Black Economic Empowerment Act Implementation: Department briefing

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Trade and Industry

14 October 2004
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Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
15 October 2004
BLACK ECONOMIC EMPOWERMENT ACT IMPLEMENTATION: DEPARTMENT BRIEFING
 


Chairperson: Mr B Martins (ANC)

Documents handed out

Department Powerpoint presentation on BEE strategy
Committee programme

SUMMARY
Progress on the Department's Black Economic Empowerment (BEE) strategy was explained to the Committee. Members were concerned that BEE was still very narrow-based and that it needed to reach more people. Concern was also raised about the fact that many people did not know about the support that the Department offered especially in the rural areas.

MINUTES
Department briefing
Mr Lionel October, Department Deputy Director-General, said that they would be reviewing what had taken place in the past year since the BEE Act was passed. The Government faced two challenges in implementing this act. The first challenge is to see that empowerment is broad based. The benefits of empowerment had to be spread to as many people as far as possible. The other challenge related to financial sustainability. Even though the number of BEE deals had increased, it was important that these deals were sustainable. He went on to address the Committee as in the Powerpoint presentation attached. He added that the aim of the policy was to transform the economy by deracialising it by 2014. It was also aimed at bringing about equality in South Africa. The main change that had been included in the Act was the introduction of the scorecard. Previously BEE had only been about ownership. It now addressed other issues such as participation in management, skills development, employment equity, procurement and enterprise development. The other intervention was the introduction of charters for strategic sectors. Of concern was the issue of "fronting". The plan was now to blacklist companies that used "fronting". The challenge was also to monitor the details which companies put forward.

Mr J Ndumo, Director of BEE Partnerships, added that the seven charters in the main sectors were in various stages of completion. These charters flowed out of the code of good practice that was in the Act. There had been problems around the drafting of the charter in the agriculture sector. This problem had been around the issue of consultation. This was now being addressed. Additional charters were also being drawn up in other sectors. These were also in various stages of completion.

Mr October continued saying that the scorecard was there to ensure that real empowerment took place. It had emerged that since 2003 a different type of transaction was taking place. These transactions were more broad and involved staff participation. There had been a delay in the establishing of the BEE Advisory Council. This was a very delicate process as the Council would oversee BEE deals and provide guidance over the next ten years. It was therefore important that this body have legitimacy and that it is inclusive. It should include both established businesses, existing BEE players and also emerging entrepreneurs. It should also be reflective of the different communities and the provinces. Proper and thorough consultation was therefore necessary in this respect. A draft list was available at the moment. It was hoped that by 2005, implementation of the Council and the charters would take place. Referring to the National Empowerment Fund (NEF), he said that there had been problems with the CEO, but these had been dealt with. He informed the Committee that no money had been lost. At present a shortlist for the position of CEO had been drawn up and they hoped to appoint someone before the end of 2004. He added that there was now a micro-lending scheme, available, known as the Apex Fund, which would lend a minimum of R300.

The Chair said that the BEE topic was eliciting much discussion, and that the Committee needed to be updated regularly on progress. He then opened the meeting for questions.

Discussion
Dr E Nkem-Abonta (DA) expressed concern at the weightings in the scorecard. The weightings were supposed to make BEE more broad-based. Ownership was the more crucial aspect of BEE. He wanted to know why it was not possible to put a cap on the number of deals which one person could do. It was technically possible to give one person 50% ownership. This would meet all the criteria on the scorecard and exclude others. Referring to the graphs, he said that more detail was needed, such as the mean size of a deal, the median and the range of the deals.

Mr P Nefolovhodwe (AZAPO) wanted to know what access the ordinary person had to the funds which were available through the Department. It was also important that the poor knew about which product they qualified for. Intermediaries such as banks, also had the tendency to have their own rules. He asked what interaction was taking place with banks. It was also a concern that only a few individuals were benefiting from BEE deals. He wanted to know what the Department was doing about this.

Ms D Ramodibe (ANC) wanted to know to what extent the inequalities were being overcome. Referring to state assets, she asked what state assets were given to black entrepreneurs as stated in the presentation. She wanted to know to if the targeted groups understood the scorecard and whether workshops were being held to address this. She asked what other occurrences were happening besides "fronting" that also disadvantaged the poor. What mechanisms were in place to monitor these occurrences?

Mr L Labuschagne (DA) asked for clarification around the issue of women and preferential procurement. He wanted to know if this referred to all women or just black women. He also wanted to know which state organs were referred to in the presentation which were applying the Act inconsistently. State organs were not there to make a profit and service delivery was the important issue. If these organs were leaving posts open because they were not meeting the necessary BEE criteria, the service would suffer.

Ms N Khunou (ANC) asked if there was an asset register. Many of these assets had been given to whites. She wanted to know how many of these would be left to be given to blacks. The funding agencies were also concentrated in Gauteng, KwaZulu-Natal and the Western Cape. These should be across the whole country to benefit all. Referring to affirmative action she said that it was important to see blacks and especially women in top management in these funding agencies.

