I am struggling a bit with tables in my posts. The last post (Caird Code Rule #2 is from MS Word and the formatting has gone haywire.
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January 2010
January 15, 2010
Caird Code Rule #2 – Which charter is applicable to your business
The DTI's generic codes came into effect on the 9th of February 2007 – we've almost had them for three years now. This means that every entity that chooses to produce a BEE scorecard can do one under the generic codes. The other charters came later and this has led to a fair amount of predictable confusion as to when they come into effect. I have discussed this with Kevin and we both tend to agree that they come into effect on the date they were gazetted and that all measurements from that date must be based on the sectoral charter – everything before that can only be measured on the DTI's generic codes. For example the Construction Code was published on the 5th of June 2009 (this date is different to the date that Mpahlwa signed the covering note), we can therefore expect the first construction scorecards in June 2010 (this great event is likely to be eclipsed by the world cup).
Here is an overview of each charter
The various tourism scorecards are summarised here.
Effective date: | 22 May 2009 | |
First scorecard due: | May/June 2010 | |
EME threshold: | ≤R2.5m | |
QSE threshold: | R35m | |
Applicable to: | All parts of the tourism value chain including:
| |
I blogged on the applicability of this charter and how I couldn't be sure whether manufacturing companies (like PPC) are bound by the construction charter or the DTI's codes. You can download the various construction scorecards here
Effective date: | 5 June 2009 | |
First scorecard due: | June 2010 | |
EME threshold: | BEPs ≤R2.5m; Contractors ≤R1.5m | |
QSE threshold: | R35m | |
Applicable to: | If the majority of turnover is derived as a result of construction related activities the charter applies. If turnover is derived equally between construction related activity and other activities then the entity can chose which code they will use. | |
Effective date: | 12 June 2009 |
First scorecard due: | June 2010 |
EME threshold: | ≤5m |
QSE threshold: | R35m |
Applicable to: | Applies to all enterprises involved with the commercial forestry and first level processing of wood products including:
Expressly excludes non-timer forest enterprises like honey, mushrooms inter alia |
Integrated Transport Charter(s)
Effective date: | 21 August 2009 |
First scorecard due: | August/September 2010 |
EME threshold: | ≤5m |
QSE threshold: | Not specified but likely to be R35m (page 9 of the General Notice, Preamble and Definitions explains that all definitions not contained in the general notice section can be taken from the DTI's generic codes. |
Applicable to: |
|
Specialised entities
These are those entities that can't be owned, for instance government, section 21 companies, universities etc. Code 000, statement 004 of the DTI's generic codes covers these entities. The charters, other than the Tourism Charter which states (T)his charter are (sic) binding to all organs of state and public entities, organised labour,(sic) and communities involved with or interested in the tourism sector, are silent about these entities. The Tourism Charter fails to produce a specialised entities scorecard for those entities it lists. A conclusion has to be drawn that any section 21 company etc that finds itself in an industry covered by a charter must follow the DTI's generic codes. This is what I think the DTI's specialised enterprises scorecard looks like.
January 14, 2010
From PMG
The Department of Trade and Industry has published the Companies Draft Regulations for public comment.Comments can be emailed to Mr MacDonald Netshitenzhe at by no later than 1 March 2010.Enquiries tel Mr MacDonald Netshitenzhe: 012 394 1510
The Draft Companies Regulations are in 6 parts:• Notice part 1
• Notice part 2
• Notice part 3
• Notice part 4
• Notice part 5
• Notice part 6
The Founder Factor - Fred Wilson's comments on Google and China
Fred wrote an interesting piece on the difference between founder management and hired management.
I've long noticed that the most innovative, decisive, and risk taking companies are led by founders or at a minimum have their founders actively engaged in all key strategic decisions. There are many examples. One could point to Richard Branson, Steve Jobs, and Rupert Murdoch. It's also noteworthy to look at the difference between Microsoft when Bill Gates was highly engaged and since he's largely moved on.
