Codes of Good Practice on Black Economic Empowerment; Committee Programme

Meeting report

ECONOMIC AND FOREIGN AFFAIRS SELECT COMMITTEE
9 February 2005
CODES OF GOOD PRACTICE ON BLACK ECONOMIC EMPOWERMENT; COMMITTEE PROGRAMME

Chairperson: Ms N Ntwanambi (ANC)(Western Cape)

Documents handed out:
Presentation on Code of Good Practice on Black Economic Empowerment
Committee Programme
BEE Codes of Good Practice are on the DTI website

SUMMARY
The Committee was briefed by the Department of Trade and Industry on the Codes of Good Practice on Black Economic Empowerment. The BEE Codes of Good Practice are to be applied in the development, evaluation and monitoring of BEE charters, initiatives, transactions and other implementation mechanisms. The advantages of a more broad-based definition for BEE was discussed as well as the ways to ensure that BEE measures were implemented in a verifiable and meaningful way.

MINUTES
Codes of Good Practice on Black Economic Empowerment
Mr L October (Chief Director: Black Economic Empowerment) referred to the three pillars of the Black Economic Empowerment (BEE) process:
- the creation of separate Charters,
- the formation of the Advisory Council and
- the compilation of Codes of Good Practice that would guide the BEE process. The Codes were now open for public comment and debate.

Ms P Buthelezi (Director: Black Economic Empowerment) gave the presentation on the Codes of Good Practice on BEE (see document). Each Code explained all issues pertaining to a key BEE element and could consist of one or more statements that were the key principles for the implementation of broad-based BEE. Broad-based BEE (BB-BEE) was an integrated socio-economic process that aimed to empower black people. Phase 1 of the formulation of the various codes had been completed and the process was now in Phase 2. The benefits of the structure of the Codes were: they followed the logical flow of the BEE score card, they were flexible in that amendments could be made to individual statements without having to re-issue the entire Code of Good Practice and they were based on internationally accepted accounting practice.

Charters had been developed in various sectors of the economy. The key principles included qualification criteria, guidelines for setting targets, weightings and indicators and the publication of the Charter in the Gazette. The Advisory Council would oversee BEE accreditation that would be carried out by rating agencies by way of BEE audits.

Ms Buthelezi commented on the current achievements of BEE. Firstly, there was a massive increase in BEE across all sectors of the economy, BEE was a recognised business imperative, and BEE charters had been firmly established in strategic sectors such as mining, construction and fishing. These signs prove that the objectives of BEE could be achieved. The problem BEE was facing today is that the Codes of Good Practice deals with how to implement BEE, but not what the objectives and components of BEE mean. This led to an inconsistent application of BEE.

She proposed the new structure for Codes of Good Practice that would include two phases. The benefits of the new structure were that it followed the logical flow of BEE and that it was flexible enough to allow for expansion or reduction of particular principles without compromising the structure as a whole. The overall goal of this new structure was to move away from a narrow conception and toward a broad based definition of BEE. They had developed a new scorecard for evaluating a company’s adherence to BEE. This new scorecard would include targets, give points for businessed that employ a certain percentage of women, and give preferential procurements. Thus it was assessed using broad-based BEE contributions rather than on black ownership only.

She continued that they had identified the key issues that arise when industries try to set up a BEE charter and they have produced outlines for the process of moving into a charter. Those business using the narrow definition of BEE would have a grace period of twelve months to move toward the new broad based definition. The BEE would create operatives to go to companies seeking accreditation for compliance with BEE mandates to check that the companies were meeting the new broad-based definition.

Ms Buthelezi reported that a more general and meaningful type of black ownership in white companies was required. The goal was to increase black ownership not only in quantity, but also in quality of ownership. Therefore, ownership would be measured in terms of voting rights (their decision-making ability within the company) and how black shareholders collected their dividends. There was a need to "pierce the corporate veil" to see how many black shareholders a company had and how much control these shareholders wielded. She argued that parent companies used holding companies and that people with assets in these smaller holding companies did not actually have much to do with decisions in the larger parent company. This was a way for companies to report that they had black ownership while minimizing the role those black owners could play. True empowerment could not rest solely on ownership; rather, it must reflect decision-making ability within the company.

Discussion
The Chairperson asked if the BEE process would be binding at Local and Provincial Government level because most of the fronting happened there. Would the Minister simply take action when and as necessary? She also asked how the DTI would go about detecting fronting such as the case reported in the media of a man who was named as a director of the company and he was not aware of this.

