Codes of Good Practice for Black Economic Empowerment: Department briefing

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
18 February 2005
CODES OF GOOD PRACTICE FOR BLACK ECONOMIC EMPOWERMENT: DEPARTMENT BRIEFING

Chairperson

Presentation on Code of Good Practice on Black Economic Empowerment
Committee Programme
BEE Codes of Good Practice are on the DTI website
BEE Charters are on the DTI website

SUMMARY
The Department briefed the Committee 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 Codes of Good Practice established the idea that empowerment was not only about ownership; but rather, it should include procurement, skills development, and management. This conception fell into line with the broad-based definition of BEE.

MINUTES
Mr L October (Department Deputy Director-General: Black Economic Empowerment) stated that there were three parts to the Black Economic Empowerment (BEE) implementation process: the Charters, the Advisory Council, and the Codes of Good Practice (CGP). The Codes were now available for this Committee’s constructive criticism and for public comment.

Ms Buthelezi (Department Director: Black Economic Empowerment) stated that the CGP would be based on Broad Based Black Economic Empowerment (BB-BEE). This code was meant to be a pragmatic document and would stipulate the intents and principles of BB-BEE. Ms Buthelezi listed the current achievements of BEE. Both domestic and foreign multi-national companies now recognised BEE as a business imperative. BEE had also increased across all sectors of the economy, and the government had firmly established charters in key economic sectors such as mining.

She added that there were some concerns about BEE. There was a lack of full understanding about BEE at the ground level,. However the CGP would make the meaning and purpose of BB-BEE clearer. The lack of clarity about BEE had led to an inconsistent application of its principles. This had also led to delays in the creation of charters and slowed compliance to BEE. The Codes would address this issue of clarity so as to minimise delays. The new BEE scorecard had been completed, and this would be one of the means to reduce obscurity about BEE.

She said that the CGP structure included two phases, and that the first phase, which included ownership and management, was currently being finalised. Thus, South Africa was entering the second phase of the CGP structure that dealt with employment equity, skills development, procurement, enterprise development, and industry. It was important to use existing legislation to aid in the implementation of CGP.

Ms Buthelezi stated that the CGP structure followed the logical flow of BEE and allowed for flexibility within the code so that one part of the code could be changed without having to rearrange the structure in its entirety. The code was similar to the Generally Accepted Accounting Principles that are used internationally.

She said that within the CGP, Code 000 establishes the conceptual framework of BEE and set targets for the scorecard. The code was able to provide generic guidelines for the application of BEE. Conceptually, the CGP had established the idea that empowerment was not only about ownership; but rather, it should include procurement, skills development, and management. This conception fell into line with the broad-based definition of BEE.

Ms Buthelezi showed how the new scorecard included targets, which the old scorecard lacked. These targets included points for women. The new scorecard was conducive with BB-BEE because it was not solely based on ownership, but now included preferential procurement based on BEE contributions.

She added that Statement 010 of the Code dealt with Sector Transformation Charters. This section provided guidelines for forming sector charters, how to harmonise the different charters within the economy, and how to constitute Charter Councils and what power these Councils ought to have. Statement 030 dealt with the implementation of B-BBEE by laying out a two-pronged attack. First, policy instruments, like financial leveraging that promote B-BBEE, should be identified. Second, was the alignment of the implementation of policy instruments and initiatives of B-BBEE. The Committee should look at the differentiation between B-BBEE and the narrow version of BEE that only looked at ownership.

Ms Buthelezi added that companies ought to check that their suppliers were meeting BEE standards. There was a need to harmonise rating agencies by having the government accredit these agencies once they met the standards of BB-BEE. Currently rating agencies were inconsistent, and a company could receive a passing rating one day and a failing rating the next day from the same agency.

Ms Buthelezi said it was important to measure the level of substantive ownership in a company. Code 100 gave the criteria and means to measure black ownership in a company. This code also aimed to reduce the practice of ‘fronting’ in which companies claimed black ownership, but that ownership existed only on paper and not in the actual management of the company. The key issues to ownership were voting rights and economic interests. In order to assess the level of voting rights and economic interests black owners received, the Department needed to "pierce the corporate veil" to see the actual structure of the business. Empowerment in business had to include management and control. Parent companies used holding companies and 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 minimising the role those black owners could play.

Ms Buthelezi said that the new scorecard gave points for voting rights and economic interests, which reflected the idea that those ideas were essential to empowerment. This focus on management power pertained to their belief that there was a need for more black executives.

