Broad-Based Bee Codes of Good Practice: Department briefing

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
7 March 2006
BROAD-BASED BEE CODES OF GOOD PRACTICE: DEPARTMENT BRIEFING

Chairperson:

Department presentation on Broad-Based Black Economic Empowerment and the Codes of Good Practice (Phases One and Two)

SUMMARY
The Department presented to the Committee Phase One and Phase Two of the Codes of Good Practice for Broad-Based Black Economic Empowerment (BEE). The Codes of Good Practice emphasised that Broad-Based BEE should be measured ‘according to economic reality rather than legal form’. They outlined a scoring system for Broad-Based BEE in the areas of ownership, management, employment equity, skills development, and preferential procurement, which sought to spread the BEE beneficiary base. The scoring system for Qualifying Small Enterprises would cover five of the seven areas covered by larger companies. Micro enterprises would receive exemption and automatic level four recognition.

The dominant concern of Members was that the Codes of Good Practice were addressed towards employees in the middle to upper management levels, and did not address the majority of active economic citizens, who were workers rather than managers. Members felt that Broad-Based BEE should create opportunities for black workers in the semi-skilled and unskilled sectors, so that unemployment could be reduced.

The Committee also discussed how the Codes of Good Practice would regulate BEE fronting and the token empowerment of BEE companies that owned shares but were without assets. Members queried whether the Broad-Based BEE scoring system should be altered to reduce the concentration of ownership of BEE companies, and to reduce the geographic concentration of BEE companies in wealthy urban areas.

MINUTES
Department briefing
Mr J Ndumo (Department Director: BEE Unit) introduced BEE as a means of shrinking the second economy and growing the mainstream economy by increasing the participation of black people in the mainstream economy. Broad-Based BEE would benefit a wide range of economic citizens, including emerging black investors, black entrepreneurs, and black professionals. It would also attempt to breach the poverty barrier in the economy through job creation and corporate social investment. The Codes of Good Practice for Broad-Based BEE interpreted the BEE Act of 2004 in order to determine the qualification criteria for the licensing of companies, as well as the criteria for public entities entering into public-private partnerships.

Phase One of the Codes of Good Practice, which was adopted by Parliament in 2005, emphasised that Broad-Based BEE should be measured ‘according to economic reality rather than legal form’. BEE fronting and sham BEE transactions would be penalised. The Codes of Good Practice outlined a scoring system for Broad-Based BEE in the areas of ownership, management, employment equity, skills development, and preferential procurement, and placed companies in BEE recognition tiers according to their BEE scores. The scoring system in the area of ownership encouraged the participation of black women and broad-based schemes. It also aimed to spread the BEE ownership base by reducing the number of deals involving the top six BEE consortiums, and by encouraging new entrants.

Phase Two of the Codes of Good Practice outlined a scoring system for employment equity that allocated no points for black representation at semi-skilled and unskilled levels. This would prevent companies from achieving high scores for employment equity when they had little or no black representation at skilled supervisory, management, and senior levels. In the area of skills development, the Codes of Good Practice provided for an Organisational Transformation Index that would measure the extent of an enterprise’s commitment to transformation. The scoring system for preferential procurement encouraged companies to spend money on Qualifying Small Enterprises (QSEs) and micro enterprises; and the scorecard for enterprise development placed heavy emphasis on non-recoverable spending.

As the Codes of Good Practice defined QSEs according to annual revenue and number of employees, smaller enterprises set a ceiling on the number of permanent employees they recorded in order to remain within this definition. Consequently, the Department would change the definition of QSEs so that annual turnover was the sole criterion. The scoring system for QSEs would cover five of the seven areas covered by larger companies. Micro enterprises would receive exemption from the Broad-Based BEE scoring system, and would achieve automatic level four recognition. In Phase Two of the Code of Good Practice, the Department released four additional code statements (statements 102-104). Statement 102 on the Warehousing Fund allowed for enterprises to be awarded ownership points for notional black participation arising from ownership by a Warehousing Fund.

Discussion
Ms F Mahomed (ANC) asked how the Codes of Good Practice would regulate BEE fronting, and whether the Department kept a record of cases of fronting.

Mr Ndumo replied that the Codes of Good Practice set out risk indicators for each element of Broad-Based BEE, as well as penalties for the contravention of risk indicators. The Department was also engaging with the National Prosecuting Authority to establish a prosecution procedure for BEE fronting whereby charges would be laid not only against companies, but also against individual executives.

Ms Mahomed noted that the Broad-Based BEE scoring system allocated double points to black women, and enquired why black disabled persons were not ‘counted double’.

Mr Ndumo explained that as the scorecard restricted double counting to women, disabled black women would be counted double but not disabled black men.

Mr J Stephens (DA) commented that Broad-Based BEE would distribute economic activity more equitably, but would not necessarily contribute to economic growth as the economy was of a certain size and ‘grew incrementally’. As the majority of active economic citizens were workers rather than shareholders, Broad-Based BEE should create opportunities for these workers through procurement policy.

Mr Stephens queried whether the three-year period for the Warehousing Fund could be extended in cases where companies purchased and warehoused shares for three years, but could not achieve a BEE deal during that period.

Mr Ndumo explained that the Codes of Good Practice aimed to discourage the non-transferral of warehoused funds to BEE beneficiaries, and therefore the three-year period would be maintained as a strict parameter.

Mr S Rasmeni (ANC) observed that the Codes of Good Practice seemed to address black people who were already employed, and he asked how they would reduce the number of unemployed black people by providing opportunities for semi-skilled and unskilled workers.

