to drought.

Ms Choumelova responded that there is no direct subsidy for both poultry production and exports in the EU even though some subsidies are being gradually rolled out since 2003 after the establishment of the Common Agriculture Policy. There is an ongoing reform discussion and added that the funding that was mentioned by the DTI at the on 23 March 2017 hearing as Horizon 2020 is a form of financial support and not a subsidy but rather an innovation and research and development programme of the EU related to research development and technology and all European businesses are entitled to benefit from the programme as it relates to technical innovation and science. The programme is not a subsidy but a programme linked to the use of science and technology in improving production. As for the computation of costs, costs are computed using raw material costs, labour costs, relevant processing costs, amongst others. She confirmed that between 60 to 80% of the chicken produced in South Africa is sold as frozen chicken in 2.5kg bags compared to the EU in which producers aim for the best price that a chicken part can be sold for to get the best market value for each part. Ms Choumelova said the chicken breast which is the white meat is regarded as the premium part of the chicken in Europe and often attracts the highest price. She emphasized that the chicken sold in the South African market is the same quality that is consumed in Europe. As regards the inability of local producers to compete with the price of imported chicken, she said chicken is sold differently in Europe and producers extract the higher cost of production by selling parts of the chicken to the markets where they can get the highest price. From statistics, the price that South Africans pay for chicken reflects 55% of the producer’s cost and 45% mark-up for retailers. The trend is abnormal except retailers add a significant value to the product via repackaging and reprocessing. She looked forward to engaging with the retailers that failed to appear and said SAPA officials would be in the best position to explain why the entity is unable to compete with the prices of imported chicken.

Ms Choumelova said the price of chicken in South Africa has been consistently more expensive than the imports flooding the country from US and Brazil and a notable issue is the retailer’s mark-up of chicken prices which makes the price of chicken unaffordable for South Africans. She affirmed that there is a market for South African poultry products in Europe as the EU has imported 100 000 tonnes of poultry products in 2016. EU imports from different parts of the globe such as South America and Asia especially from countries that pay duties. Ms Choumelova hinted that South Africa under the new Economic Partnership Agreement (EPA) can import quota free and duty free which implies that South Africa can benefit from a preferential trade agreement with the EU. This means that SAPA can be competitive pricewise in the European market. AMIE is currently engaging to create an export strategy for South African chicken and in talks with giant European companies to help facilitate meeting the sanitary requirements for exporting to the EU. SA can effectively benefit from the EPA in the poultry market in the same manner it benefitted in the citrus industry. In the last decade, the citrus industry in SA has enormously grown from less than R2 billion in 2007 to over R7 billion in 2016.

Mr De Wet Boshoff, Executive Director: AFMA, responded that ITAC is busy investigating dumping allegations. South Africa does not currently produce enough soya, only 700 000 tonnes was realized against the forecast 1.2 million tonnes of soya whilst 500 000 tonnes of soya bean meal was imported from mainly Argentina. There is a lack factor of 800 000 to 1 million tonnes of soya bean in SA.

Ms Mantashe asked why South Africa is not producing enough maize and soya bean.
                                                                                                   
Mr Boshoff replied that a contributing factor to the shortage in soya bean production is the lack of high-yield variety which is in demand as the country is constantly in search of the newest and highest yield soya. Soya production increased from about 300 000 tonnes 6 years ago to a million tonnes production before the drought. The yield in the country is lower when compared to those of Argentina, Brazil, and the United States. Other reasons include economic reasons as farmers decide on the crops to produce and crop rotation is a contributing factor. Considering the price of soya in the market, there is a real motivation to produce soya. Maize production in the country averaged 12 to 13 million tonnes (white and yellow maize) before the drought. Although the drought knocked-down production to 7.2 million tonnes which forced the country to import 3 million tonnes to cater for the internal consumption, South Africa currently targets an annual yield of 14.5 million tonnes and there will be huge exports of maize. As per the import versus export parity, South Africa exported more than it imported in 2016 and only South Africa, United States, and Mexico plant white maize for human consumption. As per the cost of maize, US has a Farm Bill which indirectly subsidizes maize production. US obtains a direct subsidy from the government due to its inclusion in Ethanol production and there is a natural benefit in winter for farmers due to the snowy weather. Soya bean is a highly-priced product with a price of R 5500 to R6 000 per tonne whilst maize costs only R2 000 per tonne. Job losses in the feed industry was incited by the “double-blow” of drought and poultry importation.

Mr Hill-Lewis asked if job losses were caused by decline in maize production.

