Democratic Alliance

Proposals to help Broad-Based Black Economic Empowerment deliver on its potential

29 August 2012

Introduction

During apartheid, racial separation was South Africa's defining characteristic. Black South Africans were deliberately disadvantaged and denied economic opportunities. Black people were subject to a ruthless form of asset stripping and restrictions: labour laws that prevented their advancement, land appropriation, business regulations banning ownership, Bantu education, and laws that kept black South Africans from living in the metropolitan areas.

The DA looks forward to the time when everyone participates fully in a non-racial economy and society. South Africa is on a journey to achieving justice for everyone. At the present time, we need to make strategic interventions to counter the effects of apartheid's asset stripping and restrictions. This can be described as redress: putting right the wrongs of the past. Broad Based Black Economic Empowerment (B-BBEE) is one of these interventions.

The Constitution provides a mandate for B-BBEE, as it supports measures to empower categories of persons disadvantaged by discrimination. The DA believes that B-BBEE is necessary for three connected reasons: redress, reconciliation and economic growth.

The DA defines redress as the implementation of corrective action to address the material and social legacy of apartheid. This legacy is reflected by high levels of income inequality, social exclusion and skewered land ownership. Redress is a driver of reconciliation. It finds expression in the equality clause of the Bill of Rights, which undertakes to take "legislative and other measures" to "protect or advance persons, or categories of persons, disadvantaged by unfair discrimination".

The DA describes reconciliation as the process that brings together South Africans who have been divided as a consequence of our history of racial discrimination and oppression. Apartheid caused incalculable emotional pain and material deprivation. Our vision today is for every South African to be a full stakeholder in our democracy. Individual dignity must be the touchstone of our collective endeavours.

Reconciliation is inspired by the preamble of the Constitution, which enjoins us to:

Recognise the injustices of our past;

Heal the divisions of the past and establish a society based on democratic values, social justice and fundamental human rights; and

Improve the quality of life of all citizens and free the potential of each person.

Within this context of redress and reconciliation, the DA supports the underlying principle of B-BBEE. This can be defined as the use of state purchasing and regulatory power to increase participation by black people in the economy. This is primarily achieved by giving recognition and preference to enterprises that authentically contribute to B-BBEE.

The DA stresses B-BBEE must be authentic because South Africa today is one of the most unequal societies on earth, with one of the widest Gini coefficients: the relative gap between the poorest and wealthiest. Inequality is choking our democracy and undercutting the social justice aims of the Constitution.

The majority South Africa's people have a legitimate claim to economic redress. If we do not succeed in providing redress, the process of reconciliation, and how we relate to one another, is put at risk.

B-BBEE is, in fact, necessary to the well-being and security of all South Africans. It is predicated on a conviction that we are greater together than we are on our own. Broad-based empowerment is therefore critical to our future.

The DA is concerned that the guiding principle of B-BBEE is being undermined by a number of factors that have played out in the headlights of the media. These include a ‘get rich quick mentality' among some B-BBEEE tenderers; ‘fronting'; ‘tenderpreneurs'; lack of long-term sustainability, and that some B-BBEEE beneficiaries do not feel incentivised to create opportunities for others.

These consequences undermine the redress and reconciliation imperatives of the Constitution, as well as the animating principle of B-BBEE. We will need to work to not only make right the technical and legislative changes to make B-BBEE truly broad-based, but also to deepen the public's understanding of how important B-BBEE is to our future success. The initial focus of narrow-based empowerment has probably taken us backwards as only few have benefited at the expense of many entry-level jobs.

Unfortunately, the issue has too often divided along government/opposition lines. A new approach is needed. We need to work to restore people's faith in B-BBEE. The DA believes that we need to change how we implement B-BBEE: by altering the scorecard, not discarding it. There have been some notable successes in B-BBEE, and the DA has a public duty to submit working principles to make it work better. This can be done by sharpening the definitions, streamlining and altering the weightings of the scorecard.

The DA believes that the best and most sustainable way to achieve reconciliation and redress is through a growing economy, clean government and excellent service delivery. B-BBEE cannot be viewed separately from education and the wider macroeconomic framework.

If we do not ensure that the poor are provided with a decent education and skills training, there is a ceiling to growth and development. B-BBEE reform will not work unless we also change the education system at the same time.

B-BBEE will work best within the context of strong economic growth. The DA 8% Growth Plan would create the prosperity for B-BBEE to work better. Our Plan means that every person will be guaranteed the opportunity to show the best that there is in them. In time, B-BBEE will not be needed when the country attains a certain level of development: when people can earn enough to take care of their family and build a modest savings.

Some of the biggest barriers to entrepreneurialism in South Africa are our chronic low savings rate, scarcity of investors and lack of capital liquidity. Yet, there is a lot of footloose capital in the world looking to be invested somewhere today.

