Paul Janisch

Capital adequacy ratio explained. This is why we have direct and indirect ownership in the FSC

What really, is going to break the camel’s back as far as the banks are concerned, is the main issue of capital adequacy ratios or capital requirements.

Capital adequacy ratio is a measure of banks’ capital expressed as a percentage of a bank’s risk weighted exposure.

Also known as capital to risk weighted assets ratio (Crar), this risk is used to protect depositors and promote the stability and efficiency of financial systems around the world.

There are two types of capital that are measured: (i) Tier One Capital, which can absorb losses without a bank being required to cease trading. (ii) Tier Two Capital, which can absorb losses in the event of a winding-up and so provide a lesser degree of protection to depositors.

via www.moneyweb.co.za

This article relates to Zimbabwe's 51% bank indigenisation programme.

Mining Charter and beneficiaries

A journalist called me last night to ask me about the mining charter. I am quite familiar with it but it did require a little bit of touch-up research. The BEE codes of good practice are badly written, to put it politely, a feature that almost every other code that has followed the generic codes has adopted (the FSC is actually quite well drafted even though it does refer to the generic codes on occasion). And because the codes are not so much legislation but practice, the interpretations are very broad. The mining charter is very different – this document is analysed down to the last word by lawyers, not BEE consultants. So it follows that what we as BEE consultants might regard as being a simple typo, is regarded as something serious by a lawyer. For instance the mining charter calls for meaning economic participation – it means the HDSA (more on this below) shareholders must get some of the dividend money in their pockets and the balance used to service a debt. This has serious implications for shareholders.

The purpose of this post is the use of the term HDSA. This is a term that has fallen out of favour in the PPPFA which has replaced it with the word black. The mining charter defines HDSA as

"Historically Disadvantaged South Africans" ("HDSA") refers to South African citizens, category of persons or community, disadvantaged by unfair discrimination before the Constitution of the Republic of South Africa, 1993 (Act No. 200 of 1993) came into operation which should be representative of the demographics of the country

We must break this down into components to understand what it means

South African citizens, category of persons or community, disadvantaged by unfair discrimination

This is simple enough. We know from the HDI in the PPPFA that this includes white women

before the Constitution of the Republic of South Africa, 1993 (Act No. 200 of 1993) came into operation

The date of commencement of the Constitution is the 4^th of February, 1997. That is about 16 years and two months' ago.

which should be representative of the demographics of the country

The dreaded Economically Active Population (EAP).

What this says is that HDSAs must be reflective of the EAP (which puts African at about 85% of the population) and they must be older than 16 years, two months and 19 days (as of today). I suppose you could argue the Nasciturus Rule and include those children who were in utero 9 months before the 4^th of February, 1997. I think this is clear. But it does have an impact on HDSA's as beneficiaries. Under "Meaningful economic participation" in the charter it is stated that

BEE transactions shall be concluded with clearly identifiable beneficiaries in the form of BEE entrepreneurs, workers (including ESOPs) and communities

It is possible that the 16 year olds could find themselves as employees of a mine and be part of an ESOP, younger than 16 years olds could find themselves as members of communities. The only problem is that these people cannot be regarded as HDSAs by definition. They are too young to have suffered any discrimination before February 1997. What are we then left to assume – it must be that the usual suspects (ANC cadres typically) are the best beneficiaries for your mining deal.

I haven't run this past Percy Abelkop or Peter Leon. And I'm sure they are both aware of this. I suppose this is just another one of those ridiculousnesses that is contained in empowerment legislation. If you would like to read a very humorous article on the MPRDA you should read Peter Leon's tragicomic analysis of a good mining regime and how South Africa's is the antithesis of this.

What the law says — and means — on transformation: Paul Hoffman

It is perhaps significant that neither race nor gender is mentioned by Parliament. The quest for a nonracial and nonsexist order in South Africa calls for a transformation of mindset, not a counting of chromosomes and measuring melanin cells. Perpetuating racism and sexism in the JSC’s processes is not what the law intends.

via www.bdlive.co.za

Such a pertinent concluding paragraph.  Hoffman refers to the Manyist definition of black earlier in the article.  It seems that HF Verwoerd's legacy is a huge inspiration for our ANC legislators.  Who'd have thought that the architect of apartheid has become the darling of the formerly oppressed.