Mr Boshoff replied that farmers were forced to diminish their herds during drought and the decline in maize production does not have any impact on job losses.

Mr Loutjie Dunn, Chairman: AFMA, responded that producers of broiler meat are in the best position to respond to the price computation of broiler exports. From AFMA’s stance, the only comparison that can be made is from the production cost of chicken. AFMA’s feed cost is competitive compared to many European countries and the opportunity for South Africa lies in the price of chicken breast meat which is much higher and can be exported to Europe.

The Chairperson requested an input from the South African Poultry Association.

Ms Charlotte Nkuna, Senior Executive: SAPA, commented that South Africa cannot currently compete in the international market as the local market is different from the European market. In the EU, breast meat is preferred and producers get premiums on breast meat whilst South Africans do not prefer breast meat as 65% of the meat sold is of the frozen mixed packs based on consumer preference. Local producers of broiler meat are unable to get the premium price for breast meat unlike their European counterparts as the pricing structures differ. Most of the production costs in the EU are recovered from breast meat hence other portions exported to South Africa are sold at lower prices compare to local producers.

Mr D Macpherson (DA) asked why Shoprite-Checkers, Woolworths, Spar, and Pick n Pay failed to appear for engagement with the Committee. The invited entities are multinational organisations with thousands of employees hence their alibis for non-appearance are invalid and unacceptable. He said there is a possibility of collusion between the entities because none of the invited entities appeared. It is a challenge to engage with poultry retailers in an attempt to have a clue of the happenings in the South African poultry industry. The single page responses received from the entities do not suffice. He suggested that the Committee utilise the rules of parliament to ensure that these entities appear for the next engagement.

Mr B Radebe (ANC) said that after the job losses in the poultry industry arose, he conducted some farm oversight visits where the broilers are produced as well as the abattoirs. There is a pathetic situation regarding some workers at an abattoir in which the employees only received R1 400 out of their monthly salary of R2 940 as 55% of the employees’ salaries were paid to a labour broker who secured the jobs for the employees. The challenge in the industry does not only relate to job losses but includes the quality of jobs. He asked how AFMA and SAPA ensure the compliance of producers in the industry with the Constitution of the country. The workers concerned were not allowed to join unions which is a clear breach of the Constitution that allows freedom of association. The Basic Conditions of Employment Act (BCOE) clearly stipulates that any employee who is gainfully employed by an employer is automatically regarded a permanent employee after a certain number of months of employment. There are instances where employees were still considered casuals after 5 years of employment. He commented that as AFMA and SAPA “grieve” before the Committee on their challenges, both need to account for the quality of jobs they offer in the industry. Whilst he would not reveal the names of the farms visited or the labour broker, he would commit to naming and shaming the farms when the Committee prepares its report and during the budget vote. Farm employees are faced with appalling conditions and are currently the most exploited workers in the country. AFMA and SAPA should report on the pay scale of their employees, their members utilising brokers, as well as the percentage paid to labour brokers. If they cannot respond now, they should commit to responding to the questions in writing. He said the price mark-up of chicken by almost 50% by poultry retailers is unacceptable and he expressed his dissatisfaction at the absence of the four major retailers.

The Chairperson said that the four absent entities are involved in corruption as a result of collusion and conspiracy to boycott the meeting and to abruptly mark-up prices.

Mr Koornhof quoted an extract from Shoprite-Checkers’ response to the Committee which read “we review prices on a weekly basis due to the sensitivity of chicken prices specifically the turnover of Individually Quick Frozen (IQF) chicken. Over a 12-month period, our margins range from between -2% to 2%, with IQF as the main draw card for consumers”. Whilst the Committee is addressing retailers, KFC should be considered as well as they might be involved in the 45% mark-up of chicken prices based on value added to the chicken.

The Chairperson said 9 May 2017 will be the meeting date to engage the retailers again and the Committee will exercise some of its powers to ensure that the entities appear for the engagement. She noted the labour related issues and the need to engage the Portfolio Committee on Labour to see if it would be able to join the Committee during engagements with retailers in the industry. A total defiance of legislation has been observed in the country in both the public and private sectors. She expressed her dissatisfaction about the explanation given by Ms Choumelova on dumping allegations, considering the size of poultry export to South Africa from the EU. Political decisions are often more decisive than technical decisions and investigations cannot be entirely left to ITAC.

Mr Macpherson emphasised that it should be a resolution of the Committee to use the rules of parliament to summon the four absent retailers and include KFC, Chicken Licken, Nandos, and Hungry Lion for the meeting on 9 May 2017.

