Paul Janisch

Tiger by the tale

  I was sent a letter that Tiger Brands has sent out to its suppliers.  Sincerely signed by Peter Matlare, the letter informs us that

Tiger Brands will be taking a (far) more demanding stance on non-compliant suppliers (i.e. level 9) as well as those who achieve minimum compliance, i.e. 7 and 8.  In this regard, we confirm that suppliers with a BBBEE status of levels 9, 8 and 7, will be expected to evolve two levels per year, until a minimum level of 5 is achieved and thereafter one level per year.  It is also confirmed that suppliers who are deficient in these expectations will be granted a three-month grace period, with Tiger Brands thereafter being forced to consider alternatives.

It then requires each supplier

to please confirm your current rating as well forward a detailed plan as to how your organization plans to improve your BBBEE contributor level over the next year.

And this has to be done by the 30th of November, 2008.   Dave Webster of Rapid Transformation Services cc is the person who has been tasked to read through these business plans.  I wonder if this letter applies to ALL their suppliers or just the non-critical suppliers.  I know from my work with another FMCG company that critical raw materials do not really feature in the empowerment equation - perhaps Dave would like to clarify this?

Anyway - I decided that it would be a wonderful excercise to respond to this letter on behalf of a fictitious company called Ben and Jonny's Cellular (BJ for short).  The example is based on a real-life company who are not a supplier to Tiger but happened to receive the letter and then sent it to me.  My views on the shortfallings of the codes have been documented before - so don't expect BJ to be too apologetic.

Ben and Jonny's Cellular Current Empowerment Status

BJ is a generic company with annual turnover in the region of R300million.  Whilst this figure appears to be incredibly high it actually is a very small company employing 12 people and  profit margins running in the region of 3%.  They have been operating for about 10 years and it is because they got in early that they are still going, very few new companies can survive on these margins.

The company is a family owned business who concluded a BEE deal that failed.  The shareholder exited after about 18 months and still owes the current shareholder a few million for his shares.  His 18 months tenure does not allow BJ to use the once empowered, always empowered rule.  This leaves a single shareholder and two white executive males in management.

Staff is an even split of black and white people, with one black woman occupying a middle management post.  The balance of black staff are drivers, caretakers and admin people.  In spite of its small size, BJ operates very efficiently - each staff member has a distinct role.  There is no need to hire more people although they do hire temps on occasion.

They have achieved 12 points out of the 20 for preferential procurement and this is purely because the overwhelming majority of their purchases come from Vodacom and MTN - both of whom score very well.  There is little chance that they will be able to look at the remaining eight points because neither operator is a QSE or has sufficient black ownership.

BJ has a distributor network in many townships throughout South Africa and they spend a large amount of money on enabling and training these distributors.  For this they get 15 points for enterprise development.  They also contribute to numerous charities that gives them the remaining five points.

It must be mentioned that the current economic climate has resulted in a dramatic increase in the number of bad debts and debtors' days.  Their cashflow situation is a little rickety.

Their scorecard looks like this

Ownership - 0
Management - 0
Employment Equity - 3
Skills development - 0
Preferential procurement - 12
Enterprise development - 15
SED - 5

Total - 35

Tiger wants them to move up to at least 45 by the next year.  They've decided to go the whole hog - here follows their BEE plan.

Ben and Jonny's Cellular BEE plan

Ownership

25% of the company will cost the partner a round R10 million.  It is not a very attractive purchase because of its low profit margins so no one is really coming forward to put their money on the table.  This means that the company will have to finance the shares using section 38 (provided they meet the criteria).  They will have to use a lock in clause of at least ten years because it will take this long for the shareholder to pay off the shares.  The shareholder is doubtful whether the new shareholder will be able to increase the market share as this oversubscribed market is showing little signs of growth.  Nevertheless they'll see who will find this business attractive.  Assuming that they do get this right we can expect about 7 points.

Management

The only people who can add any value  to BJ will have to come from one of the operators.  BJ cannot pay anything close to what executives at one of these operators can command - but they'll have to dig deep to bring on another person.  Don't forget - they don't actually need another executive, the company operates very efficiently on the staff they have.  The cost of this person will reduce profit to about 2%.  For this they can expect another 6 points.

Employment equity

This is simple - retrench five of the six white people and hire black people in their place.  The CCMA is not going to look too favourably on this but it's all about points.  They will have to find similarly skilled people or spend many valuable working days on training the new people to meet the BJ standards.  Total points - 12

Skills development

The target is 3% of payroll, and seeing that they have now hired new staff and a new executive the payroll has effectively doubled.  In order to attract the six points for skills development they'll have to send all their black staff on courses for the whole year.  Remember that these six points are all about SPEND - not about qualifications.  The upshot is that the company will lose at least three quarters of the year in productivity.  Total points 6

Preferential procurement

They'll need to find a black middle man who won't be a QSE or EME.  This middle man will supply the same products that the networks do but with  a mark-up.  They can expect about 18 points.  In such a commoditised market very few customers will be willing to pay a premium for these products.  We anticipate that their turnover will drop substantially - in fact will probably push them into the QSE range.

