Paul Janisch

NEEEF debate heats up. Don't do what we did Nam, it'll cause more unhappiness than you can handle

A plan by Namibia, among the world’s most economically unequal nations, to better distribute wealth among its citizens may end up the way neighboring South Africa’s has — benefiting an elite minority.

The nation is working on a law that will require all businesses to be at least a quarter owned by “racially disadvantaged people.” While only about 6% of Namibia’s 2.5 million citizens are white, they own most enterprises. This is a legacy of white-minority rule that South Africa imposed when it controlled Namibia from World War I to 1990, with black people being disenfranchised and displaced.

Critics of South Africa’s policy, including the biggest labor-union federation, say it has failed to redress the inequalities because it focuses on increasing black ownership of companies rather than raising education standards to match a skills shortage, and has benefited a small number of wealthy individuals. Proposals by Namibia, the world’s biggest marine-diamond producer, are similar, which could hamper investment and growth in an economy that’s contracted every quarter since March last year.

From Moneyweb

The basis of my presentation in Namibia two months' ago was that Namibia would do well to learn from what South Africa has learned (or learnt as the Daily Maverick is now wont to write).  BEE has made massive strides but my god is has made some monumental mistakes - the guptas are the perfect example.

I finished my presentation with a quote from Jenny Cargill's definitive BEE book - Trick or Treat (pp 82/3)

Yet evidence suggests that South Africa should be very cautious about drawing on Malaysia's (Bumiputera Policy). Malaysians I spoke to often cautioned against using their country as a model to justify BEE. Instead they believe it offers many mistakes on what to avoid.

I would love to have put it better.  Gerrit van Rooyen, quoted in the lead article on Moneyweb hit the nail squarely on the head.

The plan “has caused much unease among white business owners and heightened investment uncertainty,” Gerrit van Rooyen, an analyst at NKC African Economics in Paarl said. Both governments have to “create incentives to boost employment and stimulate investment. Black economic empowerment cannot succeed without job creation and wage growth.”

 

 

 

 

 

 

What if your company is really small but your turnover is ridiculously high?

This is a scenario that we come across all the time.  I have a number of clients that fall into these broad categories

1. They do a lot of business outside of South Africa and this impacts their turnover.  One of these examples is merchanting  - The Balance of Payments Manual, fifth edition (BPM5) defines merchanting as the purchase of a good by a resident (of the compiling economy) from a nonresident and the subsequent resale of the good to another nonresident; during the process, the good does not enter or leave the compiling economy. The difference between the value of goods when acquired and the value when sold is recorded as the value of merchanting services provided 
2. They are brokers or agents.  The Financial Sector Code specifically excludes broker commission spend.  Every other code doesn't.  I have come across a number of companies that are brokers for an international parent or a local company.  One specific client sends 90% of their revenue back to their parent for services that the parent ultimately renders.
3. They sell a product that is taxed to blazes.  I have a client out in Kimberly whose business is diesel fuel.  They turnover close to half a billion each year but their GP figure is less than 10% of that figure.  All the other money goes to the state in the forms of taxes.

What to do under these circumstances?  I think that there is a strong case to regard the GP figure as turnover.  This is a document I wrote for a broker.  I have pasted the content into the post but if you want to read it with all the footnotes you can find it here.  I write quite a few of these types of opinions if you ever need one written.

24 August 2017

 Justification for viewing THE CLIENT as a Qualifying Small Enterprise (QSE) under both the 2007 and 2013 BEE codes of good practice.

 It is Caird’s considered opinion that THE CLIENT should be viewed as a qualifying small enterprise under both the 2007 codes (turnover between R5m and R35m) and the 2013 codes (turnover between R10m and R50m) even though the company turns over in excess of the maximum threshold for a QSE. 

 In cases such as THE CLIENT, which is a local broker for its parent THE CLIENT INTERNATIONAL, the turnover thresholds in determining the size of a business are prejudicial.  Our view is that the Gross Profit figure is a fairer appreciation of the company’s financial performance when it comes to determining its size in terms of the relevant scorecard.  (This is made all the more pertinent as cost of sales amounts to in excess of 90% of the company’s revenue.  This amount is paid the local operation’s parent.)

 In determining that THE CLIENT is a QSE, Caird has adhered strictly to the key principles of the Broad-Based Black Economic Empowerment Act and the BEE Codes of good practice, specifically:

 Paragraph 3.4 of the BEE Strategy document

• Black Economic Empowerment is an inclusive process.

and;

Paragraph 2 code series 000 of both the revised and original BEE codes of good practice

• The fundamental principle for measuring B-BBEE compliance is that substance takes precedence over legal form.
• In interpreting the provisions of the Codes any reasonable interpretation consistent with the objectives of the Act and the B-BBEE Strategy must take precedence.