The Chairperson concurred that it is indeed the intention of the Committee to utilize the rules of parliament to engage the retailers but the programme of the Committee must be considered.

Mr Garth Strachan, DDG: Industrial Policy Development Division, DTI, said instructions from government officials in terms of principles is that South Africa must defend its corners, its poultry industry, and its jobs are under stress in the value chain and the task team is expected to consider all the supply and demand aspect instruments while working closely with all stakeholders. In the Organisation for Economic Cooperation and Development (OECD) task team, the South African approach was considered an exemplary one. He thanked the Committee for assisting in identifying all the challenges. He noted that all trade measures fall under ITAC and the department would try its best to respect the integrity of the investigation. The private sector can apply for trade measures subject to the due process under the World Trade Organisation rules. The DTI oversees mostly on obligations in terms of trade agreements including the Economic Partnership Agreement (EPA). The Department is closely engaging all stakeholders in order to improve market conditions as well as government support for the sector. As regards demand, National Treasury has issued an instruction note for public sector procurement to ensure there is a proper mechanism to identify locally produced poultry. As regards supply, the Department is considering interventions including support through an agro-processing incentive. The Department is in an intense negotiation with poultry producers because any government support must have conditionality and must be aimed at transformation which has had insufficient attention in the past. He acknowledged challenges with labour retention and legislation. DTI is of the view that SAPA is competitive but a major challenge relates to the production of Mechanically Deboned Meat (MDM). The Department is closely engaging the Industrial Development Corporation (IDC) to explore the possibilities of securing investments in new technology as MDM represents an important form of black empowerment opportunity where the state can play a role of collaborating with the private sector to secure investment. It is imperative that export of poultry products must be improved. The Competition Commission is investigating the retail sector in general, the agro-processing sector will be included in the investigation, and the DTI will present some inputs on that. The veterinary capacity of the state is a concern and the Department of Agriculture, Forestry and Fisheries (DAFF) should be engaged accordingly. Engagements with retailers are welcome under the auspices of the Committee.

The Chairperson said a major issue mentioned in the previous engagement is the increase in European exports to South Africa which had increased over the years despite the safeguard duties of 13% imposed on all EU imports.

Mr Georg Southey, Chairperson: Association of Meat Importers and Exporters (AMIE), explained that MDM is a by-product of producing primary portions. The process involves grinding chicken carcass into a paste after the removal of primary portions and processing the paste into Russians, Viennas, and polony as cheaper sources of protein. MDM is a protein paste which is not sold in its raw form but rather used as an ingredient in the manufacturing industry for the processing industry of affordable protein for large parts of the population. He suggested that the poultry manufacturing industry represented by South African Meat Processing Association (SAMPA) should be invited to make representations on the MDM component when the Committee engages poultry retailers. In AMIE’s opinion, MDM would not be commercially viable if it is produced in South Africa as currently, the bone-in portions that are sold to consumers are the raw materials that would be used to produce a very cheap protein substitute (MDM). AFMA’s report that approximately 12 000 jobs have been lost as a result of MDM importation is false because MDM cannot be produced in South Africa since chicken is sold as bone-in portions. On-farm activities of the poultry producers in South Africa are as competitive as those found anywhere in the world however the business model falls short in the marketing aspect whereby all the prime portions are sold at the same price in a mixed portion pack. In other advanced countries, prime portions are each sold for the best price that can be achieved hence producers have a better return on prime portions.

On export opportunities, the EU is a long term opportunity that would take a process to achieve. He reiterated there are lots of export opportunities to neighbouring countries such as Mozambique and Angola which imports huge portions of whole birds. Mr Southey said since South African farming activities are known to be very competitive, there is a preferential access into SADC trade partners in terms of duties, and since market can be accessed by rail and not sea freight. The export opportunities can be easily exploited. A full cost build-up is necessary in getting the best returns for poultry producers. On increasing imports from EU, he said there has been a diversion of market and South Africa has been a net importer of poultry products for the past 25 years although the import and export trades ought to be balanced. The trade diversion to South Africa is due to the increase in Most Favoured Nation (MFN) rates by 9 European countries in 2013 through the application of the local poultry industry and there was a reduction to zero in 2011 of import duties from EU which culminated in EU now being the largest exporter to South Africa as opposed to previous years in which Brazil was the largest exporter. As regards AFMA, its job losses and the consumption of feed, he said South African consumption has tremendously grown over the years, the annual growth in imported chicken meat consumed in South Africa is in double digits, and the feed conversion ratio per kilogram of chicken has improved over the years.
                                                                                                   
Mr Hill-Lewis commented that Mr Southey focused mainly on the interventions of AMIE as regards importation. He asked about the measures in place to ensure that the identified export opportunities are converted into reality.