Enterprise development

The company can no longer afford to contribute anything to its distributor network because their overheads have shot up.  As it stands the network have started looking for new suppliers because BJ is no longer a viable option.  No points

SED

Ditto - no money for charities.

BEE score in year one

Ownership - 7
Management - 6
Employment Equity - 12
Skills development - 6
Preferential procurement - 18
Enterprise development - 0
SED - 0

Total - 49

Hey they made it, what about year two

Their dubious business decisions have pushed them down to an EME level.  With the company likely to close down with six months after that.

What about Tiger then?

OK Peter, I've taken the piss.  This is a very extreme example - but I have to warn you that by forcing your empowerment agenda onto your suppliers you stand a great chance of actually causing a fair amount of damage, resulting in job losses and less tax revenue. 

How does this impact on Tiger Brands?  Simple, jobs create consumers.  No jobs - no consumers of your FMCG products.  You lose ultimately.

Perhaps you should go back to the old drawing board and find some other equitable way of encouraging transformation without such potential dire consequences.

IT portal is here at last

The BEE portal has been launched!!!!!!!!! To quote the dti

In order to ensure a better understanding and further compliance with the dti's Broad-Based Black Economic Empowerment (B-BBEE) Codes of Best Practice and Verification Manual, the Department launched the nation's first-ever interactive B-BBEE Portal, a publicly accessible central database, which features a variety of user-friendly tools to assist South African businesses, including facilities aimed at: Promoting local business opportunities; Reporting B-BBEE fronting; Managing the flow of information to the dti; and Providing a 'self assessment tool' for companies to gauge their B-BBEE status.

To access this innovative repository of useful B-BBEE information, click here.

The application was developed by B1SA.   They've done a fantastic job, I was lucky enough to see a sneak preview a week ago (you can imagine how difficult it was for me not to mention it on the blog).  It is going to piss off those companies that have developed BEE tools because it is so much cheaper.

Well done Andrew - and all the best.

Phosa - tiff averted?

I have not been posting much over the last few months because I didn't think there was much to talk about - or bitch about which is what I do mostly when it comes to BEE.  On that note I am struggling to find anyone who is actually positive about broad-based or narrow-based BEE, employment equity or anything vaguely empowerment related.

Be that as it may, we still have an issue with the FSC and ownership.  I have nailed my colours firmly to the mast supporting business here because I can't see labour and community's perspective at all.  The saving grace for this process has come in the form of Matthews Phosa who gave a very balanced speech to the Financial Sector Campaign Coalition dinner on Tuesday (no I wasn't there).  It was reported in today's Business Report.

Phosa calls for a cool-headed approach to this impasse.  He suggests that this is about a compromise, not a "winner-takes-all approach that creates long-term tension between the various stakeholders in the financial services industry".   He also drops a few hints about the shape empowerment will probably take under the new government viz:

My own view is that some of the bigger BEE transactions need to be discussed in a more transparent fashion, so that we can all understand exactly how communities and groups really benefit from these deals, if, in some cases, at all.

For me the trick lies in minutely defining how we [the ANC] ensure, as a party and as a government, that the people at the bottom of the wealth pyramid are drawn into productive economic activity.

And MOST significantly

Could banks, for instance, form more creative partnerships with training bodies and labour unions, to develop entrepreneurs and business people in the industry? In that way, we create fisher people and not receivers of fish as social handouts.

I love this stuff - we have been waiting a long time to hear this from the ANC.

The second economy
I posted something on the importance of the second economy about two years ago.  There has been a lot of thought about this economy and the importance of aligning it with the first economy.  Vuyo wrote a very comprehensive piece on the second economy and how it might not suit them to be part of the first economy and opening bank accounts and registering for VAT etc.

He concludes with

On the surface, the benefits of having small black business brought into the formal space of the economy is good for the government in accounting for its delivery, but it may not necessarily be seen by the intended beneficiaries as being good. This also applies to the BEE arena, where the interventions try to bring black people into the mainstream of the economy, but there may be black people who prefer to operate in the second economy.

Ultimately, it should be okay to have two economies in parallel, if that is what people on the ground want, rather than imposing the first economy on them just because the powers that be think it is good for them.

I know through my work with the FSC that the banks have Mzansi targets perhaps it might be an idea to take another look at how these products can meet the needs of the second economy (I can't pretend that I am an expert on this but the fact that these people are not using Mzansi accounts suggests to me that more can be done to get them to make use of them.)

