Paul Janisch

King III and the B-BBEE codes of good practice

This is an article I wrote for the Siyakha Consulting newsletter.  I should stress that Siyakha Consulting (who got there first by the way) has exactly nothing to do with EES (choose your own expletive) – and what is more the industry overwhelmingly agrees that they are infinitely better at what they do than EES will ever be. 

The Caird website is undergoing a major overhaul – so I’ll be posting a number of articles on this blog that will eventually make their way onto the Caird website.

 

The long awaited King III report was launched on September the 1^st this year and will come into effect on the 1^st of March, 2010.  It is expected that King III will assist companies in their compliance with the new Companies Act that should be promulgated in July 2010. 

King III is a framework that all companies should follow in their pursuit of good governance.  Its ambit has been extended to all entities regardless of the manner and form of incorporation in any sector, public, private or non-profit.  It aims to set standards for leadership, sustainability and corporate citizenship.  Instead of legislating the requirements (as the Americans have done with the Sarbanes-Oxley Act) it instead opts for an “apply of explain” regime.  This then allows boards to make decisions that might not be in keeping with King III recommendations but are in fact in the best interests of that entity.  The rationale behind these decisions are then required to be recorded to satisfy the stakeholders in that entity.  King III is at pains to point out that the ultimate compliance officer are the stakeholders.

 

Whilst King III is applicable to all entities, because of its intrinsic relevance to boards and board members its BEE application is limited to those entities that are generic entities.

Code	Exempt	QSE	Generic
DTI	R0-R5m	R5m-R35m	R35m+
Tourism	R0-R2.5m	R2.5m-R35m	R35m+
Construction (BEPs)	R0-R1.5m	R1.5m-R11.5m	R11.5m+
Construction (Contractors)	R0-R5m	R5m-R35m	R35m+

 

From a board perspective the management element is concerned with black representation, both from a voting rights perspective and the percentage of black people on those boards.  The table below shows the DTI’s generic management code with the top management aspect eliminated as this is not significant to King III.

 

Management Control (top management excluded)
Description		Compliance Target
	Board participation
Exercisable voting rights of black board members using the adjusted recognition for gender (ARFG)		50%
Black executive directors using the adjusted recognition for gender (ARFG)		50%
	Bonus points
Black independent non-executive board members			40%

 

King III does not make any specific reference to voting rights but it is very vocal about the percentage of non-executive and executive directors.  It recommends that each board should have a minimum of two executive board members (who should at least be the CEO and CFO) and that the majority of the board should be non-executive.  The thinking behind this is that an executive director should not be in a position to exercise an undue influence over other executive directors who are employees of the company.  Furthermore the majority of non-executive directors must be independent.  One of these independent non-executive directors must be the chairman.

If a board is pursuing points under the management element they might want to follow this example of a board of five people.

 

1)    Each director should have an equal number of votes

2)    At least two of the directors should be black women

3)    If there are two executive directors one of them should be a black woman

4)    Of the remaining directors two should be independent non-executive directors and one of those should be the chairman. 

5)    One of the independent non-executive directors must be a black person

 

We will be hosting a breakfast session next year on King III and BEE.  If you would like more information email me.

There are a few other acts that have a bearing on the behaviour of directors.  I am going to do a lot more research on this and post something as soon as I have - I think it might be found within the King report.

Pravin and the PPPFA (not quite Peter and the Wolf, but there is a jungle element in it somewhere)

This is a repost - I messed around with the blog and lost the post.  Sorry Mike - I've also lost your comments.

 

 

In municipalities and government agencies, similarly, spending on unnecessary travel and entertainment, unfocused consultant contracts, procurement supplies at uncompetitive prices and layers of administrative paperwork that interfere with getting the job done, will be cut.