Mr Southey responded that the exportation was partly redundant but AMIE has been involved in the Red Meat Industry Forum which is a similar form of process that examines the nature of opportunities and how to access the markets. AMIE has prepared and is currently in the process of finalizing a document to present to the task group.

The Chairperson said 9 May 2017 would be confirmed for the next meeting and the Committee needs to agree on the rules of parliament to utilise. There are roughly 100 000 jobs at stake in the poultry industry hence the importance of the engagement.

Broad-Based Black Economic Empowerment (BBBEE) Commission Annual Performance Plan 
Mr Sipho Zikode, DDG: Enterprise and Economic Transformation division, DTI, noted it is envisaged that the Commission will be a full-fledged entity registered with the National Treasury by the 3rd quarter of 2017. The Commission was not established to issue legal proceedings but rather to advice the market on compliance with the law when BEE deals are struck. He affirmed that the Commission had already moved into its new facility despite budgetary constraints due to cost containment measure put in place by the government. The Commission is currently investigating instances in which many companies obtained tenders from the government based on the false pretence that they are empowered companies. There is a lot of corruption in the verification process and it remains a core responsibility of the Commission to ensure that due process is followed during verification.

Ms Zodwa Ntuli, Acting Commissioner: BBBEE, presented the APP. The research conducted by the entity in October 2016 as regards the national state of transformation revealed that White South Africans still hold 55% (51% men and 4% women) whilst Black South Africans hold 30% (18% men and 12% women) directorship positions of the Johannesburg Stock Exchange (JSE) listed companies, and the remaining 15% is represented by foreign nationals irrespective of race and gender. According to the report, Black South Africans continue to encounter serious barriers such as lack of access to finance and capital, access to markets, and high entry barriers due to high concentration of markets. As regards the situational analysis on the BBBEE, it identified key strengths as dedicated team and team work, expertise and clear mandate, understanding of complimentary legislation, amongst others whilst weaknesses include lack of office space, budgetary and human constraints, red tape and bureaucracy as per turnaround times on decisions and process, amongst others. Opportunities identified include schedule of fees, learning and training, building relations and collaborations, whilst key threats include lack of political buy-in, negative reports, Black people fronting themselves, cybercrime, and a low conviction rate.

As per the compliance programme of the Commission, it will develop and issue 1 practice note to guide implementation of the BBBEE Act in the second and fourth quarters of the 2017/18 financial year and assess BBBEE transactions and publish findings within 90 days in each quarter. The projected staff complement for the programme is 28 (inclusive of 25 permanent employees and 3 interns) in 2017/18 and 29 employees in the next two financial years.

To implement the investigations and enforcement programme of the Commission, it will conduct both proactive and reactive investigations on 80% of reports each year and analyse and investigate all cases received whilst 80% cases will be referred to companies tribunal for alternative dispute resolution each year. There is a strategic objective to initiate prosecution of 2 cases in 2017/18 and 5 cases each in the next 2 financial years. The projected staff complement for the programme is 29 in 2017/18 (25 permanent employees and 4 interns and trainees) and 30 each year for the next 2 financial years.

The third programme entails research, analysis and reporting. Two sector reports will be produced each year from 2017/18 to 2019/20, 80% of real time data will be tracked, and 1 national status annual report will be produced yearly. The staff complement for the third programme is 12 employees (all permanent employees) in 2017/18 and 14 each year for the next 2 financial years.

Programme 4 addresses relationship building and stakeholder relations. Two memorandum of understanding agreements will be concluded and published in 2017/18 (1 in the first quarter and 1 in the fourth quarter), and 3 each in both 20118/19 and 2019/20. The staff complement of the programme is 4 employees in 2017/18 and 5 in the subsequent years.

For the administrative programme of the Commission, two systems will be developed and implemented in order to develop and maintain operational policies and support systems each year from 2017/18 to 2019/20. The entity plans to employ 10 graduates on internship and traineeship programme. The staff complement for the administrative programme will be 50 inclusive of 47 permanent employees and 3 interns each year.

