Paul Janisch

Whether all of an Enterprise Development contribution needs to be consumed within the measurement period

It has been brought to my notice that a certain verification agency in KZN is insisting that an ED contribution must be spent within the period that it is made. I don't agree and have written an opinion on this which you can download here.  For those who don't download, read on below.

Caird Holdings has been requested to publish an opinion as to whether a contribution made for Enterprise Development (ED) purposes needs to be completely consumed within the measurement period in order to fulfil the requirements to be awarded points under code series 600, statement 600 of the DTI's B-BBEE codes of good practice (gazette number 29617).

This opinion takes it as understood that a measured entity may outsource their ED requirements to a third party for fulfilment of their ED obligations. It is also assumed that all other requirements for an ED contribution are adhered to. The issue that this opinion addresses is that of whether the measured entity may attract the full number of points by making the contribution, be it monetary or non-monetary, during the measurement period, but that contribution is not consumed in that same period.

In addressing this question we were drawn to paragraph 3.2 of code series 600 - Recognition of Enterprise Development Contributions. This paragraph states,

3.2.1 Enterprise Development Contributions consist of monetary or non-monetary, recoverable or non-recoverable contributions actually initiated and implemented in favour of beneficiary entities by a Measured Entity

The pertinent phrase here is "actually initiated and implemented". Our reading of this statement is that the contribution must be initiated and at the very least implemented during that period. It does not state that the contribution needs to be consumed during the same period. We believe that the rationale behind this paragraph is to allow beneficiaries to continue benefiting from the contribution on a longer-term basis because this will ultimately contribute to the development, sustainability and financial and operational independence of those beneficiaries.

Our view is confirmed by Vuyo Jack and Kyle Harris in their book "Broad-based BEE: the complete guide". Jack and Harris write on page 327

Section (3.2.1) includes the words "actually initiated and implemented", which is further addressed in the statement by confirming that initiatives may not be included in the measurement unless the expenditure has already been incurred. Future commitments may not be included in the measurement. Funds set aside for initiatives not yet implemented are also not measurable as part of the contribution.

We concur with this opinion and would like to add that the measured entity will not be permitted to use the outstanding amounts that have not been consumed within the measurement period as future enterprise development contributions.

It is therefore our considered opinion that measured entity will have fulfilled their ED obligations by initiating the contribution and that there is no requirement under gazette number 29617 that the contribution has to be consumed within the measurement period.

Malema’s marchers strangers to world of work - Linda Master

The world is moving into unpredictable socioeconomic terrain. South Africans need to take responsibility and work themselves out of unemployment. There are very few adults who cannot learn something at almost any age. If only the marchers would shift their focus away from Malema’s exuberant fantasy life towards focusing on establishing and supporting microbusinesses. Tiny businesses may never make them rich, but will certainly go a long way towards healing the devastating indignity of unemployment.

via www.businessday.co.za

Tragically apt - South Africa cannot afford to lose another generation.  Throwing ED money at these people is not going to work either.

FSC still struggling - but not with ED

Is it on, is it off?  I spoke to someone who has been involved in the Financial Sector Charter negotiations last week and they told me it was still on.  I was told that the once empowered, always empowered details had been finalised and that signatures were imminent.  My most excellent friend Leila told me what she knew - which is that it was still on.

But yesterday the City Press reported that banks were contemplating pulling out of the charter.  

The threatened walkout by the banks appears to be over a disagreement with social partners, most notably labour and NGOs, over ownership targets. This disagreement has effectively rendered the charter paralysed, with no yearly report filed to the Financial Sector Charter Council since 2008.  Civil society wants the black ownership targets of financial services raised from the current level of 10% to 15% by 2014. But the industry frequently argues that international banking regulations mitigate against this. 