 At all times we have remained consistent with section 3 of the BEE Act

  (1)        Any person applying this Act must interpret its provisions so as—

(a)      to give effect to its objectives and purposes;

 A more detailed assessment and justification for THE CLIENT’s QSE status follows in the paragraphs below.

 

Our understanding of THE CLIENT’s business

The points below list the significant aspects of THE CLIENT’s South African operations as it pertains to the implementation of a BEE programme

 

1. Formed as a local broker for its parent THE CLIENT INTERNATIONAL
2. Three staff members as of last verification, currently five. In excess of 50% black and 40% black female
3. No production capabilities within South Africa. All manufacturing is done by the parent outside of the borders of South Africa.
4. Productive assets are limited to ICT equipment and sundries.
5. Cost of sales amounts to in excess of 90% of the revenue. This amount is paid the local operation’s parent.

 

If one was to map the company’s size against the National Small Business Act it would appear to be somewhere between a micro or very small enterprise if the turnover is not taken into account.

Sector or subsectors in accordance with the Standard Industrial Classification	Size or class	Total full-time equivalent of paid employees   Less than	Total annual turnover       Less than	Total gross asset value (fixed property excluded)   Less than
Manufacturing	Medium	200	R40.00 m	R15.00 m
	Small	50	R10.00 m	R 3.75 m
	Very small	20	R 4.00 m	R 1.50 m
	Micro	5	R 0.15 m	R 0.10 m

 

Pertinent primary and secondary legislation

Broad-Based Black Economic Empowerment Act

Section 2 states the lists the “objectives of this Act are to facilitate broad-based black economic empowerment by”

1. promoting economic transformation in order to enable meaningful participation of black people in the economy;
2. achieving a substantial change in the racial composition of ownership and management structures and in the skilled occupations of existing and new enterprises;
3. increasing the extent to which black women own and manage existing and new enterprises, and increasing their access to economic activities, infrastructure and skills training;
4. promoting investment programmes that lead to broad-based and meaningful participation in the economy by black people in order to achieve sustainable development and general prosperity;

 Section 3

(1)        Any person applying this Act must interpret its provisions so as—

(a)      to give effect to its objectives and purposes; and

 (b)     to comply with the Constitution.

  A Strategy for Broad-Based Black Economic Empowerment

Paragraph 3.4 lists the following key principles that underpin the national BEE strategy.

• Black Economic Empowerment is broad-based.
• Black Economic Empowerment is an inclusive process.
• Black Economic Empowerment is associated with good governance.
• Black Economic Empowerment is part of our growth strategy.

 

BEE codes of good practice

BEE codes referenced here are both the original BEE codes (2007, gazette number 29617) and the revised BEE codes of good practice (2013, gazette number 36928). 

Paragraph 2 code series 000 lists the key principles as being (inter alia)

• The fundamental principle for measuring B-BBEE compliance is that substance takes precedence over legal form.
• In interpreting the provisions of the Codes any reasonable interpretation consistent with the objectives of the Act and the B-BBEE Strategy must take precedence

THE CLIENT as a qualifying small enterprise as opposed to a large entity

The principles and guidelines highlighted above are relevant to THE CLIENT’s specific situation. 

BEE is an inclusive process

As has been discussed above, THE CLIENT’s revenue prejudices the company from being a positive and meaningful contributor to BEE.    Its micro or very small size, as measured against the schedule attached to the National Small Business Act, makes it extremely difficult to adhere to the strict requirements of the large enterprises scorecard. 

Conclusion

The relevant legislation (including codes and strategy) provides for deviation from the codes’ requirements, provided that deviation

1. Gives effect to the objectives and purposes of the Act, and
2. Is a reasonable interpretation that is consistent with the objectives of the Act and the B-BBEE Strategy

It is our opinion that the turnover thresholds in determining the size of a business can be too rigid and in this case have definitely prejudiced THE CLIENT who is a broker or agency with little choice as to who its principle is.[1]  THE CLIENT is better positioned to advance the objectives and purpose of the BEE Act by regarding itself as a Qualifying Small Enterprise.