As regards the financial plan of the entity, it plans to spend R112 million in 2017/18 with most of the expenses budgeted for employee compensation. Expenditure is forecasted at R107 million and R110 million in 2018/19 and 2019/20 respectively. Identified risks of the Commission include developing new ICT infrastructure to support the new Commission, inadequate human resources to deliver on the mandate, insufficient financial resources to effectively execute Commission’s mandate, non-compliance with corrective action and recommendations to stakeholders, and litigation. For all the identified risks, it highlighted relevant mitigation strategies.

Discussion
Mr Williams sought clarity on the statement “lack of political buy-in” highlighted under threats in the Commission's SWOT analysis. He asked if any of the 46 companies with fraudulent BBBEE certificates have been prosecuted and reasons if not.

Ms Mantashe asked if the Commission targets old companies in the same vein as it targets newly established companies. State Owned Entities (SOE) like PRASA, TRANSNET, and ESKOM should be investigated as they keep flouting and undermining BBBEE regulations and other regulations. She asked how BEE levels are rated in the Commission.

Ms Busisiwe Ngwenya, Director of Compliance: BBBEE Commission, responded that if an entity is an Exempted Micro Enterprise (EME) and is 51% Black-owned, it is awarded an automatic level 2 certificate and if it is 100% Black-owned, an automatic level 1 certificate is issued. She added that if the entity is a qualifying small enterprise and is 51% Black-owned, it obtains an automatic level 2 certificate and if it is 100% Black-owned, and automatic level 1 certificate is issued. All companies require a sworn affidavit which is available on the DTI website.

The Chairperson asked if the budget of the entity is R200 million or R20 million per annum. She noted that the new facility of the entity is unlikely to suffice in the near future. She asked if it has sufficient human resources to undertake its mandate given its constrained resources. She asked about the interventions and efforts from the private sector and SOEs to embark on transformation or efforts not to be proactive as desired.

Ms Ntuli responded that the statement “lack of political buy-in” refers to the conflicting messages conveyed about BBBEE by politicians which makes it difficult to implement policies. She explained that as per the invalid BEE certificates, companies are afforded the privilege to respond on how the invalid certificates were obtained. Some invalid certificates were withdrawn and clients of some corporations were notified of the withdrawal of BEE certificates. Many of the entities affected were not the culprits but rather the verifiers and an investigation has been launched in the verification arm of the Commission. If a deliberate fraud has been committed by a company, there would be prosecution however a vast majority of the invalid certificates were due to improper verification process. The Commission commenced investigations with SOEs, many SOEs claimed the PPPFA made it impossible for them to implement BBBEE and the regulations of the PPPFA have since been amended.

Ms Ntuli said the Commission would like to witness the implementation of BBBEE legislation without any hindrances as all forms of misalignment of BBBEE with SOEs have been resolved. On the SASSA contract raised in the previous engagement with the Committee, further engagements with SASSA revealed that the BBBEE Act was never a consideration in the procurement process. She informed that that section 10 of the BBBEE Act clearly stipulates that every SOE and government department in its procurement must apply BBBEE legislation and its code. She confirmed that the Commission is currently engaging with SOEs on a one on one basis. The Commissioner said the budget of the entity is about R200 million and the DTI initially allocated R20 million to it to commence its operations because National Treasury indicated that the Commission would not have any allocation due to fiscal constraints. The only advantage the Commission currently has is that it can utilize DTI resources such as systems and consequently, certain costs have been absorbed by the DTI. The plan is to have the Commission listed as a separate entity by September 2017 whereby the Commission can obtain its own allocation from Treasury.

Ms Ntuli informed that the human resource of the Commission is not sufficient to address BBBEE issues. She added that the Commission did not divulge the information about its human resource constraints because it might allow certain culprits to assess the strength of the Commission. Voluntary compliance by the private sector has been witnessed in several instances where the Commission has given guidance on codes as some codes of the BBBEE Act were initially too complex for the private sector to understand hence the non-compliance of some entities. Another challenge is the over reliance of many companies on consultants that present some form of resistance which cannot be necessarily translated to non-compliance of the companies.

The Chairperson said that the Committee appreciates the frank response by the Commissioner. It is however disheartening that the entity which is a tool to achieve transformation is forced to actualise its mandates amidst financial constraints. The Committee however has confidence in the Commission achieving this. She added that the emphasis of the Commission to offer internships and train learners would be beneficial to the economy of the country. The Committee will closely monitor the Commission's budget and will exercise its powers to ensure it is allocated a larger budget.

The Chairperson mentioned that Bayhill Capital might well be an exemplary company as it claimed to be a full-fledged BBBEE company.