Pravin Gordhan - Medium Term Budget Policy Statement (27 October 2009)

 

This quote comes from the Weekender’s Thought of the Week.  Our new Trevor (the real one was seen by me with Maria shopping for veggies at Woollies in Hyde Park on Saturday) has impressed me no end.  I think there is a wealth of information contained in this quote.  I suppose being a consultant who does a fair amount of work with the public sector I should be concerned, but that isn’t the phrase that interests me.  Take a look at “procurement supplies at uncompetitive prices”.  This simple phrase effectively affirms Treasury’s view on the PPPFA and the preference points’ ratio.  In the space of a few words Pravin has shot down guru jungle and other lobbyists who chant an “empowerment at all costs” mantra.  So much for sir jungle of jim proclaiming that the PPPFA should be scrapped altogether or insisting on a 60:40 regime.

Which brings me to what I really want to write about – the PPPFA.  I’ll consider it my public sector, public service duty to list a few little known facts about this mysterious act.  The PPPFA is just another one of those pieces of legislation that is badly understood and very poorly implemented.  And it is remarkably short too. 

Here are a few observations.

1)    It is applicable to those entities contained in schedules 2 and 3 of the PFMA and those contained in the MFMA (I have put up this list on the Caird website). You will notice that certain SOEs contained in schedule 2 do not use the PPPFA at all – Eskom, Telkom, ACSA (who the hell advised these guys – it is the biggest mess I have ever seen) etc.  It could be that they are not subject to the PFMA and have not been removed from the list or that they don’t know.  You will know pretty quickly if the PPPFA is at play because it will present you with a fifth hand photocopy telling you what preference points are expected for that bid.

2)    It is not a filtering tool for government procurement.  In other words if a bidder does not get a single preference point they cannot then get excluded from the entire bid process (bid is the correct word by the way).  The rules state that the preference points section and the tender section need to be evaluated separately and then the points are added together and the bidder with the highest number of points should win.  (This doesn’t apply to PPPs at the RFQ stage – as a general rule certain empowerment criteria must be met in order for a bidder to be considered for the RFP phase)

3)    The state does not need to use the PPPFA for every bid.  This would add unnecessary administrative paperwork (another of Pravin’s bugbears) in the case of goods and services that can only be procured from outside the country.  Section 3 of the act states

3. Exemption.-The Minister may, on request, exempt an organ of state from any or all the provisions of this Act

(a) is in the interests of national security;

(b) the likely tenderers are international suppliers; or

(c) it is in the public interest.

4)    As a general rule the PPPFA kicks in from contracts worth R200k. Below this figure three written quotes will suffice (actually above R30k). However I have heard that this is not a hard and fast rule – a figure of up to R500k can be contemplated before the PPPFA is used. 

I’ll dig up more information and post it up here.  My next instalment is a little discourse on King III and BEE.

O2 on the 29th

 
Another year has passed and Oliver has graduated to the terrible twos.  This year has shot by, last year this time he could walk with a little assistance and now he is running around at a pace that no one can match.  He can talk the hind leg off a donkey and has learned to throw expert tantrums.  I am now the proud father of a little boy.  I think he migrated from a baby to a little boy when we sent him for his second haircut.  The first was so traumatic for him (as it is for most babies) that he didn’t get much taken off.  The second one was a proper haircut and he was almost unrecognisable. 

We are now having a lot of fun.  We live close to a park and he regularly plays there and it is extraordinary how quickly his confidence has built up and he clambers up and down the various jungle gyms (no not that one) like a pro.  He was given his own jungle gym for his birthday which has been a total hit.

Kath bought a few cup cakes for his birthday this morning and these were far more interesting to him than the presents he got.  There is so much that you could write about parenthood – and they move between the phases so quickly that you tend to forget what the last one was like. 

Happy birthday Oliver – you’ve proved to be very up to the task of being  part of our family and I suspect that you are now going to teach us what it’s like to be part of your family.  Lots and lots of love and many more.