 Our view was that the Gross Profit[2] figure was a fairer appreciation of the company’s financial performance when it came to determining its size in terms of the relevant scorecard.  It must be stressed that the same NPBT and NPAT figures were used to determine the value adding supplier status and enterprise development and socio-economic contributions[3].  We believe that the inclusivity argument provides a stronger case for this company to make a contribution to BEE, this is in keeping with both section 3 of the BEE Act and statement 000, paragraph 2 of the original and revised BEE codes of good practice.  In our opinion this interpretation is consistent with the Constitution, the BEE Act and the BEE strategy document.

[1][1] We have come across similar situations with fuel retailers who have an incredibly high turnover, most of which is based on levies and taxes, margins are a fraction of this turnover and in many cases these margins are determined by legislation.

[2] THE CLIENT had committed to measure themselves under the QSE scorecard even if the GP figure fell within the EME threshold

[3] It must also be noted that THE CLIENT is fully compliant with SARS and VAT requirements

 

A reader writes. QSEs are falling by the wayside. Compliance is now out of the question

First Paul writes

These emails are very appreciated.  I sense that a largish court case could make its way in her direction soon. They are going to have to something about these codes – another verification agency told me that all the QSE’s they’ve verified have come up non-compliant.

Then the reader says

Yes I am seeing that a lot too. I am working on analysing my procurement spend for our rating, and I am seeing a large number of suppliers that were compliant QSE last year are now non-compliant or else level 7 or 8. A number of suppliers are just not bothering to get a certificate. Many of our generic suppliers have fallen several levels, and of course practically every certificate I have is invalid according to the Commissioner because it was issued against the old codes after 01/05/16.

Next year when all the old codes certificates have worked their way out the system and all certificates will be revised codes, I think everyone’s ESD score will look terrible, causing levels to drop significantly. It will become a vicious circle, dragging further down each year.

I would actually be delighted if someone takes her / the whole Commission to court.

Yes dear reader you are absolutely right.  If you look at the companies who have come up with a level one under the revised codes then you'll see that their procurement scores are high - and that's because procurement is measured using suppliers' old codes scores.  This is a very sound observation.  With scores dropping so significantly and the appetite for bolshie's bullshit waning we are looking at the somewhat early demise of empowerment.  awdoz can scream from the roof tops and the dti can claim racism and anti-transformationist behaviour  whilst the anc declares that white monopoly capital is the cause of all South Africa's ills.  (As an aside I saw dooso primero's cavalcade on the highway - he really does favour German colonialist vehicles.  What surprises me is that he only needs 17 and half of the traffic department.  He obviously is a very secure man basking in the love and adoration of his public.)

They can ruminate and swear and cry foul as much as they like, once you've lost the trust of the public you cannot legislate to get it back.  This is where bolshie bob is now - well almost.

What I don't understand is the endgame.  What is this commie hoping to achieve here?  Is he pushing for BEE's ultimate failure so that he can start nationalising all the businesses - or tightening the requirements to run a business so that all the anc cronies can take 51% of everything.  That's what the EFF would do.  My Cape Town area connection suggests that bolshie's intention is to exclude all less-than-51%-black-owned QSEs out of government procurement.  It's his way of ensuring that black owned businesses have a free reign on government business.  My experience shows that the smaller businesses in this country are far cleverer than bolshie thinks they are - they will survive, after all they employ the most people in this country.

This is why I am convinced this government is the most useless government that South Africa has ever experienced, and I'm talking ever.  The Nats were fascists that looked after their own through legitimate and nefarious means.  These morons have only got half of that right (and a handful of cronies is barely your own)  - if anything they have made life worse for their people.  It's wonderful to have a Ferrari that you don't deserve because it came through corruption - but not so wonderful to drive it on roads that are no longer maintained because you've killed the tax base.  

I don't expect them to listen to me, how can you listen to some white ponce who calls you a fucking idiot at every turn.  But I do have a vested interest in this country succeeding because my family has been here for hundreds of years. I have nowhere else to go.  If this country is to succeed then all of us need to make an effort of providing opportunities for the whole population.  You don't go about it under a cloud of red delusion.

 

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awdoz flexes her muscles, but has she chosen the correct opponents?

The Broad-Based Black Economic Empowerment (BBBEE) Commission is investigating a number of companies and entities for allegedly violating the BBBEE Act. Major names among those under investigation include Netcare, Nokia, MTN, Eskom and the South African Social Security Agency (Sassa). 

Also to be investigated are six verification agencies.

The suspected violations relate to BBBEE ownership structures and noncompliance with the codes of good practice for the verification process.

The investigation into MTN is aimed at determining whether its Zakhele and Zakhele Futhi BBBEE schemes meet the requirements for black ownership in terms of the codes of good practice and comply with the act.