Bayhill Capital (BHC) and African Financial Group (AFG) presentation
Dr Gil Mahlati, Chairman: African Finance Group (AFG), introduced the entity to the Committee. The African Finance Group initially focused on deal structuring and financing in the health sector after its establishment 20 years ago. The AFG expanded its focus to bring transformative financial innovation to deal structuring, mobilizing Black capital for graduation into high net worth for professionals, project refinancing, mergers and acquisitions, amongst others. Citadel was introduced as a wealth management firm managing R45 billion of private client portfolios targeting high net worth and mass affluent individuals. Citadel is 100% owned by Peregrine Holdings and regarded to have the best systems, operations, processes, and solutions in the industry. Mr Mahlati informed that AFG has acquired 51% of BHC from Citadel

Mr Geoff Blount, Managing Director: Bayhill Capital (BHC), introduced Bayhill as a private client portfolio management firm which manages R500 million of client investment portfolios. He informed that the entity was 100% owned by Citadel prior to the AFG transaction and the entity has full access to all Citadel infrastructure and intellectual property as well as the support of the Peregrine Group which includes the largest stockbroker in the country. As reported, the rationale for the transaction was the BBBEE Act of 2003 section 12(a) and 12 (b) which refers to private sector participation and the development of a plan to finance BBBEE. Afterwards, Citadel and AFG jointly sought to establish a joint venture vehicle with suitable inclusive growth and transformative products, create a platform to optimize wealth creation and capital allocation, amongst others. Considerations around BBBEE transactions identified include debt funding costs, lock in periods, lack of permanence, cyclical industries, and raising the cost of equity for the firms.

Mr Blount said the venture is a “win win” approach for both BHC and AFG. He identified BHC capabilities as investment management, financial planning, private client share portfolios, and stock broking services. He identified BHC transformational portfolios as partnership, harnessing wealth of all SA, special focus on emerging Black wealth, amongst others. The transformational fund will stem from raising capital from a diversified base of Black qualified investors, creating a base of permanent Black capital, initially targeting middle to higher net worth Black investors with the aim to create structures for small savers, amongst others. The transformational fund strategy with regards to listed investments will be to actively manage a portfolio of investments as a strategic BEE investor for listed firms, acquire such investments at a BEE discount to market given its qualified investor status, amongst others. Transformational fund strategy with regards to unlisted and private equity will be to fund Black businesses and industrialists, and unlisted White firms seeking a proactive BEE investor.

Discussion
The Chairperson asked from the Commission if there has been any form of challenges with the financial sector in the precious years and an identification of the challenges if they exist.

Ms Ntuli responded that many challenges in the financial sector are generic challenges with reference to other sectors as regards targets being set that are not advanced enough. She identified a specific challenge in the financial sector as concerns about black business funding where the funding extended to black businesses are to be converted to recognition of ownerships. In terms of loans and finances to black businesses and industrialists, the Commission strongly believes that if entities would like to gain recognition for such under the elements of the BBBEE, there must be tangible differences between the normal offer for a black business approaching the financial institution and the offer for the purpose of recognition for transformation. She added that terms must be clearly preferential as a product specifically designed for black people and should not be a product that is merely extended to a black person to obtain points.

Mr Hill-Lewis asked why a product must be only available to black people if the company is majorly black-owned.

Ms Ntuli responded that if a product is offered for recognition under BBBEE, then the product must be unique. The same terms cannot be applicable to both Whites and Blacks if the product is to be recognized under BBBEE as the loan offered to a Black citizen is not preferential whilst the entity obtains points for offering the loan.

 Mr Williams asked if the ownership of the remaining 49% of Bayhill lies with Peregrine, Citadel, or another entity since AFG currently owns 51% of Bayhill. He asked if the complex ownership structure of the venture presented was deliberately to “mess around” with BEE process.

Mr Koornhof commended the presentation. He asked if AFG is satisfied with its partnership with Citadel and Peregrine and he asked if the partners are doing enough for transformation.

Ms Mantashe asked about the difference between the operations of Sanlam and Old mutual and that of Citadel and the Peregrine Holding Company. There was a scenario whereby a certain investment company had a similar arrangement with Sanlam and major dividends were received by Sanlam whilst the partnering investment company only had access to very little dividends. She asked if “BitClub” is an investment company or a scam.

Mr Hill-Lewis asked why all AFG retail investors have to be Black since AFG is majority Black-owned. He asked why White investors with an interest and commitment in empowerment are not encouraged to invest.