I was thinking of that today as I was reading Jessica Vascellaro's account of Google's decision making on the China situation. According to Jessica, Eric Schmidt prefers to see Google stay in China. And Sergey Brin prefers to see Google leave.
Google's statement on China is pretty extraordinary. That they are even considering leaving the largest growth market in the world is a stunning revelation. And it is unlikely that hired and professional management would make such a decision. Management's primary job is to build value for shareholders and it would seem that leaving the largest growth market in the world is not in the shareholder's interest. (my emphasis)
However, when the largest shareholders happen to be the founders, such decisions take on a different light. And it may well be that leaving China is the best thing for Google, its employees, its customers and users, and its shareholders. Only time will tell what Google will do and what impact it will have on the company.
I am very impressed with Google and have been for a long time. I think that many of the reasons it is such an amazing company result from having its founders engaged and involved in the key strategic decisions the business faces. The founder factor is a huge intangible force in companies and is most often for the best.
Very important to remember when it comes to family-owned businesses.
Caird Code Rule #4 – Business first, BEE second
Over the last few years this rule has become more relevant. A while ago I wrote a piece on how an empowerment agenda could break a business, however there are real life examples. Eskom's "empowerment-at-all-costs" policy showed us that you can pretty much bring a country to its knees if you ignore business requirements and chase empowerment.
The overwhelming message is "BEE must make business sense otherwise don't bother". Always ask a few questions before you embark on any BEE programme.
- How many points do we need to remain competitive
- How much will it cost and how many points will it generate
- Is there any other way to generate the points without spending the money
- What are the positive business benefits of us doing this
The last question warrants a little more explanation, I'll do this by using a few examples
- If you are in the mining industry you need a percentage of black ownership – otherwise you don't operate (general rule)
- Training staff is always good for the business. However this training must be within an agreed budget. Going for the full 3% of payroll on black staff when the business doesn't need it doesn't make for a sound business practice
- Getting rid of a key supplier because they don't meet your empowerment requirements is plain stupid. An established supplier/customer relationship will probably yield preferential payment terms and discounts etc. Sacrificing that for BEE points is not advisable
- Setting up an ED project to sell your product is a fantastic idea. Both Nestlé and Pick 'n Pay have done this to great effect
January 13, 2010
A justification for PPPs
Taken from info.gov.za. The Settlers PPP hospital is opening tomorrow - it's a private public partnership with Nalithemba hospitals and Netcare. The announcement has this to say about the nature of PPPs
Private partnerships and collaboration in the health sector is important and timely in light of the challenges the public sector is facing in healthcare finance, management and provision. Many governments are confronted by fiscal constraints that force them to carefully prioritise and restrict public expenditures.
Moreover, many public health systems are already indebted and face further fiscal pressures, such as the need to provide care to increasingly aging populations, improve quality, or invest in often expensive medical treatment and technology advances.
Turning to the private sector can, when appropriately structured and executed, help address specific cost and investment challenges, deliver improvements in efficiency (for example: improved service provision and management at reduced costs) and enhance service quality (for example: increased expertise, more rapid and substantial investments in infrastructure and new medical technologies, a potential to attract and retain better performing staff).
OK - let's see a few more then
PPPs and BEE
Public Private Partnerships are without doubt the most effective tool that the government has to achieve its Black Economic Empowerment (BEE), RDP and other empowerment related goals. Yet this method of procurement is not making the most of these opportunities. The problem seems to be that the transaction advisors that are used in the early stages of the feasibility study are not suitably aware of empowerment requirements and structures that PPPs would like to achieve in the long term. The majority of these bid documents contain antiquated empowerment requirements that might deliver a narrow type of empowerment structure that ultimately benefits very few people.