And in keeping with tradition at this time of year it’s important to remember that one PA Greenbaum (or Peter Green) happens to be 63 today as well.  I’ve posted up the song that demonstrates his extraordinary capability as a musician.  This song is taken from the Blues Jam at Chess album and is essentially a jam track (check out the out-of-phase PG sound at 53 seconds).  Fleetwood Mac recorded this song earlier on the Original Fleetwood Mac, that version was a lot more manic and upbeat and actually starts off with the “Love that woman” verse.  In this version Green is a little more foreboding in his vocal delivery and his guitar work is simply superb.  Long been a favourite of mine.  

Fleetwood Mac - Watch Out

And then there is Ollie.  Ollie Halsall has been a fantastic discovery, his music is completely removed from anything Green did.  You could almost regard them as chalk and cheese.  I can’t quite put my finger on why Ollie moves me as much as he does – his playing is manic and incredibly fluid (more fluid than Jeff Beck?) and it doesn’t ever bore me.  He was a great vocalist and very interesting songwriter.  This track is taken off Tempest’s Living in Fear album.  Ollie made one album with Tempest replacing Allan Holdsworth.  Ollie’s contribution to the band was significant, he was the lead vocalist, guitarist, keyboardist and song writer.  I love this song it has a very strong Queen-like feel that predates Queen by a few years, in fact I am convinced that Queen were aware of this album because it sounds like one or two famous Queen songs.  I have sent a few emails to Brian May asking him about this – when he answers I’ll be sure to post it here.  Ollie later reprised this song on Boxer’s Below the Belt album.   

Tempest - Waiting For A Miracle

Court rules out consideration of 'other benefits'

I found this on one of my Google Alerts.  It's a little too involved for a Tweet so I'll have to blog it.  Legalbrief states that it is a commentary by Cullinan & Associates Inc.  I can't find it on their website so if this does get to them - please could someone email it to me.

It involves the Provincial Minister for Environmental Planning and Economic Development in the Western Cape and Arabella (just outside Hermanus). 

The court found that

1. The Minister had acted beyond the scope of her powers in that she imposed a condition in which required Arabella to give effect to a BBBEE Agreement to provide social and subsidy housing in an area that was not on the site of the phase 2 development. The court emphasised that when making a decision under the ECA (Environment Conservation Act) and NEMA (National Environmental Management Act) the benefits and disadvantages of the socio-economic and environmental impacts of the authorised activities must be considered, not 'extraneous benefits divorced from the impacts of the authorised activities.'
2. Second, there was a reasonable apprehension of bias on the part of the Minister since an 'action group' in favour of the appeal approached the Premier of the Western Cape, who then advised them on how to go about concluding the BBBEE agreement with Arabella. This information was then conveyed to the Minister.
3. The judgment serves as a reminder to administrators and developers that the exercise of political pressure may compromise the decision making process.

There are a few interesting connotations here.  Probably the most significant one would occur in PPPs where ED and SED requirements must work within a local economic development context and not extraneous to it.

Ownersheepish

Bless me for it has been a while.  I discovered that if you get twittering your blogging suffers - something my fellow blogger Melissa Chang told me is a very normal process.   It's been a very interesting month - I went on a national tour talking to both the private and public sectors about the PPPFA regulations.  I was quoted in Business Day - something I have been wanting since I started this BEE lark five years ago and I appeared on TV.   Now before my head gets too big..........

I found this article on my alerts "BEE firms could warm up to family businesses" that initially got up my nose (I've changed tack since I started writing this post).  It's written by Cynthia Mapaure who is the financial director of the Mineworkers Investment Company and in it she avers

Family businesses employ millions of black workers yet black economic empowerment (BEE) has made only limited inroads within these companies - leading to impatience in some quarters over the slow pace of change at the core of our economy.

OK - I don't agree with this statement.  I firmly believe that family businesses should be allowed to remain exactly that FAMILY BUSINESSES.  Why on earth should they sell out to a BEE investor or any investor for that matter. 