Nokia Solutions and Networks SA is to be investigated to determine whether the BBBEE ownership transaction involving its employee trust and Sekunjalo Investment resulting in 26% black ownership and the subsequent change in black ownership, which resulted in 31.28% black ownership by Sekunjalo, complied with the act.

From BusinessLive

 It has been observed before that the poor bee commissioner, one awdoz (that's zodwa to her friends) is just not taken seriously.  Here she comes with both guns blazing with her gallant posse of BEE purificationists providing small arms cover.  This will get the people to take notice, and I think this is all it is; it's an attempt to get people to take her seriously.  Or perhaps it's just another enawz petulant fit.

But - has she taken on the right opponents here? The answer is no, my phone has not rung this much in years.  The industry is now pissed off.  The first issue is that she can't publicly announce that she is investigating companies - she needs to publish the results of an investigation.  She's tarnished the reputation of some very serious companies, both verification agencies and listed companies (more on this later).  She apparently brought the much maligned KPMG  in to conduct an investigation of some verification agencies; although my sources suggest that KPMG is no longer going to do this.

People are talking lawyers, talking to lawyers, lawyers are talking to people.  And this is just the beginning.  Many years ago the Employment Equity Commission would go on a naming and shaming exercise every October - they would claim (as they are once again doing but not naming the actual companies) that certain very high profile companies were non-compliant with the EE Act.  These kinds of utterances have the potential to mess with investor relations, both locally and internationally.  There was a certain court case that the Department of Labour lost when they tried to investigate a transgression.  This is where awdoz is inevitably headed.

I'm not going to go into the full list of investigatees but suffice to say a few are listed on the JSE (I think the likes of Evkom and SASSA will just fob her off), the one that is the most sensitive is MTN.  MTN has had a torrid time in the last few years (other than the fact that they are ripping me off for airtime).  They were properly hit by the Nigerians - which couldn't have done their share price any good.  Now they are being investigated for non-compliance with the BEE Act (more specifically Determine whether the MTN Zakhele and the MTN Zakhele Futhi B-BBEE schemes meet the requirements for black ownership elements and comply with the B-BBEE Act.)   This does not bode well for MTN, they don't need this negative publicity.  Neither do the verification agencies, three of them I spoke to today have all said clients are phoning them and asking for clarity because they don't want to be associated with them.  And this is based on allegation - something awdoz is not empowered to do.

Here we have awdoz who really has set the cat amongst the raptors - raptors like to eat cats.  This will inevitably be awdoz's Mkhwebane moment (her name is in uppercase because I believe that she will see the error of her stupidity and start doing her job without fear or favour - as the cliche goes).

BEE Commissioner (Ms Zodwa Ntuli) you are out of your league here, your opponents are not scared to go to court and vilify you the way the high court lambasted the public protector.  You obviously believe that bolshie bob would support you, and he probably will but that's not enough.  You need the support of those entities that you are supposed to be policing - you've gone about it the wrong way from the start, there'll be little or no sympathy when this ends up in court and I suspect you'll end up paying for it.  The word on the streets is that some big players are very upset,  the smaller players are furious.

 

How Rob Davies helped Zwane craft Mining Charter

“The question is, how could he agree to something that is clearly so bad for the economy? It was at the very least deeply reckless. This means he basically helped to craft this lunacy Charter.”

via www.fin24.com

Why are surprised here. bob has been hellbent on destroying the economy for years. He's as inept as any other minister in zuma's cabinet. That's unfair, zuma's cabinet (full of woodworm) has muthambi, dlamini and enawz for starters, that's a hard act to beat, even for bob.

Back to bolshie bob, he's a deluded communist. He has no idea how to operate in a capitalist state. He wants to control everything through unreasonable BEE codes, licences, apartheid-style legislating and an even more clueless department. Woe is us

A polite letter to your suppliers letting them know of your pain and how you sympathise with theirs

As an aside - this piece of virtual media has had 19 hits today.  19 hits - that's what I normally get in a good month.  

This post has been drafted in my mind over the last week.  The success of black economic empowerment came through the private sector pushing the procurement element, don't believe that any government entity or state-owned entity made any contribution to the empowerment of this country.  All they ever did was push their own corruption agenda in the name of transformation.  Look where the likes of Eskom, SAA and Transnet are now.