The Chair pointed out that in 1994, there had been no asset register. Much progress had however been made. He had served on the Portfolio Committee on Public Works and he knew that that Department had begun to compile a register. This was not concluded yet. It was not correct to say that all the state assets had been given to whites. The issue at hand was Broad-based BEE and one could not shy away from this issues. The need was therefore to address this.

Mr M Stephens (UDM) said that nothing was said about a transformation charter in the tourism sector. This was a growing and important sector that needed to be addressed. He also expressed concern about share options for workers as mentioned in the presentation. Experience had shown that employees were not really empowered through this. He also felt that the funding products were not designed well. They did not seem to be linked to the different business types. It also seemed as if the different agencies were competing against each other with their different products. This was not a healthy situation.

Mr S Maja (ANC) referred to leadership problems in the NEF, mentioned in the presentation, and wanted to know if there was a plan to address this.

Ms B Ntuli (ANC) said that she was worried about the amounts that was given out by the NEF and its agencies. She felt that many of these businesses were underfunded which caused businesses to fail. It was also important to train people to handle this amount of money. The funding system needed to be revisited.

The Chair said that he wanted to encourage Members to cite examples from their constituencies as the previous speaker had done. This would help the Department to respond

Dr Nkem-Abonta (DA) said that the finance was not the only problems facing black enterprises. Management training was also needed. He noted that this type of training seemed to absent in the strategy.

Mr October said that access to funding was the main problem and the problem of outreach was identified as a problem. There were efforts as well to merge the work of the enterprise development agency

 

Ntsika and National Manufacturing Advisory Centre (NAMAC) so that there was one national network which would be retail. This would be present in all nine provinces. The final plan is that all municipalities would have a small business access point where people could access funds. Under the National Empowerment Fund (NEF) more products would be available as well. He agreed that finance was not the only solution. Finance is a major problem though and it was important to remember that many people have been stripped of all forms of collateral. The state therefore had a responsibility to provide finance.
 

He said that the issue of management training was however noted. Market opportunities were also a problem for many small businesses. In the scorecard, there was an element that referred to enterprise development and preferential procurement. These two had been given a combined weighting of 30%. Most companies grew through intra-firm trade. Through preferential procurement, it was hoped that SMMEs could develop. He agreed that the issue of inequalities was a difficult one. There was a structural problem in the labour sector. The current fastest growing sectors were attracting semi- and skilled people. Because of this, the black middle class had more than doubled. Unskilled labour however was being retrenched, for example on the mines, the agricultural sector and in the manufacturing sector. In this way, the inequality in the country was increasing. It was hoped that the public works program would try to address this unskilled sector.

Referring to state assets, he said that most of these had been sold. Most had gone to broad-based BEE companies. The remaining ones such as Eskom and Transnet were strategic and would be dealt with carefully as they still had a role to play in the economy.

On the issue of fronting, Mr October said perhaps it would be good to consider whether legislation might not be necessary to deal with this. Tenders were granted every day and therefore it was important to put in systems to monitor details of companies. The approach taken on BEE was that it had to be in partnership and should be driven by the private sector. For this area, a charter approach had been taken. The charter councils had to see that the benefits were to be broad-based. The Constitution guaranteed freedom of economic activity, so limiting the number of transactions might be a problem and would be very complex. Where the state was concerned however, the implementation had been very clear, and had been broad-based. It was clear that not only a few people had benefited. He agreed that employee share options was a difficult process. The concept however was supported in the strategy, but had to structured be properly.

Mr Ndumo said that the tourism sector had already drawn up a charter, but it was not based on the scorecard. This would be attended to now. The leadership problems in the NEF had been dealt with as Mr October had shared earlier. Referring to the scorecard, he said that there had been number of roadshows in which forums were held with business and communities. Further workshops were planned to inform people about the scorecard and the BEE strategy.

Mr October added that when the scorecard referred to blacks it included Africans, Coloureds and Indians. This was related to ownership. In employment equity and management however, white women were also included. He said that at times there was a perception that BEE was about people simply getting shares. He stressed that most of the empowerment transactions were taking place at fair market value. Some had taken place at a 5-10% discount.

Ms Polo Radebe, Director of BEE finance, said that a DFI review was being done which would look at all support mechanisms. These mechanisms are not only financial but others as well. The aim was to locate BEE in all of the mechanisms. They would be trying to identify the needs and then try to address these. These include access to markets, technology needs, and soft skills training. It was hoped that through and integrated approach could be given so that businesses were sustainable.

Mr Maake (ANC) said that the strategy was good, but he was concerned that the information was not reaching people. Even if it was reaching, they did not understand it and did not identify with it, this was especially true in the rural areas. Referring to the state assets, he said that blacks were excluded form acquiring these assets as they had no money. Even though some were sold to black consortiums, the communities had still not benefited. There were some assets that nothing was known about.