The empowerment criteria for PPPs are contained in Module 2 of the National Treasury PPP Practice Note of 2004. The practice note precedes the Department of Trade and Industry's broad-based BEE codes of good practice (COGP) by about three years but a careful reading of both the COGP and the practice note reveals that they are remarkably similar and that a standard COGP implementation will more than likely cover almost every requirement that Module 2 has laid out. Interestingly the Municipal Service Delivery and PPP Guidelines have deviated from Treasury's module 2 and incorporated the DTI's codes of good practice into its requirements – suggested perhaps that the Treasury module will follow suit in the future.
The stated empowerment objectives of PPPs include
• Increasing levels of black ownership and management
• Development of local skills
• Development of supporting entrepreneurship
• Creation of local jobs (directly and indirectly)
It is the last three objectives that tend to be ignored in most PPPs. The management and ownership requirements are pushed to the fore and more often than not benefit people who may not reside or have any roots in the area that the PPP has targeted. It may appear that empowerment has been achieved but without the required emphasis on local economic development, the local population might come out of this process completely neglected. Perhaps the best way to explain this process is to use an example of a PPP that we worked in a remote area of the Eastern Cape.
The specific project is located in an region that was a labour sourcing area during apartheid. It is still suffering from the chronic ravages of this policy and as a result has virtually no infrastructure with an economically active population that is mostly female with a high HIV infection rate. It stands to reason that any investment in this area must have some positive impact on the local community. Our job was to ensure that the empowerment requirements would continuously develop that local community.
Using both module 2 and the DTI's codes as a starting point we recognised that the construction phase was unlikely to employ any of the local population on a permanent basis so budgets that would typically be allocated under a standard BEE scorecard were re-allocated to other areas of the scorecard that would see a greater investment in the local community. We specified that the local community (i.e. people living within a 50km radius of the target area) was to be used because the DTI's BEE scorecard only speaks of black people – not local people. This means that without specifying local investment it is conceivable that a company operating in this area could be fully compliant by investing in any other area. The facilities' management scorecard built on the BEE foundations laid by the construction phase and increased the number of local people employed on a permanent basis over a ten year period. The modifications to the scorecards were within the ambit of module 2.
The single most important feature of a PPP is that the Treasury Manual insists that all empowerment requirements are made contractually binding on the winning consortium, with penalties for non-compliance. Of course this requires both the government and the private party to measure their BEE performance. If the prescribed scorecard deviates so far from a standard scorecard then there is no conventional method of measurement. Verification agencies have been mandated to measure empowerment based on either the DTI's scorecard or a sectoral charter and do not have the legal capacity to measure any other type of scorecard that deviates from these norms. This means that an additional third party has to be contracted to measure and report on this.
Public Private Partnerships are still relatively new to South Africa and their efficacy is not yet fully tested. But there is little doubt that they have incredible potential to deliver on government's empowerment measures. It is very important that these measures are carefully thought out at the early stages of any PPP because it may be very difficult to change them ten years down the line when it is realised that they are not achieving what all stakeholders hoped they would. Proper advice at the outset mitigates this risk.
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Paul Janisch is the CEO of Caird Consulting – a broad-based BEE compliance consultancy. Caird has advised both the private and public sectors on PPP empowerment requirements. Janisch can be contacted on 083 227 1375 or email
January 12, 2010
Attracting SED donations and how not to do it
The relationship between SED beneficiaries and donors is normally a little one-sided. The beneficiary is very dependent on the donor for continued support and might find that support can dwindle at a whim. It is therefore very important that the beneficiary starts taking a different tack and appealing to the donor at a business level. This might mean offering additional benefits like marketing mileage.
The SED element in the BEE scorecard must have had a positive impact on corporate donations. And the more ingenious causes have been using this to their advantage for a while (Philimpilo and Out-of-the-Box are two examples that I know well). In exchange for the contributions these causes go out of their way to ensure that a verification agency will quickly recognise them as points-attracting contributions.