Mr J Sibiya (ANC Limpopo) said the Code 100 on ownership referred to voting rights. Did this imply that the beneficiaries would play a role in the decision-making of the company, especially transnational companies? He suggested that instead of trying to reduce fronting (especially by multinational companies) one should rather be putting something in place to close the gaps that allow for fronting.

Mr T Setona (ANC Free State) asked what the basis was for the lack of understanding of BB-BEE. He said a distinction needed to be made between the legal interpretation of BB-BEE and the ideological understanding of BB-BEE. Secondly, he asked what the divergence of opinion was and the degree of consensus among the people involved in the consultation process and what the time frames were to conclude the process. Thirdly, he asked if institutional capacity was adequate to cope with the ambitious and positive process especially when it came to Local and Provincial Government level. He gave the example of mechanisms to detect fronting and sham transactions.

Ms Buthelezi said the concern about fronting would be eliminated by the Codes because rating agencies would be able to assess effective levels of black ownership instead of having companies simply show them paperwork without real verification. The Department itself would not physically do the audits. Rating agencies would do the BEE audits and go out and count heads. It would not be necessary for the municipalities to do this assessment because BEE credentials would be verified beforehand. No company will receive accreditation without verification of all the relevant facts. The DTI was currently working on a specific code to deal with fronting. The public sector could reduce fronting by asking private companies for their BEE scorecard prior to doing business with them. All Departments in all spheres of Government were required to apply the guidelines of BB-BEE when transacting with private companies.

Mr October said that there were legitimate concerns regarding the ideological and legal understanding of BEE especially when one considered NEDLAC and COSATU’s concerns. The misunderstanding of BEE derived from people using the narrow conception of BEE to say it was elitist. But BB-BEE avoids this objection because its general terms allow for more inclusion and requires that power in the company be made available to a wider group of people. He said that the Department was still discussing the issue of more local involvement. He added that foreign investment was currently not excluded from BEE; so all foreign multinationals are subject to its standards. Criticisms of BEE were also used as an excuse not to introduce BEE and often BEE was circumvented by the introduction of models that merely produced patronising relationships.

He said the labour movement had raised two main concerns: one with regard to the approach to BEE and secondly in regard to the importance of job creation at the local level as a measure of BEE. The Department was still involved in discussions regarding this.

Further codes were still being developed for state ownership and foreign based ownership. He said there were no exemptions as far as local and foreign enterprises were concerned. There was some flexibility where licencing was not required and especially in the motor and finance industry where companies could come up with alternatives to equity requirements by introducing skills development programs for example.

Ms Buthelezi referred to the question on multinationals and fronting and asked what informed Mr Sibiya’s thinking about this. The Chairperson asked that this should wait until further questions had been asked.

Mr D Gamede (ANC KwaZulu-Natal) asked whether Slide 25 dealing with the scoring of Economic Interests (I.I.2.4) should read 4 and not 8. He referred to Slide 8 that stated the process was based on "international best practice". Why was this not based on South African standards? Women were referred to in Slide 13. A lot had been mentioned about giving points based on the number of women in a company. Why were other marginalised groups of people not included. Slide 15 stated that "only sectors that interacted directly with Government" would be involved in the process. Why was this not all sectors? Lastly would the Department monitor progress in the BEE process.

Ms M Themba (ANC Mpumalanga) commented that the DTI should take steps to ensure that people at grassroots level understand the meaning and benefits of BEE. As regards voting rights, would there be a board to oversee that the process was done correctly and would all provinces be represented on such a board?

Mr Sinclaire (NNP Northern Cape) commented that white women had been previously classed as Previously Disadvantaged Individuals (PDIs) but the emphasis was on points for black women in the company and not white women. He noted that the challenge was to breach the divide between the first and second economy in South Africa. He also asked why the Department did not give bonus points to companies that create jobs in rural areas.

Ms Buthelezi explained the allocation of points in Slide 25 saying that the compliance target for economic interest was 25% and when it was not restricted in any way, one got 4 points. The compliance target for women was 10% and out of the 25%, 10% should be allocated to women. The weighting of 8 points was for the unencumbered portion.

Referring to international best practice she said there was only one standard for an audit and South Africa had been a signatory to these international accounting principles.