The Chairperson commented that since the inception of the transformation of the economic structure in South Africa, there have been numerous mechanisms such as giving shares to Black workers. The intention to transform the economic structure then fails to achieve its mandates as the Black-owned shares are later resold to White companies which was identified as a major challenge by former finance Minister in person of Mr Trevor Manuel. She asked how the unintended consequences of BBBEE such as lock-in structures and revolving door of empowerment partners will be addressed.

Dr Mahlati implored the Committee to envisage 2117 when there would be no arguments about economic transformation, when Black citizens would have enough money to control the stock market and control the wealth. That there was an estimated R700 Billion of Black money after 20 years of democracy in South Africa which is invested by Whites. That for Blacks to invest their money in transformation, harnessing the wealth must be actualised and the right companies with the right knowledge to transform the structure identified. Afore mentioned incited the partnership with Peregrine and Citadel. Peregrine is very knowledgeable with investment whilst Citadel is well known for wealth harnessing. Dr Mahlati added that Citadel was established in Pretoria and was bought by Peregrine. The aim of AFG is harnessing the wealth and then utilising it to transform both the ownership and management of businesses in South Africa. White investors will be encouraged to invest but their investment is restricted to 49% of any structure according to BEE Act and Procurement Act. He expressed his satisfaction with AFG partners and informed that the difference between Sanlam’s business and that of AFG is that Sanlam for instance manages retirement funds of parliament MPs and MPs make laws that the funds must be invested in black economic transformation which can be actualised via AFG’s structure as investors can track their resources in the stock market even if it is a high share portfolio. He affirmed that BitCoin is not a scam but rather a company registered in the stock market.

Mr Moeller said Citadel delivers the operations whilst AFG delivers the strategy, the vision, the employees, as well as the resources. The financial industry is increasingly becoming highly regulated and time to market in terms of carrying out ventures can be onerous.

Mr Blount said that clients of the venture invest in funds that are then deployed into investment portfolios. The venture is neither a scam nor is it in any manner different from other asset management companies but the only difference is to change the objective of the investment portfolio as most investment portfolios bought at Sanlam, Old Mutual, Coronation, or Allan Gray focus mainly on investing clients funds in stock exchange and maximize returns for clients. The objective of the entity’s investment is not only to generate a return on investment but to transform the economy. To gain access to the BEE market, Black investors must be on board.

Dr Mahlati clarified that previously when a deal is done in the stock market, the investor is locked-in the system and the current structure of AFG assists in such instances. The unintended consequences will be a situation in which black partners are revolved when a White partner loses his/her empowerment status.

Mr Williams asked if Peregrine and Citadel are engaging with Bayhill to secure the R700 Billion in new emerging money in the market. It appears as if Bayhill is fronting for Citadel and Peregrine that are not 51% black-owned companies. since Bayhill is 51% BEE company, it is perhaps being used to attract investors and if the investment processes is being conducted by a White-owned company, then there is no transformation. Mr Williams asked about the BEE status Peregrine and Citadel.

Mr Geoff responded that the ownership structure in which Citadel is owned by Peregrine and Bayhill is a subsidiary, is a legacy which has been in place for a years. The operating structure of Peregrine Holdings is to take significant stakes in various financial services businesses with brands such as Peregrine, Citadel, Peregrine Security, amongst others. To implement a vision of building transformational portfolios in the country, the best place to hold them is Bayhill which already targets and builds interesting and different alternative investment strategies. There is no intention to front using Bayhill and Bayhill can be seen as a subsidiary of AFG which has Citadel as an external small share shareholder. 51% of dividends is allocated to AFG.

Ms Mantashe asked about the relationship between Peregrine and Citadel. She asked if both entities have the same directors.

Mr Geoff responded that both entities have different governance and different board of directors. There is a cross-holding in terms of the CEO of Peregrine Group who sits on the Citadel board due to the shareholding nature. Peregrine is a listed entity, Peregrine is the holding company and there are 5 subsidiaries of Peregrine with Citadel as one of them.

The Chairperson said concerns by members and rigorous engagements were due to the unusual structure of the venture. The Committee on finance would normally oversee such engagements but the Portfolio Committee on Trade and Industry is only attending to the presentation because it addresses the issue of BEE.