If we are going to survive this government and still travel the road of transformation then we have to do it as a partnership. It's OK for Vodacom to insist that you become 51% black owned and retain your level because they are going in a whole heap of trouble with their large suppliers that will never meet their demands and it'll take 100 years before they ever reach the desired levels of ownership (51%).  If Vodacom (and any other huge entity that shares similar sentiments) were responsible corporate citizens then they would take a responsible approach to the empowerment of their suppliers under the revised codes.  Perhaps they might send you out a letter that looks something like this

Dear supplier/service provider

There is no doubt that economic and social transformation is vital to overall success of this economy.  Over the last ten years we have steadily improved on our BEE score by making greater empowerment strides through the various elements in the original scorecard.  Your contribution to our improvement under procurement has been vital to our overall BEE score. 

The gazetting of the revised BEE codes has had a negative impact on our BEE score.  The levels that we have been used to achieving are now only something we can hope to achieve in the next few years.  We too have been subject to demands from our own customers who are insisting that we retain our current level under the revised codes coupled with a substantial increase in our black ownership levels.  This has proved to be very difficult in the current economy.  The sheer cost of compliance will erode our financial viability and as such put our business and the livelihood of a number of people at risk.

We believe that if we are in this position then you must be too.  We don’t want to encourage fronting, nor will we allow our suppliers to simply renege on their responsibility to transform this economy.  We are however willing to travel this road with you.  We understand that achieving similar scores that were reached under the old codes might be arrived at over a period of time. We’ll make no unreasonable demands on you but will expect an improvement in your BEE performance over the next five years. 

In this respect we understand that is likely that your first few scorecards under the revised codes will come up as non-compliant. We will tolerate your non-compliance or current score for the next two scorecard periods, there after we will expect a steady improvement in your BEE performance.

Please join us in this journey and as a unit we’ll continue changing the social and economic landscape of this country through our steady investment in skills development, enterprise and supplier development as well as socio-economic development.

This kind of letter is far more responsible than the unreasonable demands that we are seeing by large corporates hoping to curry favour with politicians who truly do not know how to run a country, let alone a business that is profit orientated.

Here's the letter in word format.  Use it as a proforma or use it in its current form.  All I ask is that you send me an email (my email address is at the top of the blog) telling me that you've used it.  You can modify it for your customers - believe me, they know exactly what you are going through. 

 

 

 

 

We ain't never going to survive unless we are a little litigious

A persistent question arises from the chamber’s affidavit: why did it not at the time contest the second iteration of the charter implemented in 2010 when it contends so strongly in the affidavit how unhappy it was with some of the clauses? It does make the point that it did not sign the 2010 charter.

Peter Leon, a partner at Herbert Smith Freehills, says the chamber should have acted more decisively on the 2010 charter. "They should have attacked it then and there without leaving it for so long. My sense is that the chamber at that time did not want to rock the boat and disturb its then modus vivendi with the department, which was [in] a rather different era."

Via Business Live

Peter Leon is correct in this analysis.  Seven years ago zuma was in the ascendancy.  We knew he was a crook and a liar and thief and an extraordinary manager of his member, but we hoped that he would be reasonable and put South Africa first. It wasn't only zuma that we thought would be reasonable, it was also the anc.  We thought there was hope, we'd all play along.  Both zuma and the anc proved to be the contrary, it's difficult now to figure out which of the two has been the most deceitful.  We didn't litigate back then.  We now have no choice.  They don't care so we have to.  

Back to zwane

"It is helpful, but not a legal imperative that stakeholders are in agreement with the principles" which the minister determines in developing the charters, he said. The department will present similar arguments in its defence of the third charter, with (z)wane arguing he consulted more than 60 stakeholders and could not just respond solely to a single stakeholder, the chamber.

We saw this with the revised BEE codes and the charters that have been gazetted subsequently.  bolshie bob did consult with stakeholders (as zwane did) but not the stakeholders that actually have to implement the codes.  It's not news that I wanted to go to court to get these codes blocked on the grounds of their reasonableness and constitutionality but I was too early.  That was four years ago, companies weren't willing to take on the government.  That's changing now.  I know a court case is likely; it might not be led by me but it's coming.

There's a strange psychology that this government uses when it comes to compliance and "transformation" they would rather kill an industry than have it transform.  This is exactly what zwane's latest petulant fit is about. If you won't do what I want I'll destroy the industry, I'll do this in the name of transformation (think dud miyeni-millions to steal).  Now zwane doesn't know to care about investor confidence because the guptas haven't told him to consider this.  bolshie bob is no different - I am increasingly coming across companies who aren't going to get on the scorecard with the best intentions and they couldn't be bothered now.  This is what bolshie wants - he'd rather have companies not comply at all than make an effort to comply and be rewarded with a BEE score.

 Is our fate Sealed?  Not if we are a little crazy (litigious)

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