The same perennial argument that keeps on rearing its ugly head.  The author of the City Press article, Thebe Mabanga, puts the issue in the friendliest possible way (if you want a more complicated explanation take a look at my post from April, 2009)

This is because in banking ownership shareholding above 10% confers a status known as shareholder of reference.  This means that in the event that a bank needs to be recapitalised, as happened to some American and European banks during the financial crisis, a shareholder of reference has to contribute according to their shareholding. 
Thus if, say, Standard Bank were to go to the wall and required a R1 billion bailout, the Industrial Commercial Bank of China, as a 20% shareholder, would have to stump up R200 million.  A 15% shareholder would need R150 million, the kind of sum that empowerment partners – who often have to borrow to finance their deals in the first place – would struggle to raise. Smaller shareholders do not face such obligations. 
But labour has refused to budge on the matter, first staging its own walkout from the charter in 2008.  It argues that the financial crisis showed that government bears the ultimate cost of a bailout. It further argues that the probability of a bailout being needed is low. 

Thebe informs us that the banks have approached Pravin with a new charter that they are willing to abide by.

This has gone on too long now.  The FSC is completely vital to South Africa's future.  It is a far more fluid document than the DTI's codes (or any of the other annoying transformation charters).  Most importantly - it is the only one that adequately deals with the once empowered, always empowered rule.  End this rubbish now, let's move on

AND NOW ONTO A LITTLE ED RUMOUR

I got a frantic phone call from a concerned citizen the other day.  She informed me that she had heard (still a vicious rumour) that a certain financial institution who shall remain nameless for now is/or is going to take ED money from their clients and then loan this money to black businesses.  The deal would go along these lines

• The financial institution will take 15% of this money for admin purposes (which seems to be the industry norm for ED providers)
• They'll loan the balance to black businesses at prime
• They'll write a lovely letter to the ED donor saying "here are your 15 points etc"

Whilst I like the idea there are a few problems 

1. Can a financial institution with a banking licence loan money to other people on behalf of others.  I was told that they'd need some sort of fund to do this
2. What happens to the interest and the repayment of the capital amount.  The money being loaned does not belong to the (let's call it a bank), it belongs to the ED contributors.  Surely the interest and repayment of the capital amount must be paid over to the ED donor (I don't want to call them that).  I know that a repayment of a loan messes with the long term ED points but money is never free.

I'd like to see this concept develop but it does need a mountain of refinement before it goes out.

NEF Enterprise Development project - not convincing enough

This has to be approached with a certain amount of caution.  Other than the fact that the NEF itself instills very little confidence in me, this information we get to read is sketchy, and for an investment of R5m you'd want a lot more information.

The first issue is their "blackness", they claim in the prospectus that they are a BEE facilitator.  I can't comment what they are - but I suspect they are correct.  BEE facilitators are considered in paragraph 3 of code 100

the Minister may by notice in the gazette, designate certain Public Entities as BEE Facilitators. In calculatingtheir Ownership score, Measured Enterprises must treat BEE Facilitators as having rights of Ownership held: 

• 100% by Black People; 
• 40% by Black Women; 
• 10% by black designated groups: 
•  without any acquisition debts; and 
• without any third-party rights. 

In other words they can claim the full 20 points for ownership.  I was not aware that this same status could now be used to claim themselves as black for enterprise development purposes.  They however do think this is possible

NEF has been designated as a BEE Facilitator in terms of the Codes.........Since NEF is deemed to be 100% owned by black people, the NEF qualifies as a beneficiary for Enterprise Development.  In addition, in terms of Code 600, payments made by Measured Entities to third parties to perform Enterprise Development  on behalf of the Measured Entities, qualify as Enterprise  Development contributions. NEF is therefore suitably qualified to act as a recipient of Enterprise  Development contributions and to carrying out Enterprise  Development activities.  

They've hedged their bets a bit here - claiming that they are also allowed to perform ED facilities on behalf of measured etcs.  Even though the bets are hedged they are either calling themselves category A or B beneficiaries - I can't find a BEE scorecard that confirms either status (it's based on turnover or contributor level if turnover is more than R35m).