Some commissioners interpret this to mean that when the judiciary is 5% white men, 5% white women and 45% black men, with 45% black women making up the numbers (let us leave out the odious race classifications that should have died with apartheid but linger on like a bad smell), a nonracial and nonsexist judiciary will be achieved. On this interpretation, the words "broadly" and "must be considered" are given a strangled meaning that leads to an outcome that would make Hendrik Verwoerd and all other social engineers proud.

I think the thing that would have impressed Verwoerd the most is that the man who is in charge of creating the most racist policy since the Group Areas Act is in fact white.  He would have loved to have a strong black anti-black activist.

Delinquent, or absent shareholders and ownership

The BEE world is really for the good times. Empowerment likes the idea that companies make money and black shareholders get rich. It doesn't do the bad times very well, for instance if a black shareholder is unable to meet the payments for the shares then the company is penalised under the ownership scorecard. What happens if you have a black shareholder who actively does not wish to exercise his shareholder rights. In other words, what do you do with a delinquent shareholder.

Ownership is measured by both voting rights and economic interest. Lesley Fodor has in a comprehensive article on voting rights and shareholders' meetings, writes (on the issue of voting rights)

The primary rights of shareholders relate to their entitlement to vote at meetings of the shareholders. While this does not confer a direct role in management of the company (this function falling within the purview of the directors), the directors are required to implement those decisions of the shareholders, which are reserved to them.

It follows then that voting rights must be EXERCISABLE. If restrictions are found it's likely that the voting rights' points won't be awarded. If you are interested in a summary of shareholder rights have a look at this BDO post.

That's voting rights sorted. Economic interest is simply (to quote Kyle and Vuyo, page 192) "the basic monetary right of ownership. It refers to an ENTITLEMENT of black people to dividends, capital gains and other economic rights of shareholders." The operative word is ENTITLEMENT. The word does not mean that the person needs to receive cash directly through dividends, there may be an agreement that dividends will be used to settle a debt first and only then will the shareholder get that cash. Any restriction on this entitlement would be considered in determining whether the economic interest points will be allocated. An unreasonable restriction will in all probability not make it through a verification (I really do give verification agencies a lot of credit when it comes to understanding company law).

Say now you have shareholder that is entitled to vote at a shareholders' meeting but chooses not to. I am aware of a specific case where a shareholder has a majority stake in a company and doesn't seem to get on with the other shareholders and as such doesn't vote or pitch to shareholders' meetings. There's no legal reason why he can't; it just seems that he doesn't want to. This example has an interesting issue when it comes to dividends. Dividends can only be declared when a profit is made, the company in question has yet to make a profit and as such hasn't declared a dividend. The shareholders' agreement has this to say on distribution of dividends.

The shareholders shall procure that the Company shall….. declare and pay dividends equal to a percentage, to be determined and recommended by the board of directors, of the distributable profits of the Company.

This was a problematic paragraph for me but I spoke to two lawyers who both confirmed that the directors cannot distribute dividends on a whim contrary to the percentage shareholding of each shareholder. In other words if you own 25% then you will get 25%.

In this case we have a shareholder who doesn't want to vote and who has never received a dividend because the company hasn't made any money yet. This same shareholder would be described as black and therefore is very beneficial to the company's BEE credentials. That's where the simplicity stops. The company's BEE scorecard considers four other elements and ignores the ownership element – even though the company is in fact (and in law) 51% black owned. It would seem that the verification agency refused to consider this element because they could not interview the shareholder – a requirement that comes from the Udge-approved verification manual; viz paragraph 7.1.6 which states that a verification agency must

Interview a sample of the black shareholders to determine whether they understand their voting rights and whether they have exercised such voting rights independently

This cannot be regarded as fair on the company. There are no restrictions on the ownership in any shape or form, it is only the personality of the shareholder that gets in the way of the allocation of ownership points. Unfortunately there is nothing in any of the BEE information including Vuyo's Book (he does like Black with an uppercase B) that anticipates this situation even though I would suggest it is very common.

We need a solution; what I recommend is that the company follows the procedural guidelines listed by BDO and Fodor and if the shareholder chooses not to attend then that shareholder has not been denied their rights. This is the same argument that I have put forward for this case.

The problem with South Africa is that everybody wants to govern

So says Zoomer in today's BDLive

via www.bdlive.co.za

Bullshit you incompetent nicompoop.  We want YOU to fucking govern, right now a two year old could do a better job than you.