Ms Buthelezi said the economic rationale for women was based on the figures provided by Statistics SA. The percentage of women in the population must be reflected in the BEE policies.

She said the process was only for sectors interacting with Government because the Department wanted to caution against every sector of the economy asking for a charter. The Department could only monitor enterprises where government had leverage and where the carrot and stick approach could be used. If companies were not interacting with Government there would be no way government could enforce anything.

Ms Buthelezi said that the establishment of the Advisory Council would be finalised by the Minister shortly. The Advisory Council’s role was to monitor the BEE process and to engage the Charter Council in a particular sector. Rating agencies would compile data for the Advisory Council and the latter would advise the Government and the President with regard to progress in BEE.

Mr October added that the Government remains committed to a non-sexist South Africa and that employment equity still applies to white women as well. He argued that while white women have been discriminated in the labour market, black women have been discriminated against in terms of ownership as well as in the labour market. The BEE emphasised black women because white women had never been restricted from owning a business, whereas this was the case for black women. There were incentives in place for companies to go into rural areas. A different score card was used for community and corporate social investment and extra points could be scored here by enterprises.

Ms Buthelezi said that companies were beginning to realize that it is to their benefit to go to rural areas and that the DTI scorecards for rural areas would ensure that the company allowed the people in rural areas voting rights in the company.

Mr Gamede said that he wished the Department would reconsider including other marginalised groups. He strongly proposed that the youth be included in the empowerment process. The youth should see the Government doing something about the issue of empowerment.

Mr Z Kolweni (ANC North-West) reemphasised his concern for rural areas in that they desperately needed businesses to come and provide job opportunities.

Ms Buthelezi said that companies had complained that there was no one single standard for BEE, but this new BB-BEE got rid of variations among BEE evaluations. She added that in order to link ownership and empowerment, one had to look at what is currently here in South Africa and how to divide that up fairly and create new enterprises that have black owners from day one.

Mr October stated that the agricultural charter will not only deal with equity, but will also deal with rural development so that BEE could take hold in both urban and rural environments.

Ms Buthelezi said there would be a simpler version of the Code. Also, as regards taking the process to rural areas, she said several companies were establishing funds that played an advisory role and ensured that communities had voting rights and were empowered by BEE.

Regarding empowerment and the first and second economy debate she said they were finding ways to develop infrastructure in rural areas and also to increase access to financial markets for black people as part of the Financial Services charter.

Mr Setona asked whether Parliament still had to ratify or adopt the code.

Mr October said the legal power rested with the Minister of Trade and Industry to formally issue the Codes. The Minister would still consider all inputs.

Mr Setona referred to the debates around the BEE process and said some of the discussions and debates with NEDLAC should be brought to the Committee. He also wanted clarity on the rating agencies and who they were – were they accounting companies that would be contracted? He asked for clarity on the difference between employment and ownership and how the two were applied. Were they interchangeable? He gave the example of foreign companies who merely appoint a number of black employees.
He asked how the regulation of multinational versus local companies was monitored to ensure that local markets were not subdued by the power of multinationals.

Mr Z Kolweni (ANC, Alternate) said he was also worried about the rural areas and there was always a bias towards the cities. He asked if there were any incentive schemes for BEE to move to rural areas.

Ms Buthelezi said that previously BEE assessments were done inconsistently by the different rating agencies. The new accreditation system created one standard and harmonised the different rating standards.

On the issue of the link between employment and ownership and how the two could be reconciled, she said that division of the economic cake was the first leg and the second leg was to create new enterprises with black partners from day one. When one was looking only at ownership it was not so easy to create jobs as well. There were many initiatives the Department was investigating with a view to increasing foreign investment and ensuring that jobs were created.

On the role of multinationals she said it was important not to generalise. Each sector was very different and before the transformation agenda could be introduced one had to understand the sector and the way the sector worked. For example, there was a big difference between the ICT sector where little value was added locally and the motor industry where local content was much higher. One could not have one policy for all sectors.

Mr October said the development of rural economies was a very big issue that concerned different Departments such as Land Affairs, the Department of Trade and Industry and Agriculture. A number of initiatives were in place but in terms of BEE the Department wanted to ensure that all rural economies underwent BEE and the Agriculture Charter was key to this process. The Agriculture Charter would not only deal with equity, but will also deal with rural development so that BEE could take hold in both urban and rural environments.

Committee Programme
The Committee discussed unanimously adopted the programme.

The meeting was adjourned.