Rule number 1 - GET A BEE CERTIFICATE FROM THE NEF BEFORE YOU DO ANYTHING

The minimum investment amount is R5m and for this you will get a section 18(A) certificate.  Even though they qualify this in a disclaimer remember no more than 10% of your income can be donated for tax deductability purposes.  

It also seems that each contribution will last for five years; viz

The NEF ED Fund will have a 5 year term for each Contributor

I read this as saying that you can contribute R5m upfront and you will accrue ED points for five years for the contribution, subject to the rules.  Effectively a company would have to project five years into the future to get to a cumulative NPAT of R5m.  I'll do the basic maths here:

• Assume that R5m target is evened out over five years.  
• This would mean that for 15 points a company would need to contribute R1m per year (this is 3% of NPAT).  
• Therefore 1% would be R333,333 per year
• Which amounts to a total NPAT figure of  R33,333,333.
• The complexity comes in determining turnover.  However the fine people at BEE-Matrix tell me that the industry average profit margin is 6.17%.  
• The turnover would therefore be R540,248, 514.32 - that's just over half a billion rand - and this is smallest company that can make a contribution.

 

I don't know how many companies there are that turnover this amount of money - but there are at least 10 that the NEF wants to contribute to them on an annual basis (that's 10 x 5 years - 50 companies).

The business case here is flimsy - it'll be a lot cheaper and I think more beneficial for you to hire a decent ED facilitator who might be able to sweat this money more effectively for you.  Someone who understands your business and looks for greater business opportunities in your ED project.

Just as I have done with EMEX - the NEF is free to post a stronger justification in the comments, in the absence of this my advice is to steer clear of it for two reasons

1. there are two many holes in the concept 
2. they are a government organisation, and I don't believe that they can do anything for enterprise development that the private sector can't do better.

The DTI's big stick

Do we need to be concerned about what Rob and the souls are the DTI are sprouting from their mouths,  especially when it comes to enterprise development?

The first thing I paid attention to was Rob muttering  "companies would have to be actively involved in fostering small businesses" in April this year.  I thought this was the stupidest idea ever (amidst all the competition for stupid ideas), and I have not changed my opinion on this.  However it has now found a close competitor.  

This quote is attributed to Sipho Zikode who is the deputy director-general for empowerment and enterprise development at the DTI.  He mentioned this at the launch of the NEF's ED plan (which we need to approach with a great deal of caution).

Zikode gave warning at the launch that there were proposals to increase the requirements of the scorecard. He aimed his warning specifically at so-called qualifying small enterprises.  We have found that some of these companies quote things they were going to do anyway as part of their empowerment efforts and claim that as a credit for participation in the transformation of the economy"

And then threatened us with 

"That is why there is a proposal now that all seven elements will have to apply (to these companies too)."

Let's go back to the first paragraph, it's quite clear that he is referring to enterprise development (he was after all speaking at an ED launch).  Is he saying that ED should be extraneous to your business - like Rob is suggesting.  In other words if you do do something that benefits both your business and the ED beneficiary but it is linked to your business you can't claim the points.  That's how I read this. 

This is quite simply ludicrous.  And again it demonstrates how little the DTI understands both capitalism and how BEE might grow the economy.  Which of course should not come a surprise considering that Rob is a serious player in the SACP.

But then who are we as the people who actually pay the taxes that fund the tenderpreneurs and other scam artists to tell the DTI how to go about BEE et al.  What the fuck, we'll try anyway even though we know that we will be continuously threatened with more onerous policies, taxes and other types of blackmail, for so-called "lack of transformation".  Never once has the DTI actually recognised the BEE strides that the private sector has made in the last four years - it's always another threat and another law.   What the DTI should do is claim (undeserved) credit for what has been done - maybe that's the converse approach.