See you next Tuesday

Unfortunately we lost Richard Griffiths a few days ago.  Most will know him as Uncle Vernon in the Harry Potter movies but I remember him as Uncle Monty in the (tie for best movie ever made) Withnail and I.  The Independent writes about Griffiths' performance in Withnail and I 

As Uncle Monty in Withnail And I, Griffiths tapped into a long tradition of British eccentricity stretching back to Gilbert Harding and beyond. He was wondrously camp, holding forth about everything from his liking for firm carrots to his disappointment at never playing Hamlet. Even here, though, he never quite teeters off into complete ridiculousness. We still feel for Uncle Monty, even as Richard E. Grant yells at him he’s a “terrible c**t!”

You can withness (sic) that hysterical scene yourself.

An overview of African empowerment, indigenisation programmes

It appears that State participation, indigenisation and economic empowerment are still applied in various parts of the continent in a manner distinctive to each region, possibly as a result of the different historical backgrounds of the countries in which they are implemented. As a general overview, indigenisation does not seem to exist in Francophone Africa and more generally in West and Central Africa. In these countries, State participation seems to be mandatory only for companies created for the operation of mining projects. This is the case for all member countries of the West African Economic and Monetary Union (UEMOA) where the State must have a shareholding of 10% (Benin, Burkina Faso, Mali, Niger, Senegal…). This is also the case in Guinea, where this shareholding may be as much as 35%, 5% for the DRC or 15% for the Central Africa Republic.

Indigenisation and economic empowerment appear to be a trend in Southern and Eastern part of Africa and although several colonial influences exist in these regions, the Anglo-Saxon and Portuguese heritage remains a common feature, as does the fact that colonialism lasted far longer in this region than elsewhere on the continent. As a result, these States faced severe and potentially destabilizing disparities of wealth and resources between rich and poor at the attainment of their independence from colonial rule which, because of the economic policies of colonialism, was based on the colour line. This has been the case in the more commonly-discussed examples of South Africa and Zimbabwe but also to some extent in Namibia, Botswana, and Angola.

Indigenisation, such as in Zimbabwe, aims at giving a “controlling interest” of not less than 51% of the shares or interest in an enterprise to black indigenous Zimbabweans. Every company in respect of which 51% of the shares or a controlling interest is not held by indigenous Zimbabweans and whose net asset value is above certain thresholds (depending on the industry) must submit an indigenisation plan detailing how and when a controlling interest of its business will be transferred.

Indigenisation in other countries has been a relatively smooth process. In Angola, the “Angolanisation” policy seeks to ensure preferential treatment of Angolan Businessmen and also stipulates that companies must conform to a ratio of 70% national workers to 30% foreign workers.

In Botswana, the Government proactively encourages Citizen Businesses and Entrepreneurs. Certain categories of tenders are restricted to Citizen-owned companies only and Citizen-owned or Majority Citizen-owned companies enjoy preference during tender evaluations. Certain manufacturing activities are also restricted to Citizens and Citizen-owned companies. The Government has set up the Citizen Entrepreneurial Development Agency to provide fledgling citizen-based companies with technical, financial and managerial assistance.

Other countries tend to apply this policy for very specific and strategic sectors. This is the case in the DRC where land concessions for agriculture shall only be granted to Congolese individuals or companies having the State or Congolese individuals or Companies as shareholders.

The more sophisticated policies appear to be Namibia’s New Equitable Economic Empowerment Framework (NEEEF) which aims to provide a clear overarching policy framework into which all other policies will slot, promoting transformation in business through the five pillars of Ownership, Management Control and Employment Equity, Human Resources and Skills Development, Entrepreneurship Development and Community Investment; and of course South Africa’s BBBEE.

We will however continue to keep an eye on the evolution of the Economic Empowerment Policy in Tanzania and Zambia’s Citizen Economic Empowerment which seem to be very influenced by the South African system.

via www.lexology.com

Written by Sebastien Thouvenot of Edward Nathan Sonnenbergs. This is the most succinct overview I've read.

Free State tender flawed yet they deny it. Just in time for Easter

Mondli Mvambi, the province’s director of media strategy and liaison, says the bid documents and the process followed to evaluate submitted bids complied fully with treasury’s instruction note. “We hope this helps to clarify the matter.”

via www.itweb.co.za

You have to love the "we hope this helps to clarify the matter" comment.  Er.... no Mondli, it clarifies nothing.  Nicola Mawson told me that Free State would not release the original bid document.  This document would explain a lot, and if they don't want to release it then they certainly have something to hide.

Isn't Easter a good time for denials, somewhere in my dark Sunday School past I seem to recall that Easter and betrayal, denial and chopping off ears are synonomous.