All but one
I had the privilege of asking a certain home to write a letter stating that my client's donation would be spent on their black residents. This confirmation was requested by the verification agency. But the old duck that I spoke to refused. Oh no she said - I can't do this, the money benefits all our residents and I'd be lying, she said.
She confirmed to me that the white residents pay at least 50% of their monthly rental and the black residents are fully sponsored. The letter itself would not have been a lie (as she suggested) and it would have provided my client with another 3 points.
What an idiot. A clueless dimwit. And likely to be a poorer dimwit next year because her narrow-mindedness has in all probability cost her another contribution from my client.
If you are a cause looking for SED/CSI money then please follow these steps. I can't guarantee your success but you stand a much better chance than this lame duck.
- Explain where the money is going to go to. The codes want to see 75% of the benefits going to black people
- Provide the donor with a letter of gratitude thanking them for the contribution and informing them what the money is for
- Offer the corporate marketing opportunities. Think in terms of the Outsurance TV advertisements. If they turn down your offer then invite them to get involved - I know of a big financial company that uses their CSI project as a team building exercise.
- Look for new ways to get them involved - change your offering so that it can be viewed as enterprise development and tap into those funds
Apartheid's legacy
BEE is to right the wrongs of the past, it's the right thing to do, wealth needs to be redistributed from the 5% who have etc. We've all heard these justifications from numerous commentators and agitators.
I have a different perspective. I don't view BEE as being so much about righting the wrongs of the past, I see it as investing in the future of South Africa. The righting the wrongs argument inevitably leads to people justifying their behaviour with "they did it to us, now it's their turn". There are two examples of apartheid's legacy that have become very relevant to me
- The matric results
The Sunday Independent carried an article on Verwoerd's Bantu education policy and its legacy. The author, Graeme Bloch, argues that Verwoerd's policy of not teaching black people maths if they were never going to use it is still being felt today. This policy when coupled with job reservation effectively only allowed the black middle class to become nurses and teachers (I am summarising this article that IOL has deemed premier so I can't post a hyperlink on this post). The result is that teachers were ill-equipped to teach maths and this problem continues. Bloch suggests that it will take another generation to fix.
- Bantustan policy
Last year I worked on a proposed PPP in Mt Ayliffe. Mt Ayliffe is a desolate and forgotten place in the Eastern Cape. It falls under the Alfred Nzo municipality which is one of the ISDP nodes (in other words - where the poorest of the poor live). My job was to conduct a socio-economic study and determine the best BEE scorecard for the PPP. The study was showed an area that has yet to recover from the Bantustan policy. Mt Ayliffe was a labour resourcing area for South Africa, men were migrant labourers and the women and children stayed behind and fended for themselves. Nothing has changed. The economically active population is still made up of women who live under the most challenging conditions. Education is a luxury that that few can afford because the HIV-infection rate (about 30%) has forced younger people to stay home and support the family. There is little formal employment and almost no basic infrastructure. We concluded that whilst this PPP would have a positive effect on the community it was nowhere near enough.
The upshot in both of these circumstances is that both the matric failures and those who live in areas like Mt Ayliffe are left with few choices and prospects. They could become dependents of the state or resort to crime - either way it places a greater burden on the tax payer. And this South Africa can ill afford.
No one likes to be told to do something because it's the right thing to do. People like to know what they will get in the short term. The BEE message is not about that - the question is that can we as South African's afford not to do it. I am hoping that when the BEE advisory council meets they look at things like SED, enterprise development and smarter ways to create sustainable economic activity in those decimated rural areas.
I have posted an old document on the ISRDP and URP nodes - they featured in an earlier version of the codes. They were removed in the final version.
January 10, 2010
Once empowered – always empowered discussed (disgust?)
We are about to hit the third anniversary of the DTI's codes. This is significant because to my mind it is the first time that we can use the once empowered, always empowered; high watermark or continuing consequences principle. The reason for this is paragraph 3.5.1.3 of code 100 states that transformation must have taken place. The only way that this can be measured is by comparing BEE scores over the last three years. And this can only be measured using a uniform scorecard which only came into effect on the 9th of Feb, 2007. I suppose you could compare EE submissions over the three years but this won't apply to every company.