And so, as a result of a clear lack of understanding, the DTI is going to make compliance even more onerous.  The upshot will be that scores will drop dramatically.  If this should happen I will go on a single person crusade to educate the larger corporates that they cannot expect such great scores under procurement because the DTI have now made it twice as difficult to comply with a concept that they barely understand. 

 

An overdue comment on entrepreneurship

Many years ago when I was at university I used to wonder why the cleverest people in my class at school could study anything other than medicine.  To my mind if you were that clever then you might as well do a course that required cleverness - like medicine.  

This same sentiment occurs within South Africa, here we don't understand why black people bother with getting a job when there was so much opportunity for them to start their own business.  An article in the FM, written by Willie Thabe who  is MD of the Black Management Forum Investments Company, puts this whole concept into persepctive.

global statistics tell us that only 5% of all people — black or white — are entrepreneurs at heart.
Empirical evidence from development finance institutions such as the IDC and Khula Finance suggests the failure rates of investee companies are high in spite of the fact that their core mandate is developmental. It’s a well-known fact that 66% of startups survive the first two years of business and only 44% the next two.

He then poses the relevant but politically thorny question

The moral of the story: new businesses carry a level of risk. So what is the economic benefit to a local business of developing a second enterprise purely for a good BEE score?

And he concludes with

we can’t ignore the fact that the type of entrepreneur that emanates from the provisions of BEE policy may qualify for the opportunity due to previous economic displacement but may not have the appropriate background or savvy to operate a successful enterprise despite its size.
Therefore it makes no difference where the BEE emphasis lies. The lack of a strong entrepreneurial culture is the fundamental problem. Government’s expectation of the private sector succeeding where developmental institutions have not makes the new move untenable in practical terms. For corporates and individuals to be bullied by government into a development mind-set can’t possibly be the way to broad-based economic success.

 This is very hard-hitting and relevant.  And again harks me back to the absolute lack of decent entrepreneurial talent on the BEE council.  The same problems are going to continue until the DTI and ZumachineGat actually figure this out.

Well written Willie.

New state bid to make BEE more hands-on

New state bid to make BEE more hands-on (edited)

CAPE TOWN — Amendments to the Broad-Based Black Economic Empowerment Act, aimed at shifting its focus from equity deals to enterprise development, will be tabled in Parliament by July.

They would also address sharp criticism of black economic empowerment (BEE) as only benefiting a small elite and creating a class of passive black shareholders rather than entrepreneurs actively engaged in economic activity.

Department of Trade and Industry acting director-general Lionel October said the recommendations of the advisory council  would shift the focus of BEE away from equity investment and ownership towards productive activities.

Currently, companies scored high marks on the BEE scorecard for black ownership, which gave them a high overall score even when they performed poorly in areas such as enterprise development and procurement.

A proposal being examined by the economic cluster is that minimum scores would be required for enterprise development and procurement — or the overall score would suffer. This would compel companies to aim for achievement in all areas.

Mr Davies said what was under consideration was that points would be deducted from the overall score if minimum scores for enterprise development and procurement from small companies were not achieved.

It would also not be enough to merely hand over money for an incubator or enterprise development project. Companies would have to be actively involved in fostering small businesses.

"In Asia, small and big businesses have a symbiotic relationship where big business gets a lot of input from small business and works hard to ensure that it has the required capacity and the technology," Mr Davies said.
via www.businessday.co.za

So what do you do, clap your hands vigorously and chant "should have happened a long time ago".  

The italicised and highlighted sentences are relevant.  But there are concerns

1. What's with the stick - why punish companies for not achieving a sub-minimum.  The proliferation of BEE certificates in the economy shows how many companies are taking this BEE thing seriously. Many businesses cannot purchase from smaller businesses because they buy 90% of their products from a single supplier.  And if that supplier is improving on their own BEE scorecard then we are seeing progress.  
2. I have a huge concern about companies now having to become involved with their ED beneficiaries.  This is stupid and won't work - I don't care if it works in Asia. Here companies do what they do best which is run their own businesses - not helping other businesses.