But Cynthia goes one step further, surprising me very pleasantly.

Why would a family business that had stalled on BEE for years suddenly have a change of heart in the middle of a downturn? Chances are the company is in dire need of capital and is embracing a new partner out of necessity.

She backs this up with

Some empowerment companies still have relatively strong balance sheets and solid capital reserves. They might benefit from value opportunities like this.

Is she perhaps suggesting that empowerment companies might actually be willing to part with money for their shares - something VERY few have been interested in doing up until now.

Her concluding remarks are

If you are serious about your empowerment mission, there can be no shirking the responsibility of extending transformation to the workers who depend on these businesses for jobs and a regular income.

And this is where I draw a line.  We know where Cynthia is coming from - the byline tells us that she is the financial director of the Mineworkers Investment Company, a leading BEE company with a 14-year track record.  She does deals.  But surely someone who knows anything about deals knows that there is a scorecard that looks after the transformation of the workers.

I put it to you Cynthia - can you seriously prove that by extending the ownership of a private company to the workers you are benefiting them in any real way?  Let me tell you what I think

1. The shares ain't worth shit unless someone is going to buy them.  And in a private company situation this is not going to happen readily
2. I have yet to be convinced that ownership in a company where the shares are not readily for sale actually improves staff retention

Come now Cynthia - drop the ownership rubbish and start talking about job creation and entrepreneurship.  Focus on skills development and whilst you are at it talk to the SETAs about innovative ways to develop skills.  And then why not invest some of your own money in starting black owned family businesses that will compete healthily with white owned businesses.  Leave the ownership of family businesses alone - they are the cornerstone of our economy.

More on the PPPFA regulations

I'm warming to the regulations.  I wrote an article for the Star Workplace last week and I concluded that the current status quo should remain.  I stand by this in the sense that there were certain facilities within the old regulations that could help regional businesses etc.  These do need to be incorporated back into the new regulations (sorry Kevin I pinched an idea or two from you in my submission to Treasury - uncredited of course). 

However there is a fair amount of thought that has gone into the new regulations and it would be a little sad if they aren't accepted.

Anyway what I really wanted to write about was this little section on start-ups.

6.4 Start-up Enterprises must submit a QSE Scorecard when tendering for any contract or seeking any other business covered by section 10 of the Act with a value higher than R 5 million but less than R35 million. For contracts above R35 million they should submit the generic scorecard. The preparation of such scorecards must use annualised data

I was looking at this clause with my colleague Tsele.  I wrote something about this for the British Chamber and left it somewhat open-ended.  What I wasn't sure about was whether a standard start-up certificate would work with the new regulations.  I missed the point here; namely section 10 of BEE Act.

10. Every organ of state and public entity must take into account and, as far as is reasonably possible, apply any relevant code of good practice issued in terms of this Act
in—
(a) determining qualification criteria for the issuing of licences, concessions or other authorisations in terms of any law;
(b) developing and implementing a preferential procurement policy;
(c) determining qualification criteria for the sale of state-owned enterprises; and
(d) developing criteria for entering into partnerships with the private sector.

I cannot say that I know of many instances where section 10 has been expressly used.  It is very prevalent within the PPP space - most of the bidding consortia at RFQ phase are unincorporated SPVs and their scorcards are more a case of a commitment for the future. 

Another instance of section 10 could happen with liquor licences.  They are issued by the DTI which would indicate that section 10 is involved.  I can't find a mention of section 10 in the regulations.

This then begs the question; if section 10 is used do they have to expressly mention it.  I am quite sure they do - because how is a start-up going to know whether their start-up certificate is acceptable when bidding for state business.

And then if section 10 is used - how are you supposed to use annualised data in calculating a scorecard for contracts above R5million?  I suppose this is another one of those mysteries that the DTI themselves are unable to answer.