Ms Ntuli mentioned that from internet sources, Bayhill website does not depict the transaction because the structure of the venture is not listed on its website. She asked about the BBBEE status of Bayhill pre and post the transaction and when the transaction was conducted. Mr Koornhof’s inquiry about the BBBEE status of the entities is relevant. She added that the Commission is interested in perusing the shareholders agreement for the 51% ownership of AFG as there are previous concerns about some other entities in which the 49% entity acquires the 51% entity in what is expected to be an acquisition for a Black entity. no inputs can be made until the shareholders agreement is perused to ascertain if the structure is a solid 51% control and influence over the business that is being acquired. She stated that there are conditional deliverables to AFG and the details of the deliverables will ascertain whether an acquisition exists or not as there have been instances in which the conditions in an agreement cancel the acquisition part in such a manner that an entity acquires 51% and is stripped of all the powers that can be exercised under the 51% ownership. It would be important to peruse the finance agreement if it exists as the Commission is currently dealing with a case whereby a Black-owned company which initially borrowed R19 million has paid over R60 million back to the financing company in a BEE transaction. She asked if the venture is an investment scheme or an ownership scheme because voting rights, net value, and economic interest are applicable to ownership schemes. The venture is the aim of the BBBEE legislation especially as it pertains to investment in new black entities.

The Chairperson commended the Commissioner and Bayhill Capital given the importance of having real life case studies. The Committee is still uncertain if the venture would be a structure that can be pursued and the Committee will await further information by the Commissioner before any conclusions can be drawn. She stated that it is preferable to shorten the period of economic transformation forecasted by Dr Mahlati to a period of 10 to 15 years. She informed members that the parliamentary legal service would promptly advise the Committee on the rule of parliament to utilize in engaging the four entities that failed to appear before the Committee.

Mr Macpherson sought clarity if the absent entities are being invited or summoned.

The Chairperson responded that on the first occasion in which the entities failed to appear, the entities were invited and whilst the Committee will summon the concerned entities to make them appear for the next engagement, it is imperative for members to note that a summon might not suit the entities as regards the date.

Mr Macpherson said the Chairperson definitely has a lot of faith in the entities than he does. There would be another round of excuses from the entities again if they are not summoned and they would forward a single page report to the Committee again after non-appearance.

Mr Williams said the Committee is clearly embarking on a reasonable approach which is to write one more letter to inform the entities to either appear before the Committee on 9 May 2017 or be summoned.

Mr Koornhof concurred with Mr Williams’ comment.

The Chairperson said the current approach of the Committee towards the entities is more reliable and responsible. There are series of questions that political party representatives ought to discuss with the Chairperson of the Committee on issues pertaining to the National Lottery Commission on Friday 5 May 2017. She requested that the Committee secretary update the Committee on its programmes.

Mr Andre Hermans (Committee Secretary) said the workshop would be held in the afternoon on Thursday 4 May 2017 at 1300 if parties have a caucus in the morning of afore mentioned day and 1000hrs in the morning if there is no caucus. The National Treasury has signified a challenge in attending the Thursday session of the engagement and National Treasury will be engaged on 10May 2017 on pertinent issues whilst DTI will be engaged on Thursday 4 May 2017. The poultry retailers will be engaged on 9 May 2017 and the Committee will have a lengthy session.

The Chairperson mentioned that there is an upcoming engagement with National Credit Regulator (NCR) on 3 May 2017 at the Good Hope Chamber.

Mr Hill-Lewis asked if the programme can be received via email by members as soon as possible. The National Regulator for Compulsory Specifications (NRCS) committed to addressing its backlog by end of March 2017 and the Committee ought to follow-up on the progress made in the regard.

The Chairperson thanked Mr Hill-Lewis for the reminder and affirmed that it is important for the Committee to follow-up with the NRCS.

Mr Macpherson said the Committee committed to following the ICT programme of the NRCS and the entity needs to brief the Committee on progress made so far as the entity is expected to go live in December 2017.

The Chairperson urged members to inform the Committee on any issues that might have been overlooked.

Mr Macpherson mentioned that in the previous week in the EThekwini Committee for economic development, a report was tabled by the municipal council and a false account of the Committee’s position was provided as regards poultry. The report reflected that the Committee had resolved that the government will buy failing farms. The report is a complete misrepresentation and factually untrue. He stated that it is problematic when other spheres of government are misrepresenting the resolutions of the Committee in order to suit their private agendas. He suggested that a letter should be tabled to the responsible municipal council asking the council to withdraw any untrue statements claimed to have been made by the Committee. The document tendered at the municipality will be forwarded to the Chairperson who would decide on the due course of action as there are huge challenges in the municipality with farmers and businesses

The Chairperson said Mr Hermans should write to the affected municipal council immediately indicating that the Committee has been made aware of the issue and request a copy of the report to be forwarded within the week so that the issue can be thoroughly addressed. It is important to take Committee decisions on the matter. She thanked attendees for their participation.

The meeting was adjourned.