For B-BBEE to succeed, we must have a proper system for attracting foreign investment, treat it predictably, have the appropriate infrastructure, and have a legal system that functions fairly. Our B-BBEE policy unfolds within this context.

In sum, the DA's approach is a unified one: ensuring that the Constitution continues to frame the principles of B-BBEE, and creating the right policy environment for it to succeed. The work of reconciliation and redress will only be done when millions of poor South Africans benefit from the policy. Our proposals seek to do just this.

A revised model for B-BBEE

There are three sets of legislative and regulatory frameworks that have a definitive impact on how B-BBEE is implemented, namely:

 The Broad-Based Black Economic Empowerment (B-BBEE) Act of 2003, which provides the legal framework for government to achieve its B-BBEE objectives;

 The Codes of Good Practice on Black Economic Empowerment issued in 2007, which provide practical guidelines for the implementation of B-BBEE initiatives and the measurement of empowerment contributions in terms of the B-BBEE scorecard; and

 The Preferential Procurement Policy Framework Act (PPPFA) of 2000, which guides the way in which B-BBEE principles are integrated in government procurement decisions.

Amendments to the PPPFA and the B-BBEE Act were published in December last year. The DA is in broad agreement with them. However, we will use our interaction in the Portfolio Committee on Trade & Industry to gain clarity on Section 12A of the Amendment Bill to the B-BBEE Act. This gives the Minister the right to allow organs of state and public entities to determine their own "transformation policies", which would take precedence over the Codes of Good Practice. We remain concerned about the potential abuse that this could give rise to.

The DTI is expected to release a revised version of the Codes of Good Practice soon.

After in-depth analysis and engagement with a broad range of stakeholders, we are able to make practical recommendations on how these frameworks can ensure that B-BBEE works better.

The Codes of Good Practice

The B-BBEE Codes of Good Practice provide a framework for the implementation of transformation initiatives by the business community. The seven elements of the original B-BBEE Scorecard were:

- Socio-Economic Development

- Enterprise Development

- Preferential Procurement

- Skills Development

- Employment Equity

- Management Control

- Ownership

These elements represented different ways in which South African businesses could contribute to changing and broadening the composition of the economic base.

The Democratic Alliance believes that there has been an over-emphasis on the ownership component of the empowerment scorecard. Too few have benefited from government's insistence on focusing just on ownership over the past few years. This has been to the detriment of other B-BBEE components that encourage access to economic opportunities and innovation.

There are a number of reasons for the initial focus on changing ownership as the key mechanism to achieve redress. These include:

 The Department of Trade and Industry's decision to allow for a one-year transitional period following the publication of the final Codes of Good Practice: An entity's empowerment performance was assessed on a so-called "narrow-based" scorecard. Transformation was measured solely by the ownership component and the involvement of black South Africans on its board and senior management. The Treasury did not align preferential procurement with broad-based codes until December 2011.

 The lack of alignment between national procurement regulations and the full B-BBEE scorecard: Government procurement initially considered black ownership alone as an indicator of an entity's contribution to transformation.

 The widespread public perception that views black ownership in South African companies as the primary measure of progress towards equity.

The DA believes that it is important that institutional modes of economic progress and empowerment also contribute to other NDP aims. This includes job creation, access to education and skills development opportunities, and the expansion of the economy through the creation and support of small businesses.

This can be achieved by recognising the importance of skills-building, enabling new entrants to access the economy, and streamlining the B-BBEE scorecard to align it with the NDP's objectives.

Cabinet has approved the revised B-BBEE Codes of Good Practice to be published for public comments. The DA will use the public consultation around these proposals to advocate for a number of principled changes to B-BBEE (discussed below).

The Preferential Procurement Framework (the Procurement Act)

The Procurement Act preceded the B-BBEE Act and the Codes of Good Practice, and initially only obliged organs of state to give preference to procurement from firms with black ownership. New procurement regulations under this Act came into force on 7 December 2011.

The B-BBEE amendment bill published for comment in December 2011 prescribes that the empowerment status of firms tendering for government business must be determined on the basis of all B-BBEE elements, rather than ownership alone.

This represents a welcome alignment between the Codes of Good Practice and procurement regulations and can reasonably be expected to encourage the business community to broaden its focus in terms of empowerment to include alternative empowerment mechanisms.

The new procurement regulations also specify certain sectors (e.g. locomotives, rail rolling stock, buses, power pylons, canned vegetables, clothing and footwear) in which government entities will be encouraged to buy locally manufactured goods with the aim of preventing the de-industrialisation of South Africa.

The local content requirements will only be sustainable if they are implemented in parallel with efforts to improve the competitiveness of local manufacturing - e.g. through easing the regulatory burden on South African businesses, developing an appropriately skilled labour force and preventing labour regulations from increasing the cost of doing business without concurrent improvements in labour productivity.

