Property Codes and Broad-Based Black Economic Empowerment: briefing

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
30 May 2007
PROPERTY CODES AND BROAD-BASED BLACK ECONOMIC EMPOWERMENT: BRIEFING 
 
Chairperson: Mr Y Carrim (ANC)
 
Documents handed out:
Joint Project Facility Property Project presentation  
 
SUMMARY
The Department of Public Enterprises gave a presentation covering the disposal of State Owned Enterprises’ non-core properties. It looked at the composition of the portfolio, progress made, the implications for the revised broad-based black economic empowerment and the scoring and criteria used as a framework for the disposal of non-core properties.

Subsequent discussion dealt with the basic premise of disposal of non-core assets. Concern was expressed over their possible future use, the nature of potential proprietors, the price of property, and the concept of B- broad-based black economic empowerment.
 
MINUTES
Department Presentation
Ms C Richardson (Project Manager: Property Project) presented a discussion on the rationale for property disposal, a look at the non-core property share by State Owned Enterprises (SOE) and an overview of the breakdown of the non-core property portfolio. The latter was comprised of government disposal, housing, development, and open market property sales. A brief look at the progression of the decision to dispose of non-core properties was also provided, starting from 2005.

In 2006 two Cabinet decisions (Framework for Disposals and Disposal Policy and broad-based black economic empowerment (B-BBEE) Guidelines) were made, conditional PFMA approval was granted for Denel and Transnet, preparatory planning work was completed for Key Integrated Projects, and negotiation with government departments began. In 2007 the revision of the Department of Public Enterprises (DPE) B-BBEE Guidelines in light of the Department of Trade and Industry's (DTI) new Codes of Good Practise will be made.

Ms Richardson's presentation also looked at the status of disposals in Transnet, Denel, Eskom, and SAA; considered the implications of the revised B-BBEE codes and the key differences; provided a summary of the B-BBEE disposal guidelines; outlined the DPE's effort to promote local benefits and report on compliance; looked at the composition of the general scorecard, QSE scorecard, and scoring matrix; and finally considered some recommendations for the way forward.
 
Discussion
Mr Hendrickse (ANC) asked whether the decision to dispose of what was called non-core properties might be detrimental in the long term where it cannot be retrieved if necessary. He asked if leasing was perhaps a better option, and if there was any investigation into the use of unit trusts in order to grant ownership to ordinary citizens, i.e. not just big business. Mr Hendrickse further requested a list of the properties sold, to whom, and what the nature of the new proprietors was. Referring to page 8 of the slides presented (see documents) he asked if Rosherville should not be kept for future use. Finally Mr Hendrickse asked if the DPE has any monitoring mechanisms in place to prevent fraud in the self verification process described in slides 10 and 13.
 
Dr Van Dyk (DA) asked if Ms Richardson could differentiate between the types of property sold and their respective values. He asked if the delays referred to in slide 7, which were said to create the space for a more coherent approach to property management and disposal, were not in fact causing the property price to increase for the buyer, leading to what he called a 'penny wise, pound foolish' scenario. Dr. Van Dyk took the converse approach to Mr Hendrickse's question and asked if it would not be wiser to sell of the property sooner instead of leasing in order to avoid unnecessary costs.
 
The Chairperson said that it was understandable that the SOEs should get rid of non-core properties but the question was how they would do so. He asked if it was possible to find alternative forms of the disposal of non-core properties such as leasing so that these properties could be reclaimed if they become vital in the future.
 
Ms K Venier (Co-ordinator: Joint Project Facility (JPF), DPE) said that the project was established to provide SOEs with a framework with which to sell and focus on the sale of non-core properties. She said that the problem exists in defining non-core properties due to the diversity of the properties; the holding costs of some of them could be tremendous and of no benefit to government. She reassured the committee that every effort was made to ensure that the properties up for disposal were truly non-core properties. In terms of who had purchased the properties she said that there hadn't been many transactions thus far and those had been of an ad-hoc nature, but a report on the description of these could be provided.
 
Mr Hendrickse said that the concern was whether the properties were being sold to a small black owned company or the larger broader ones.
 
Ms Richardson said that the best way to view the problem of composition was to bear in mind the scorecard requirements, which in her opinion were very rigorous so such detail could be traced. There was also a data checklist which could be made available. Ms Richardson argued that when dealing with large disposals it was difficult to scrutinize companies individually, hence the development of such measures as the scorecard. She emphasised that there were measures in place to prevent fronting by companies such as the guidelines provided.
 
Ms Venier added that procurements had BEE requirements that had to be fulfilled and that it was the responsibility of the SOE to conduct necessary audits.
 
Mr Hendrickse asked if the same black companies could buy up most of the properties leaving smaller, less developed black firms without any acquisitions.
 
Ms Richardson said that the SOEs at their discretion would not dispose of the properties to one buyer as the approach was to dispose as broadly as possible.
 
Regarding unit trusts, Ms Venier said that it had been considered but was found to be a non-viable approach due to the massive capital expenditure required to sometimes rehabilitate these properties and make them profitable.
 