Discussion
Mr B Martins (ANC) said that the CGP provided a good framework that would apply broadly to all sectors of the economy, but the Committee will need to appraise the process of its application.

Dr E Nkem-Abonta (DA) said that even though the DTI had said BEE must go beyond ownership, ownership is an easier measuring stick. Moreover, people want to buy into successful companies even if their interests and managing power in the company would be minimal. He also wondered if the guidelines were objective enough to different agencies to come up with the same weighting for scorecards. Finally, he asked if they would discount the efforts made by companies that had moved toward BEE on their own accord.

Prof E Chang (IFP) asked for the exact meaning of the points and what it meant to have reached the maximum number of points. She inquired why when the Code mentioned people who are coloured; it it did not include Malays or Chinese people.

Ms D Ramodibe (ANC) questioned how extensive BEE will be if the first phase is to be finalised as soon as March.

Mr M Steven (UDM) believed that the Flowthrough Chart could be a beneficial structure. He said that the chart is based only on dividends. He argued that when considering control you must take into account the fact that the individual in the chart only had to buy 12% in order to gain control in the large parent company. So only one relatively small investment got this individual into a chain of businesses. The capital required for control had been diluted by this structure and that was beneficial.

Ms N Khunou (ANC) was excited that ownership now included control, but asked for more details about the targets and practical applications of skills development projects that would help people in rural areas become part of economic empowerment.

Ms S Rajbally (MF) expressed her concerns about fronting, and asked if the Department had the capacity to eliminate or even reduce that practice.

Ms Buthelezi responded that the Department wanted to know what it really means to give black people assets in a company. So they want to measure what the level of ownership truly is, and for that reason they need to critically examine the structure of business. She said that they had looked at the Malaysian Model and examined why it failed in certain places and succeeded in others. She argued that a company might claim 26% ownership, but that might be equal to only 1% of actual control. Therefore, one must assess the level of effective ownership, which entails determining the level of voting rights and economic interest. Ms Buthelezi added that she was not saying that the Flowthrough Chart was wrong, just that the Broad Based definition of BEE must be applied within the structure that the Chart lays out.

She added that even though they would finalise Phase One of BEE in March, BEE was a gradual process and that quality would not be sacrificed for expedience. They had taken past actions by businesses into account, but that actions taken in both the past and the present should meet the standards of the newer BB-BEE. Pensions and other government pay-outs of that nature remained colourless despite BB-BEE.

Dr Nkem-Abonta asked why pensions would remain ‘colourless’ even though South Africa was mainly black.

Mr October responded that BEE is trying to bring in new people and it is therefore necessary to change the status quo.

Dr Nkem-Abonta said that one might find that black people own more than one thinks. They did if one looks at black ownership within state owned enterprises. He added that giving added weight to inclusion of women in a company on the scorecard might lead to double counting since one black woman gets counted in two categories. For instance, a company could get points for both increasing the number of women and increasing the number of black owners simply by hiring one black woman.

Ms Buthelezi said that double counting was not a bad thing for the purposes of the scorecard. A black disabled woman from a rural area would get counted in multiple catagories, but that was fine because the aim is to empower groups of people that have been marginalised.

She added that the DTI would be promoting an educational campaign to inform businesses and investors from South Africa and from abroad about BEE. She said that BB-BEE would align itself with existing skills development programs in order to create a coherent process.

Prof Chang inquired again why Malaysians and Chinese had not been included in the definition of coloured people, and asked that these groups be added to the scorecard.

Mr October said that they would interact with representatives of the Chinese community to include them in the scorecard, but that it would take an act of Parliament to redefine the term coloured.

He added that the charters and codes are meant to interact with each other. Charters have areas where they can decide what is appropriate, while codes are primary in defining ownership and management.

Dr Nkem-Abonta said that he wanted the scorecard to select a broader group of people that had been socially marginalised instead of just women.

Ms D Ramodibe asked what mechanisms were in place to help monitor black shareholders.

Ms Rajbally said that men had dominated business and that the category for women was justified. She added that the Department needed to do more advocacy for BB-BEE.

Dr Nkem-Abonta replied that he wanted to make it clear that he did not want to discount women; he was just concerned about the effect of double counting.

Ms Buthelezi said that it was impossible for the DTI to physically monitor companies, but the rating agencies will perform audits and physically investigate claims. Furthermore, they would apply penalties to companies that were caught fronting. A company that was caught fronting would be blacklisted and would thereby be unable to do business with the government. This blacklisting would also provide a severe disincentive for the rest of the private sector to work with a blacklisted company. The DTI would be issuing a code on fronting shortly.

The meeting was adjourned.