Mr Ndumo replied that the Codes of Good Practice did not provide incentives to companies to employ semi-skilled and unskilled black personnel, but rather sought to create employment opportunities through preferential procurement.

Mr L October (Department Deputy Director-General) clarified that the focus of BEE was on deracialising the economy at the levels of ownership and management. As the semi-skilled and unskilled labour sectors had historically been dominated by black people, these sectors were not a focus for BEE. However, the Codes of Good Practice allocated additional points to companies in the area of enterprise development for job creation initiatives.

Mr Rasmeni enquired whether the Codes of Good Practice emphasised the transformation of middle management in the area of ownership and management control. Middle management was a crucial connection point between senior management and workers; and senior management was often isolated from the issues faced by workers through the ‘sifting’ of reports at middle management level.

Mr Ndumo explained that the Codes of Good Practice indicated transformation targets for both middle and upper management. At middle management level, the employment equity target for black personnel was 75%, and the target for senior management was 60%.

Mr L Labuschagne (DA) asked whether the Codes of Good Practice placed a restriction on the number of times a black owner could be awarded BEE points for the ownership of different companies. If there was no restriction, a small percentage of black owners could acquire control of a majority of BEE companies.

Mr Ndumo said that the consequence of the concentration of ownership of BEE companies was that BEE deals were brokered with the same BEE consortiums (the top six consortiums). The Codes of Good Practice addressed this problem by encouraging companies to widen their beneficiary bases to include black women and broad-based schemes. They also gave companies incentives to spend money on new entrants, which were defined as companies that had not achieved deals exceeding R20 million.

Mr Labuschagne suggested that white owners who managed small businesses providing services to BEE-compliant companies could face financial ruin if they were not able to meet the targets in the Broad-Based BEE scoring system.

Mr Ndumo responded that white-owned businesses could easily meet Broad-Based BEE requirements by demonstrating a commitment to transformation, particularly if these businesses were classified as QSEs. Micro enterprises were exempted from the Broad-Based BEE scoring system, while the ten-year process of implementing the Codes of Good Practice would allow medium-sized companies to meet transformation requirements.

Prof B Turok (ANC) noted that as the Codes of Good Practice were extremely complex, business managers would require consultants to explain them. The Department should produce a simplified version of the Codes of Good Practice.

Mr October conceded that when the Department presented the Codes of Good Practice to Cabinet, the President recommended that a simplified version of the document should be produced. The complexity of the document arose from the attempt to regulate both small and micro enterprises, and medium and large enterprises. BEE was focused on regulating the medium and large enterprises as 80% of South Africa’s wealth was concentrated in the top 100 companies on the Johannesburg Stock Exchange. The SA economy had a narrow entrepreneurial and managerial base, and therefore Broad-Based BEE aimed to expand the economy by expanding the managerial class.

Prof Turok expressed concern that BEE fronting was taking place through the token empowerment of ‘paper companies’ that owned shares but were without assets. This was leading to the growth of an unstable group of black-owned companies. Preferential procurement was putting a burden on public servants and government officials by setting up a conflict of interests.

Mr October responded that the Codes of Good Practice mitigated against sham transactions by stipulating that companies should transfer 10% of net equity to black owners each year. Since the issue of the Codes of Good Practice, 70% of BEE transactions were broad-based. An explicit code statement should be formulated to address the problem of conflict of interests in the area of preferential procurement.

Dr M Sefularo (ANC) enquired whether ordinary citizens were able to participate in the enforcement of the Codes of Good Practice.

Mr Ndumo responded that if individuals identified BEE fronting, they were encouraged to report this to the Department. However, enforcement of the Codes of Good Practice was chiefly institutional, taking place through the charter councils. At national level, the National Advisory Council would monitor the implementation of the Codes of Good Practice, and make policy recommendations to different sectors of the economy. South African Revenue Services (SARS) would be able to identify QSEs that were broken down with the aim of circumventing Broad-Based BEE regulations.

Dr Sefularo asked to what extent SA multinational companies operating beyond the borders of SA would be measured according to the Codes of Good Practice.

Mr October answered that a number of SA multinationals were extending the reach of their markets into developing countries in Africa and Asia. Some of the companies (such as Shoprite and Caltex) that were the highest investors in other African countries were performing poorly in the area of BEE. Other multinationals, such as the black-owned MTN, were performing well in the area of BEE.

Mr Ndumo added that other countries in the Southern African Development Community (SADC) were beginning to establish their own BEE structures.

Dr Sefularo contended that the geographic distribution of wealth in SA was uneven, and therefore the Codes of Good Practice should measure ownership of BEE companies according to geographic location.

Mr October agreed that unless the Department set targets for resource transfer, economic activity would agglomerate in urban areas as these were the locations in which BEE companies could be established with maximum efficiency. The Department was considering following the example of European Union policy on the transfer of economic activity to poor areas.

Dr Sefularo enquired whether the insurance companies that held a large proportion of the money of poor black communities would be measured according to the Codes of Good Practice so that the benefits of Broad-Based BEE could be received by these poor communities. This question was not answered.

Mr Rasmeni recalled that the mechanisation of South African industries in the 1980s caused many workers in the semi-skilled labour sector to lose their jobs. These unemployed workers were never re-absorbed into the economy. He asked if the the Codes of Good Practice would provide incentives to companies to employ semi-skilled workers.

Mr October stated that until two years ago, the manufacturing industry was shedding jobs in the unskilled and semi-skilled sectors. However, this trend had been reversed.

Mr Ndumo added that the Department would consider providing incentives to companies to engage in job creation programmes, yet it would also encourage companies to promote employees possessing ‘broad-based skills’.

The meeting was adjourned.