I think the article is a good reflection of the new ANC's way of thinking.  It is a very good article you'd do well to read it.

I am a MAC-a-tini

  Would you believe it, unbeknownst to almost everyone I know, the Media, Advertising and Communication (MAC) Sector had been planning their own little charter which they have now gazetted under section 12.   I haven't looked through it properly but its weightings and targets are substantially different to the codes. I revert back to Kevin Lester's submission to the DTI regarding the Tourism Charter.  If you read Kevin's comments then you'll draw the conclusion that this charter will not make a section 9 gazetting.  This means that subscribers to this charter will have to produce a codes scorecard and a MAC scorecard - that is of course when the PPPFA and B-BBBE Act are eventually aligned.  (More below)

On the subject of Kevin, the DTI sent out a press release stating that (thanks Louise)

The Department has noted with concern advertisements suggesting that a partnership exist between it and the Association of BEE Verification Agencies (ABVA) and Transcend Corporate Advisors. The department would like to state categorically that no relationship exists between the department and the two organizations relating to the training sessions on the Verification Manual.

I am firmly of the opinion that ALL other BEE courses and seminars that are being offered are utter rubbish - rehashed bullshit by self professed experts who are largely clueless.

 The Transcend courses do not fit this bill and the DTI would doing themselves a favour by aligning themselves with them.  I would regard this as an endorsement - so go on the Transcend courses, tell them I sent you.

DTI B-BBEE IT portal
Still no sign of it.  The DTI issued an update on the 31st of August where they said it would be live on the 1st of September, 2008 (year specified) and still nothing.  I can't understand why they would make such announcements when everybody knows they'll never keep to their deadlines.  In the same release they state

Considerable work has been done by National Treasury and the dti to align the Preferential Procurement Policy Framework Act with the Codes and the National Treasury will communicate the outcome of this process in due course.

We wait with bated breath

Phosative
I like Matthews Phosa - h has a good business head and we can only benefit from this.  He is reported in the Business Day today on the subject of the FSC. 

there should be less concern about adding another 5% to the black economic empowerment (BEE) ownership of major financial institutions, and more focus on making BEE truly broad-based. 

Smack on the money Matthews - although the report does note that he won't be popular with  the labour and community sectors.  So what - he'll be popular with the business community and these are the people that create the jobs for the unions.  Read the article - it's a welcome breath of fresh air.

KPMG surveys whilst ABVA gets the moer in

There has been a fair amount of BEE activity over the last few weeks.  We all know that narrow-based BEE is now over, kaput, klaar and finish.  What we don't know is whether the FSC shares a similar fate - it appears that they have been given a stay of execution.  And then there is the keenly awaited DTI assessment tool which was supposed to be launched last Monday (the link to the Business Day site is broken so you'll have to take my word for it).  I can't wait to see it and I have it on some authority that we will see it next week.

And then ABVA starts questioning why SANAS has put the verification process on hold.  And so they should, accreditation will add so much more legitimacy to BEE.  Vuyo thinks that it's not a bad idea that they have extended it because they now need to measure them against that stupid manual that they published.  I noted with interest Vuyo's comment about the complexities of verification

The potential downside effect of the manual is that the prescribed procedures require adequate capacity. This lengthens the time spent on the verification process, affecting the profitability of the agency. Gone are the days when a big company could be verified in two days.

Trust me - this is not a good thing for the industry.

OK back to ABVA, Kim sent me this story.  I'm going to focus on a small from Abva director Ridwana Jooma-Cook  quote in the article,

"In effect, the codes of good practice are fantastic, but they have failed on implementation."

What rubbish is this, the codes are definitely not  fantastic.  They are a terrible concoction of inflexibility, lack of thought, bad business sense, poor spelling and worse arithmetic.  But that's my opinion.

Which brings me to the KPMG survey.  I read about it here and was drawn in by the opening paragraph

Companies across the board are falling behind on their black economic empowerment (BEE) compliance, a survey by forensic auditing firm KPMG has found

The report is very good and thorough and asks some very poignant  questions and produces some interesting results it makes for an interesting read.  I think the results are quite obvious in certain places, for instance the mining sector will place more emphasis on ownership because they have to.  But I do not agree with the contention that a scorecard makes a company more competitive and I think we are a long way from that happening.  A scorecard is still a tick box requirement, companies do not purchase from companies that have high scorecards, especially strategic items, they purchase for numerous other reasons ranging from price to relationships.  The scorecard just gets the messy empowerment criteria out of the way. 

And as a final note - I wrote this for the Namibian Economist .  Namibia are in the early stages of their own BEE implementation and they could learn a fair amount from South Africa.  The article discusses where South Africa needs to improve if this policy is to succeed.