Ms Richardson said that the buyer profiles were very diverse and varied according to the desirability of the property, hence packaging was proposed where all properties could be sold in certain packages not excluding properties that might be overlooked.
 
Mr Hendrickse was concerned with the diversity of the properties and the effectiveness of packaging to sell off all the properties. He re-emphasised his concern for selling the properties of the private sector prematurely.
 
Ms Venier said that regarding packaging the emphasis was to get all the property sold, not just the most desirable.
 
Mr Hendrickse asked if there was a requirement for development of the disposable properties, especially those less developed in the package.
 
Ms Richardson said that the developmental requirement falls under the adjudication criteria with three key elements, i.e. price, broad-based empowerment, and functionality. She said that the SOEs could use the functionality criteria at there discretion.
 
Regarding the issue around the retention of Rosherville for Transnet, Ms Venier said that the services of Rosherville were no longer needed due to the extensive development of the Central Rand with much bigger facilities and potential. She said that on the 30-year planning horizon Transnet could see no need for Rosherville because Central Rand has huge additional development potential. Regarding the delay in the sales process she acknowledged Dr Dyk's concern, but considered a balance between the book and market value to be ideal and that there was a priority to close the deal given the possibility of unfair discrepancies between buyer and seller prices originally agreed upon.
 
Dr Van Dyk asked what the value of the properties was and why there were delays in the first place.
 
Ms Venier said that the delays were mainly due to process issues because of the volume of properties being disposed of and she could not see further potential for fast-tracking.
 
Ms Richardson said that the value of the property for Transnet amounted to R2.1 billion, and with Eskom and Denel included amounted to R2.5 billion which she argued was a conservative estimate and relatively small in the property industry. She said that the Department of Public Works retains more than they would want to dispose of while the SOEs are not interested in leasing non-core properties.
 
The Chairperson again asked if there were other forms of disposal where property could be reclaimed if necessary.
 
Ms Richardson said that the option of appropriation was always there. She said that in the long term leasing was not favoured due to the management issues involved in the portfolio.
 
The Chairperson said he acknowledged the issues involved in leasing but overall the answers provided were not convincing. He pointed that regarding housing properties the need for disposal by Eskom for example is clear but it becomes more complex to discern what forms Transnet should take in the disposal of their properties due to its changing roles. He emphasised the need for the discussion to follow concrete examples so as not to reach a point of ideological debate that could not be resolved.
 
Mr Gololo (ANC) expressed concern that foreign developers might seize the properties being disposed of.
 
Mr Nogumla (ANC) said that perhaps what was required was a re-evaluation of the contribution of non-core properties. Regarding B-BBEE he said the scorecards provided ascribe to a narrow definition, and which companies where benefiting was essential to discern.
 
Ms Ngcengwane (ANC) asked what the DPE's definition of B-BBEE was. She asked if it was truly broad based.
 
The Chairperson asked, given the large scale disposal, why the emergences of new local firms were not being seen. He asked how the DPE would monitor this process. The Chairperson argued that it was not only racial fronting that was being utilised but class fronting in order to gain from B-BBEE.
 
Mr Bekker asked for clarification on the scoring system. He asked how preference would be established between white firms offering a larger bid than smaller black firms and the added dynamic of big black firms biding as well.
 
Ms Richardson said that the initial biding criteria and the fact that provincial and local government would have preference meant that the seizure of non-core properties by foreign firms was prevented. Regarding the definition of B-BBEE she said that BEE was narrowly defined in terms of ownership and equity where as B-BBEE uses a larger criteria to ensure the broader distribution of gains due to factoring for example the 7 elements in the scorecard.
 
An observer from the DTI, Ms P Radebe, said that what was needed was a workshop on defining B-BBEE and its codes. However, she said that BEE dealt only with racial profiling but it was found that the needs of the black population differ. For example, she said skills development is sometimes prioritised over ownership as it provides the necessary tools for ownership. She said that the scorecard was meant to address this. Here enterprise development, skills, assistance, and sustainability were emphasised.
 
The Chairperson asked if there was any study done to assess the benefit of the new B-BBEE approach.
 
Ms Radebe said that there was a base line study being conducted, however there had been evidence from research conducted by Ernst & Young of an increase in 70% of the value shifted to new black firms from 2004 to 2005; so some change had been detected. Overall she said that there was a high degree of class consciousness in DTI's implementation of B-BBEE.
 
Ms Venire clarified that there was two steps involved in bidding for properties. The first being qualification for the bid based on the scorecard after which ones bid could be considered. Once the stage of qualification has been past further bidding criteria are implemented.
 
Mr Hendrickse re-emphasised the need to be cautious about selling off public property without a clear idea of its usefulness in the future.
 
The Chairperson was eager to hear from the JPE progress report next year. He emphasised the need for a clear sense of progress and what might cause delays and act as impediments. Finally he asked how extensive fronting was.
 
Ms Venier said she was not aware of the extent of fronting because the disposal of properties had not begun.
 
The Chairperson thanked the delegation for their participation.
 
The meeting was adjourned.