Dr Nkem-Abonta (DA) said that he noted that 62 BEE deals had been done in 2003 totalling R21.2 billion. This would mean that the average deal was R300 million. The average person would not be able to manage this kind of deal. These would only be possible to the people who were empowered already. He could not see why it was not possible to limit the number of deals. It would not be going against the Constitution as BEE was an interventionist program. The amount was very small and narrow based for a country such as South Africa.

Ms Chang (IFP) said that unskilled people were losing in the rural area. BEE should try to address these problems.

Mr Stephens (UDM) asked if the the Department was financing research on behalf of small businesses. Many times, small businesses had to do research to see whether their business ventures were feasible. This kind of research normally cost and also has a risk attached to them.

Ms Khunou (ANC) said that she would appreciate it if the Committee could have a program of the roadshows which the the Department was doing. They could then promote these programs in their constituencies. She agreed that marketing of products was also an issue that had to addressed.

Ms Ntuli (ANC) said that in the ex-homelands, loans were given to people but the money was kept by the development cooperation. The cooperation would gain interest but yet also charge the business interest. The borrower was therefore suffering. This needed to be addressed as well especially in the rural areas.

Ms Chang (IFP) suggested that perhaps an example could be taken from China to see how they had helped people in the rural areas to manufacture items. A certain area would be targeted and the whole area would make one type of product.

Mr Nefolovhodwe (AZAPO) said that then a poor person was assisted by Khula, they had to 20% upfront. The bank then gives the other 80%. This amount was not given at a preferential rate. Khula also needs it own money, this means that the borrower is suffering. This must be dealt with.

Ms L Mabe (ANC) wanted to know what specific programs were planned by the the Department that would help to empower rural women.

Mr October said that the issue around state assets would be taken up. The aim in selling off these assets, was that local communities could benefit from these transactions. He agreed that access points had to increase in communities. The Apex fund being launched would be aimed at micro-enterprises. These loans would start at R300. The the Department had also made a point that charters had to address local and rural communities. In the mining charter, it was stated that there had to be activity in the local areas. It was hoped that the other charters would do the same. He said that there had been a mistake in the number of deals on the slide. Instead of 62 deals, it had actually been 189 that had been made in 2003. He agreed that this was still small. He pointed out that only two charters had been implemented. To achieve the the Department's goals, there would have to be a tenfold increase so that the target of 25 to 30% black ownership by 2014. The figures for 2004 was not available but it was expected that there would be over 300 deals for made. He emphasised once again that the charter process would be the mechanisms to achieve this. Through the charter, targets would be set for the different sectors. There was no compulsion on companies. It was up to them to decide to partake. Incentives would be given and the whole process would be market driven.

Ms Radebe added that it was important to remember that the number of deals mentioned were only the ones recorded and did not reflect the total amount. Further, the number of mergers and acquisitions had taken a downturn globally. The number of BEE deals however had increased over the years which was a positive sign. There were also lots of small deals which were taking place which were not recorded or in the media. The benefits of this strategy might only be seen later as these deals give rise to new enterprise development. The DFI review would examine the issue of research for new enterprises. A communication and marketing strategy had been decided and would be rolled out. She agreed that they would need to sit down with banks to discuss the financing of BEE deals. One of the things being done was a study on risk mitigation strategies.

Mr Ndumo said that the strategy that was planned to disseminate information, was very detailed. This strategy was aimed at covering the whole of South Africa. Further studies were planned so that more details could be obtained from the deals. The targets agreed on in the financial services charter process, were very critical for the rural areas especially in the area of agriculture. The agriculture charter would also be addressing targets for around land distribution.

The Chair said that this was a very important issues and further meetings would be necessary in the future.

Ms Ramodibe (ANC) asked whether the strategy also addressed the survivalists such as street hawkers.

Mr Nefolovhodwe (AZAPO) emphasised the problem that the banks posed. The Department presented guarantees to people yet they claimed that there was risks attached to these people. This should be addressed.

Mr Maake (ANC) asked if the charters were part of the Act.

Ms Khunou (ANC) wanted clarity around the number of BEE deals in 2004 since it was not reflected on the graph.

Mr October explained that the survey had ended in 2003. The statistics were not available for 2004. He was therefore speculating that in 2004 there would be over 300. To achieve the targets for 2014, deals would have to be doubled each year. The charter had to meet the criteria in the Act and is agreed by the major parties in the sector. These charters would then be gazetted. These targets in the charter would be binding on government departments as far as tenders were concerned. He agreed that ensuring that survivalists and micro-enterprises were part of the BEE process, was a challenge. These would now be targeted through the Apex Fund. The association of hawkers, ACHIB, would be announcing soon how they would be partaking in empowerment deals in the retail sector.

The Chair agreed with Mr Nefolovhodwe that the issue around collateral, which the banks wanted, was a serious one. The Department provided the banks with collateral. This must receive attention.

The meeting was adjourned.
 

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