Come on Rob, the ED principle has done wonders for so many businesses - why do you want to overhaul something that isn't broken, it just needs a little refinement which includes tax breaks and other types of incentives.  And also fire that useless Zungu, what the hell has he done for any business in South Africa - other than being a professional black.

Richard Ferrer just called me and asked if outsourced incubators and other types of ED facilitators are now going to be out of a job.  I don't think so - they will need to get closer to the companies who are paying them.  They'll also need to become the bridge between the two entities.  It'll take a little creativity but they will become more relevant than ever.

What about those entities that think they might need a BEE scorecard but don't

This is a repost of one of my informative Caird Code Rules as per a reader's request.  I've added in another little feature that I've never done before - if you place your mouse on the underlined text it will show the sections in the codes that I'm referring to.

Charities and other section 21 companies that are looking for SED money

Paragraph 5 of Code 000, statement 004 states very clearly that their BEE status is not a consideration in determining whether they will be beneficiaries of SED contributions

There are some NGOs/section 21s who provide certain types of services to corporates to raise money for their core activity. Under these circumstances they become a supplier to that corporate and might be required to produce a specialised enterprises BEE scorecard (statement 004).

Entities or companies providing enterprise development services

Now this is a very common occurrence. There are many private companies providing these services, Endeavor and Raizcorp are two that I know rather well. This practice is contemplated by code 600, paragraph 3.2.5.12.  It does not appear that these companies actually need to produce a BEE scorecard to provide ED services. One of the exclusions under Code 500 (Preferential Procurement) is empowerment related procurement – more specifically (paragraph 6.5.2)

investments, loans or donations qualifying for recognition under any statement under Code series 600 or 700

This strongly suggests that that expenditure is excluded and hence a BEE scorecard is not needed.

Mazwai's views on empowerment

TOWNSHIP communities need to be empowered to develop their own economies so they can set up and sustain small businesses, said Thami Mazwai, director of the University of Johannesburg’s Centre for Small Business Development (CSBD).

I found this in today's Business Day.  This is typcial of Thami Mazwai's sentiment on empowerment.  He is part of that school that doesn't want 25% of an established company - he advocates 100% black ownership of a competitor to that company.  And he has my full support in this. 

I wrote about Mazwai before.  And I am so pleased to see that he is starting to lay the foundation for this plan.  His position as director of the Centre for Small Business Development at the University of Johannesburg, Soweto campus puts him in the perfect place to start effecting this.

Mazwai is advocating township people supporting their local businesses and not heading into Sandton or town (or any other main CBD) for their purchases.  It is a noble idea and with the correct support from ED funds it can certainly happen.  There has to be a benefit for some companies helping develop small township based businesses - these guys could open up new markets for you.  Nestle has done it quite successfully.

There was a programme in the US (Chicago) where a couple decided to only support black businesses for a year.

I think that if you do not have a structured ED policy you would do well to contact Thami at UJ, I am sure he will put your ED ZARs to good use.

Things startups do and don't need

Courtesy of Fred Wilson (love the reference to Microsoft)

Things startups do need

Sunny office

Windows that open

Democratically controlled music system

Two forms of internet access

Beer on fridays

EVDO cards

Video game system

Good coffee maker

Proximity to public transportation

Proximity to park

Heating that goes all night

Health care plans for everyone

Mac laptops with second monitors

Plants

Lots of in-person interaction

Gmail and Google docs

Soft lighting

Things startups don’t need

Fancy (Aeron) chairs

Expensive art on the walls

Vacation policy

PR firm

Dress code

Private offices

COO’s and GMs

Business cards

Microsoft products

Dental plans

Free lunches

Central air conditioning

Doorman

Phone system

Set time you need to arrive in morning

Meetings

Carpeting