On the subject of liquor licences, we are hosting a one day course on BEE plans for liquor licences.  It's a great course that covers the DTI's generic codes and the Tourism Charter.  If you want more information email me and I'd be happy to send you something.

 

Transport Charter gazetted says Engineering News

Again this twitter thing speaks.  I tweeted a while ago that the Transport Charter was going to be gazetted.  I heard it from the WKRP man.  Engineering News reports that it has been gazetted - all except the Aviation Charter, which is still under section 12.  It's not up on the DTI's website yet. 

The gazetting comes in time for the BRT debate 

The Code would also ensure that the taxi industry provided commuters with reliable, safe, affordable, efficient and quality public transport services.

Good luck with this one.

As soon as it is published I'll tweet on it.

PPPFA regulations and irregular fonts

I tweeted that the DTI and Treasury had just released the new PPPFA regulations for comment.  We  have until the 14^th of September, 2009 to send our comments to either JAN Breytenbach or HML Malinga.  I suppose this post could be regarded as my opinion.  If you want jungle’s opinion you’ll find it here.  I especially love his recommendation for a 60:40 system.  He must have been advised by the person (and I know who she is) who drafted the GPG’s procurement policy all those years ago.

I was expecting a lot more from this document.  The hype that has surrounded it over the last five years has set it up to be something a lot grander than it actually is – all it really is, is an endorsement of BEE scorecards.  A rather safe compromise that may shed a fair amount of light on the dti’s attitude to BEE, which is more orientated towards compliance than actual transformation.

The most significant features

• 80:20 rule is extended to all contracts below R1million
• 90:10 for contracts above R1million
• Preference points are awarded on the basis of BEE score – with different sliding scales for 90:10 and 80:20 rules
• Historically Disadvantaged Individual (HDI) status and RDP goals are no longer used in determining preference points
• (And I quote paragraph 13) Bidders SHOULD NOT be disqualified or regarded as non-responsive for being a non-compliant B-BBEE contributor.  Under such circumstances bidders will score no points for their B-BBEE status
• Treasury wants BEE scorecards and only those issued by SANAS agencies (you know that drivel)
• Paragraph 11(1) provides for local manufacturing – for specific industries (identified by the DTI) where the award of bids to local manufacturers are of critical importance, such bids may be advertised with a specific bidding condition that only local manufacturing products will be considered.  (Keywords to consider here – blackwashing, code series 1200 and the man from WKRP)
• The regulations state (strangely because the codes don’t) any certificate substantiating the B-BBEE status level of a bidder must be based on the findings of the previous year’s financial statements of the relevant enterprise.
• You’ll still need a tax clearance certificate to do business with the government.

What I think

1. A scorecard is going to become the thing you need to do business.  But that’s all you’ll need.  Black ownership is no longer relevant unless it actually contributes significantly to the scorecard, and we all know that QSEs can rustle up 100 points without any ownership.
2. At best, the state will be able to measure their procurement.  They will not be able to target certain types of businesses – this goes back to section 217 and practice note SCM 2 of 2006 (prohibition of set asides).
3. The rigid nature of allocating preference points is going to have a negative impact on the people they are intended to benefit.  By insisting on an accredited BEE scorecard they will end up prejudicing all those entities that cannot get a scorecard done because there aren’t enough verification agencies or because an agency doesn’t service their area.  The press is going to have a field day with this when that poor black person in Polokwane gets 80 points for price and functionality and no preference points – and the white-owned business gets a total of 82 points because they got seven preference points.

The solution

Judging by Rob’s reluctance to insist on only accredited verification agencies we can assume that he doesn’t believe in them or that there aren't enough to cater for the demand.  This means that the two systems need to run in conjunction until scorecards become more prevalent.  Maybe the 2001 regulations should be used for the 80:20 system exclusively and both for the 90:10 rule. 

Broad-based BEE scorecards are extensively used in Public Private Partnerships – so there is some conditioning in certain government departments.