It would appear that if the black shareholder willingly parts with their shares by selling them then you can recognise the actual ownership percentage in perpetuity, but a only a fraction of the points. This implies that if the company was a QSE that was more than 50% black owned and the black shareholder sells out then this company is still regarded as 50%+ black owned – and hence could be regarded as a Category B ED beneficiary (provided it has a BEE score higher than level 6). I say this because the codes don't mention 25% black owned, only 50% black owned. I somehow think this might be difficult to push through but I'd invite the discussion.
The paragraph contemplates two different ways of relinquishing shares – sale or loss of shares. They are more lenient on the company if the shares are sold. If the black person loses the shares because they are taken back or for any other reason then the codes penalise the company. I think this magnifies the ridiculousness of the ownership model and seems to presuppose that the black partner is the innocent party in this programme – surely if a black partner does not pay for the shares or can't meet the payments and the shares are taken back they have to shoulder a portion of the blame. I've never been a fan of the ownership element, especially in small or family-owned businesses.
Paragraph 3.5 is the significant section (The recognition of ownership after the sale or loss of shares by black participants) and has four aspects to it
1) Recognition of black ownership
3.5.1 A Measured Entity is allowed to recognise a portion of black ownership after a black participant has exited through the sale or loss of shares subject to the following criteria:
This is a little confusing – the paragraph says "a portion of black ownership" but doesn't explain what this means. It is different to paragraph 3.5.2 which refers to 40% of the points under ownership. The Interpretative Guide hasn't explained it either.
3.5.1.1 the black participant has held shares for a period of 3 years;
3.5.1.2 value must have been created in the hands of black people;
This is a simple calculation of the value of the company at the time of sale of shares compared to the current value of the company. I suppose this is a bit of an incentive to make sure that the company makes a bit of cash over the period.
3.5.1.3 transformation has taken place within the measured enterprise.
See above
2) Can't have more than 40% of the score under ownership
3.5.2 black participation arising from continued recognition of black ownership cannot contribute more than 40% of the score on the ownership scorecard.
The maximum number of points you can get is 9.2 for generics and 11.2 for QSEs. But in spite of the reduction in points and the lack of clarity in 3.5.1 it would appear that the company may still be deemed the same percentage black-owned and should be recognised under procurement and ED (as I discussed above). Otherwise what is the point of regarding it as having black ownership – is it only for the points?
3) Loss of shares
3.5.3 In the case of a loss of shares by the black investor, the following additional rules apply:
3.5.3.1 a written tripartite agreement between the Measured Enterprise, the black Participant and a lender must record the loan or security arrangement, unless the Measured Entity is the lender; and
3.5.3.2 The period over which the points were allocated or recognised will not exceed the period over which the shares were held.
The minimum amount of time that a company can regard itself as being black owned (or getting the points) is then 3 years. This is just plain stupid!
4) A calculation to determine the points
3.5.4 The ownership points under this paragraph that are attributable to the Measured Entity will be calculated by multiplying the following elements;
3.5.4.1 The value created in black hands as a percentage of the value of the Measured Entity at the date of the loss of shares as a percentage of Measured Entity's value;
3.5.4.2 The B-BBEE status of the Measured Entity based on the balanced scorecard at the date of measurement; and
3.5.4.3 The ownership points that were attributable to the Measured Enterprise on the date of sale or loss.
Maths and I aren't the best of friends, but I can proudly state that I understand English particularly well. Even so – I do not know how to calculate these points. The Interpretive Guide offers some clarity but no enough. I'm sure Vuyo's book says something but I can't seem to find my copy. If you do find yourself in this position I am happy to announce that BEE-Matrix can help you with the calculation.