The B-BBEE Act

On 9 December 2011, the Department of Trade and Industry (DTI) announced proposed amendments to the B-BBEE Act of 2003.

The DA supports the intention of the bill to prohibit and punish fronting activity, the clarification in terms of the definition of fronting and the strict penalties proposed for entities found guilty of fronting. It is particularly important that fronting in all seven B-BBEE elements is recognised as an offence - and not just the misrepresentation of black ownership.

We do, however, object to the proposed changes to the B-BBEE Act (section 12A) which gives the DTI Minister the right to allow organs of state and public entities to determine their own "transformation policies", which would have precedence over the Codes of Good Practice. This introduces legal uncertainty and can perpetuate the situation where black ownership is deemed to be the only indicator of an enterprise's contributions to empowerment.

There are also certain aspects of the proposed amendments on which we would request further clarification, including the following:

 The Amendment Bill seeks to establish a B-BBEE Commission. This Commission is expected to be "impartial and perform its functions without fear, favour or prejudice". The head of the Commission will, however, be appointed by the Minister of Trade and Industry and will be subject to policy statements and directives issued by the Minister. The DTI will thus have to give additional assurances that the Commission will remain impartial.

 The Commission has the power to investigate allegations of fronting and may delegate its "duties and functions" to the Special Investigating Unit or "any other person or organ of state". We believe that it is necessary for these powers of delegation to be clarified.

 The Bill requires that all "public companies listed on the Johannesburg Stock Exchange" provide to the Commission (a) "the report on their compliance with B-BBEE" and (b) "any other prescribed information". Given the already cumbersome regulatory environment in which South African businesses have to operate, we will question the limitations on the powers of the Commission to call for information.

One of the key concerns relating to the implementation of the Codes of Good Practice since 2007 is the unresponsiveness of the DTI in dealing with questions on the interpretation of the codes. The B-BBEE Commission will now take responsibility for responding to technical questions. The DA will require specific information on how the Commission will be capacitated to deal with these queries.

We will take up these matters with the DTI when the amendment bill is discussed in the Portfolio Committee on Trade and Industry.

An alternative approach to Broad-Based Black Economic Empowerment

1. Recognition for contributions to job creation

We will propose an increased weighting to the socio-economic development component, and call for points to be awarded in recognition of employment creation. In the original version of the codes, this component accounts for only 5 of the 100 points on the scorecard for generic enterprises. Employment is the most sustainable way to lift people from poverty, and it acts as an economic multiplier by increasing people's purchasing power. Specific recognition must be given for job creation by South African businesses. Indeed, it is vital that businesses are rewarded for their contribution to job creation. Incentives must be created for entry-level jobs in particular, in order to ensure that as many South Africans as possible are able to access the economy.

The recognition could be based on proportional annual increases in job opportunities offered by an entity.

The proposed consolidation of the employment equity and management control elements and the merger of the Preferential Procurement and Enterprise Development elements into a Supplier Development Element will allow scope in the scorecard for such an increased weighting.

2. Encouraging access to employment through the Youth Wage Subsidy

An alternative scorecard should recognise job creation via the proposed Youth Wage Subsidy programme.

As it stands, the scorecard for the skills development element awards points for the percentage of black employees participating in learnership programmes offered through the Sector Education and Training Authorities (SETAs).

SETAs are an unwieldy and ineffective tool to bolster skills development, lacking the flexibility to respond to the market.

Businesses should be incentivised to appoint young South Africans - thereby contributing to their skills base and work experience and improving their chances of becoming permanently employed.

3. Encouraging participation by black new entrants in ownership transactions

The DA will also propose increased recognition for the participation of "black new entrants" in ownership equity programmes. The ownership element currently awards only 2 bonus points for equity deals that benefit individuals who have not previously held ownership in other entities with a total cumulative value of more than R20 000 000.

These points can be increased, while reducing the threshold for qualification as a "black new entrant". This will promote broad-based participation in equity transactions, and help reduce the incentive to "re-empower" the growing number of super-rich black South Africans. 8

The DA believes that there should be a cap on the monetary value for individuals and companies participating in B-BBEE deals. This will not block black entrepreneurs from investment opportunities. Rather it will determine the extent to which their participation will be deemed to contribute to broad-based empowerment.

4. Allowing local companies to make use of equity equivalent programmes as an alternative to ownership reform

The present Codes allow foreign-owned companies to adhere to specified development programmes as an alternative to equity transfers. Contributions are measured against 25% of the value of the entity's operations in South Africa. The objectives for these programmes outlined in the DTI's guideline on equity equivalents include programmes expected to contribute towards the achievement of the following objectives:

 Human development with focus on education and skills development;

 Enterprise creation and development;

• Foreign direct investment;

 Accelerated empowerment of black rural women and youth;

 Sustainable growth and development; and

 Infrastructure investment with an emphasis on developing the country's research and development (R&D) infrastructure.