Anyone ever BEEn to Namibia

Last year I got a telephone call from a lawyer in Namibia.  He'd read my book and wanted me to come through and help them with a fronting problem they had.  We managed to solve this problem without me going there but since then I have harboured a great desire to do some work up in Namibia.  I spent a year on the border in Oshakati in the mid eighties and I have been to Windhoek a few times since then.  I love the people, the country and the dangerous hospitality that I experienced with one Barney Harmse.  I wrote a few articles for the Namibian Economist on the subject hoping to stir up a little interest (if anyone is reading this from Namibia - please invite me on a speaking tour, I promise I'll be there in a shot).

Namibia's BEE programme is known as The Transformation of Economic and Social Empowerment Framework (TESEF) and is supposed to have been finalised sometime last year.  A draft policy has been published but needs to be pushed through the legislative process.  Sounds strangely familiar.

The policy favours historically deprived Namibians (HDNs) and can include white women to a certain extent.

If anyone has a copy of the draft TESEF document please send it through to me - I'll comment on it in this blog. 

Mine!!!!!!!! (as Oliver is wont to say)

There's been a fair amount of speculation as to the future of the Mining Charter and how it might move across to the Codes.  It is due for its five yearly review in October this year.  I found a few articles that discuss this review.

“The Mining Charter review comes on top of the Codes of Good Practice, which are problematic, and which, I think, retrospectively 
amend the Charter,” says International Bar Association mining law chairperson and Webber Wentzel chairperson Peter Leon.

“Where the Mining Charter, I think, has fallen down is that it hasn’t promoted broad-based black economic empowerment, which accounts for some frustration with it by government and by communities.

In terms of the amendment to the Mineral and Petroleum Resources Development Act, which is not yet in force, the Minister of Mineral Resources can impose conditions on mining companies to advance the participation of near-mine communities, which new Minister Susan Shabangu referred to in her recent Budget speech.

I like the last paragraph - it's a bit of positive move towards the codes.

This next article shows how the charter's insistence on equity actually contributed to Mvela's demise

Mvela CEO Pine Pienaar  highlights a “fatal flaw” in the legislation – the Minerals and Petroleum Resources Development Act (MPRDA) and associated Mining Charter – that’s forced Mvela into the situation it now finds itself in.

Pienaar says: “The fatal flaw in the Mining Charter is the obsession with measuring black empowerment in terms of percentage equity stakes instead of taking an approach based on value. I think it’s often far better to have a 5% stake in a strong business than 51% of a weak business.

“You need to be able to dilute for value and I hope that, over time, the politicians will accept that and realise there are enough other checks and balances in place to achieve their empowerment aims.”

And here is the crux

Pienaar says the need for Mvela to maintain its high empowerment shareholding was a major constraint on the group.

Mvela’s controlling empowerment shareholders – Afripalm Resources and Mvelaphanda Holdings – are short on funds, which put severe limitations on what Mvela could do without diluting the equity stakes of the two major shareholders that had to be maintained to meet legal empowerment requirements.

Says Pienaar: “We couldn’t go to the market and raise capital to strengthen our balance sheet – as a number of mining groups have done so far this year – because that would have diluted our major shareholders.

From the horse's mouth.  The charter is a mess, and the mining codes don't make anything clearer or easier.  If you don't believe me take a look here.

Zimbabwe is paying close attention to our legislation too.  Mugwump announced a few years ago that a controlling stake had to be given to indigenes.  Gono made a recent speech where he poured water on the senile idiot's policy.

The Mines and Mineral Act should reflect an indigenous policy that encourages foreign investment. The policy should allow foreign investors who are bringing in capital to own more than 50% of the venture

Gono is acutely aware of our policies and their potential for cronyism.

South Africa embarked on a Black Economic Empowerment (BEE) drive a few years ago but the exercise is now mired in controversy after the ruling African National Congress officials got the lion’s share of empowerment deals.

I'm not too sure about the complete accuracy of the last paragraph