BEE snarl-up delays Transnet’s locomotives project

A PROGRAMME by Transnet Freight Rail (TFR) to buy 1,064 new locomotives as part of an ambitious seven-year strategy to ramp up capacity is running four months late as Transnet, the Department of Public Enterprises and the Treasury fight over evaluation criteria for the multibillion-rand bids.

Transnet and its shareholder, the Department of Public Enterprises, are pushing the Treasury for a relaxation of the 90:10 evaluation formula — as stipulated in the Preferential Procurement Policy Framework Act (PPPFA) — to 70:30, in order to reach more industrial and social development goals.

The Treasury is concerned Transnet will pay a higher premium than is allowed under state programmes to leverage procurement into industrial outcomes.

via www.bdlive.co.za

Treasury are correct here. Under the 90:10 scheme the state is willing to pay 11% extra for empowerment. If Transnet gets their 70:30 then Transnet could end up paying 43% more for empowerment criteria.  It's not clear why they want to pay more for this, nor is it clear why the ratio is causing the tender process to slip up.  The article says that Transnet needs to increase the ratio "in order to reach more industrial and social development goals".   This logic doesn't work for me, why not just take 20% of the R35bn and pour it into a variety of job creation activities at those small towns that a train may go through.  

There is a precedent for this. 

The Passenger Rail Agency of South Africa, which operates Metrorail and is embarking on a R123bn fleet renewal, fought the Treasury for an exemption seeking a 65:35 split. It was granted a 85:15 exemption.

I think we need to be cautious here.  If they allocate more for empowerment the potential for corruption goes through the roof.

What’s wrong with this picture? And we thought the BMF were on the road back to credibility

There should be consequences for companies who do not comply with black economic empowerment, the Black Management Forum said on Wednesday. "These companies should be published in a public register and have meaningful fines imposed on them," the forum's managing director Nicholas Maweni said in a statement. (to parliament)

There we were hoping that once the arch racist Jimmy Manyi had left the BMF that they would start making sense again – and possibly picking up the pieces of their shattered reputation and begin contributing constructively to business issues. Alas – this is not to be. Not only is this a most ridiculous statement but it lacks any form of legal basis. It's been said before and so I'll say it again.

BEE is a voluntary process. It's never been anything other than that. The BEE Strategy document, which predates the BEE Act didn't go so far as to suggest that the process must be made compulsory. Paragraph 3.4.2 says

Black Economic Empowerment is an inclusive process. The process of BEE is an inclusive one, and all enterprises operating within South Africa CAN, AND INDEED SHOULD, participate in this process. This strategy will be implemented throughout all sectors of the economy and is not limited only to those enterprises that derive income from government procurement or those where the sector is regulated by government.

You'll notice that there is no imperative here. Words like compelled, required or must do indicate a certain element of having to do things. (By the way – that strategy document is still a very good document and contains a number of principles and ideas that have somehow lost their way in the last 10 years)

Things are a little different in the 2007 dti codes of good practice where public entities and state-owned entities are compelled to be measured under the codes. (Code Series 000, Statement 000)

3.     Application of the Codes

3.1     The following entities are measurable under the Codes:

3.1.1     all public entities listed in schedule 2 or schedule 3 (Parts A and C) of the Public Finance Management Act:

3.1.2     any public entity listed in schedule 3 (Parts B and D) which are trading entities which undertake any business with any organ of state, public entity or any other Enterprise, and

3.1.3    any enterprise that undertakes any business with any organ of state or public entities;

Paragraph 3.1.3 simply states that if you want to do business (or economic activity as Rob likes to call it) with organs of state or public entities then you are measurable under the codes. It's paragraph 3.1.4 that emphasises the voluntariness of BEE to the private sector that doesn't do business with the state etc.

3.1.4    any other enterprise that undertakes any business, whether direct or Indirect, with any entity that is subject to measurement under paragraph 3.1.1 to 3.1.3 and WHICH IS SEEKING TO establish its own B-BBEE compliance.

Even Rob who thinks he knows what he is doing (although the evidence is overwhelming that he doesn't) didn't change this paragraph that much to force companies to comply with BEE. In fact Rob left paragraph 3.1.4 unchanged in his revised BEE codes. Perhaps Rob understands that compulsory compliance would not pass constitutional muster (I wrote a long piece on BEE and the constitution here).

We can therefore ignore this reactionary submission and hope that one day the BMF starts earning respect at some stage – this is not the way to go about it.