These programmes have the potential to benefit many more people. They provide an alternative to ownership schemes that often tie up scarce capital in B-BBEE, without creating productive participation by black South Africans in the economy.

Equity equivalent programmes could potentially result in a significant increase in the number of empowerment beneficiaries. These beneficiaries would be defined not only as new owners or shareholders, but as any black South African benefitting from initiatives aimed at improving our socio-economic situation.

5. Incentivising both internal and externally focused skills development initiatives

Cabinet indicated that a decision has been made to make skills development more outwardly focused.

The scorecard currently only recognises contributions to skills development for an entity's own employees in the skills development component. This excludes South Africa's large unemployed population from capacity-building initiatives initiated by the business community.

The DA will propose that contributions to skills development opportunities for any South African earning less than R15 000 per month be recognised in the skills development component. Recognition of skills development contributions for non-employees will encourage businesses to invest in equipping South Africans to participate in the formal economy.

6. Increasing the weight of the enterprise development element

We support the proposed merger of the management control and employment equity elements to create an integrated measurement of black participation in strategic decision-making and key management roles. This would allow for additional points to be allocated to both enterprise development and socio-economic development.

We are also in favour of the decision to merge the Preferential Procurement and Enterprise Development elements into a Supplier Development Element. Most businesses already opt to invest their enterprise development contributions in businesses in their value chain.

The enterprise development component rewards direct contributions and investment, as well as the transfer of skills, and human capital contributions (including mentorship programmes) in support of emerging enterprises. It is a powerful tool to promote small business development.

To ensure that enterprise development initiatives assist emerging entrepreneurs who add productive value, support could be given to enterprises with black owner-managers, rather than just simply black shareholding.

Given the potential job-creating power and growth contribution of small businesses, consideration could be given to the recognition of all enterprise development initiatives in support of businesses below a specified turnover threshold - regardless of the racial profile of the small business owners.

7. Recognition for talent management strategies

Employment equity drives will only be sustainable if they are coupled with appropriate strategies to attract, develop and retain talented staff.

Recognition for the development of effective talent management strategies should be included in the employment equity element of the scorecard.

8. Recognising support for local industry

Businesses that use local resources should be rewarded for their investment in the South African economy. The DA will support changes to the preferential procurement component that increase recognition for procurement from locally owned businesses, and remove the exclusion benefit for imports. Industries that rely on imports will not be adversely affected as they will continue to be benchmarked against their peers who face the same global supply realities.

The aim must be to retain as much capital as possible in the local economy, especially in the rural areas.

9. Easing the regulatory burden on small businesses

Small and medium size enterprises employ 68% of South Africa's labour force, but carry a very high administrative burden. South Africa is ranked 35th in the world on the World Bank's ‘Ease of Doing Business' rankings, but 124th for ‘getting electricity', 76th for ‘registering property', 44th for ‘starting a business', 81st for ‘enforcing contracts', and a disappointing 144th for ‘trading across borders'.

We welcome the intention to make an upward adjustment in the thresholds for compliance for exempted micro enterprises. We similarly welcome the move to qualify the BB-BBEE scorecard and the tentative steps to ease the regulatory burden on small businesses.

We are however concerned about the proposal that requires qualifying small enterprises to comply with the full B-BBEE scorecard and believe that it is likely to make it much more difficult for small businesses to become compliant with the Codes and reap the potential benefits of a good empowerment status. This negates the potential positive impact of the upward adjustment in thresholds for compliance and will introduce further regulatory rigidity for small businesses and hinder them in their role as an engine for growth and job creation.

10. Reducing the cost of compliance

The cost of compliance to B-BBEE regulations for qualifying small enterprises can be reduced by introducing biennial B-BBEE audits that produce scorecards which will be valid for 24 months. This would also allow businesses to implement empowerment programmes with slightly longer timeframes.

Conclusion

The DA is committed to making B-BBEE work. We will table these proposals during the public consultation process and at the committee stage in Parliament. As a political party, we will continue to listen to the many people across South Africa - the jobless, the young and old, businesses and entrepreneurs - who inform our policy-making.

We need to work not only to make the right technical changes, but to deepen everyone's understanding of how the successful implementation of B-BBEE will secure greater prosperity for all. It is a question of leadership, as much as it is a matter of policy content.

In conclusion, the DA's approach is to ensure that the Constitution continues to frame the principle of B-BBEE, and to create the right policy environment for it to succeed. For B-BBEE to succeed, the millions of poor and unemployed must benefit from it, so that they can lift themselves and their families out of poverty, and become active and productive contributors to the country's economy.

Issued by the DA, August 29 2012

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