Paul Janisch

The tourism minister and section 10 and being forced to listen to a 702 newsclip

I stopped listening to 702 because of YouseewhatadoosIam McHysbak. I don't think 702 misses me but I do wish they'd fire this idiot (I'm not using very fiery language on purpose). I was sent this article which contains an interview with our minister of tourism. At about 7:18 she talks about an application for exemption from BEE. I can't make out whether this is for an exemption in the application process or whether she is referring to an EME certificate as I discussed in the last post. It certainly does sound like she has no idea what she's talking about when it comes to BEE – if she is referring to EMEs, then it's not application – it's an affidavit.

In the Timeslive article she tells the disbelieving public that she is hamstrung by section 10 of the BEE Act

Over and above the moral imperative of transforming the economy, the department of tourism is compelled to apply sector codes as stated in section 10 of the B-BBEE Act: "[E]very organ of state … must apply any relevant code of good practice issued in terms of this act in … determining criteria for the awarding of incentives, grants and investment schemes in support of B-BBEE".

Let's check to see how this measures up against section 10, I've include the relevant subsections of section 10 below

10. Status of codes of good practice

(1) Every organ of state and public entity must apply any relevant code of good practice issued in terms of this Act in

(a) determining qualification criteria for the issuing of licences, concessions or other authorisations in respect of economic activity in terms of any law;

(b) developing and implementing a preferential procurement policy;

(c) determining qualification criteria for the sale of stateowned enterprises;

(d) developing criteria for entering into partnerships with the private sector; and

(e) determining criteria for the awarding of incentives, grants and investment schemes in support of broadbased black economic empowerment.

2(a) The Minister may, after consultation with the relevant organ of state or public entity, exempt the organ of state or public entity from a requirement contained in subsection (1) or allow a deviation therefrom if particular objectively verifiable facts or circumstances applicable to the organ of state or public entity necessitate an exemption or deviation.

(b) The Minister must publish the notice of exemption or deviation in the Gazette.

She's spot on in section 10 (1). It could be either (a) or (e). But what she's not doing is telling us about section 10(2). My reading of 10(2) is that the minister (being hotfood masala Ebie Patel) can exempt the tourism minister from section 10(1). The pandemic being a force majeure in the case of most businesses in the country must measure up as an "objectively verifiable facts or circumstances applicable to the organ of state or public entity". And for those that argue that this is not applicable to the tourism ministry, an organ of state is defined in section 239 of the Constitution as

"organ of state" means ­

a. any department of state or administration in the national, provincial or local sphere of government; or

b. any other functionary or institution ­

i. exercising a power or performing a function in terms of the Constitution or a provincial constitution; or

ii. exercising a public power or performing a public function in terms of any legislation, but does not include a court or a judicial officer;

Of course she counters the legitimate concerns about her selective reading of section 10 with

Evidently, the DA and its surrogates have decided to deliberately conflate non-compliance with the B-BBEE Act and exclusion on the basis of race. Perhaps the question we need to ask and give an honest answer to is, why is it that so many businesses are still failing to comply with B-BBEE?

That the DA, Afriforum and Solidarity have chosen to oppose the application of B-BBEE policy in the administration of the fund is hardly surprising, because these three organisations have, on many occasions, expressed their opposition to the B-BBEE policy and want it scrapped. However, what is unfortunate is that these organisations have chosen to use this crisis as a theatre for political posturing on such an important issue.

Then you have to ask, if she is so concerned with section 10 then why has she ignored paragraph 3.1.1 of STATEMENT 000: GENERAL PRINCIPLES AND THE GENERIC SCORECARD (DTI's generic scorecard) which says

3. APPLICATION OF THE CODES

3.1 The    following Entities are measurable under    the Codes:

3.1.1    all Organs of State and Public Entities;

She's a charlatan and has been caught out and she doesn't have a case. She has to resort to racist rhetoric – she's an ANC (uppercase as an exception, only because I like Cyril) politician. The minute you get caught out you accuse your accusers of being racist or anti-transformation. Hence the accusation will be thrown at me.

Could Abil's failure be the beginning of the new era of economic empowerment?

Until now, economic inequality has been dealt with at the highest level through Black Economic Empowerment equity participation and at the lowest by microlending. Neither is a sustainable model. You can’t borrow money at a 10% interest rate to buy shares with a 3% dividend yield unless you’re in a sustained bull market.

via www.bdlive.co.za

Mark Barnes suggests that 

The collapse of African Bank Investments (Abil) is an overdue wake-up call. It may just herald, at last, the beginning of real economic transformation. It has arrived not a moment too soon. If we learn from it, and fix it, we may just avoid the revolution that is otherwise coming.

The seriousness of the crisis is summarised here.

ABIL has about 2.5-million credit customers at various stages of precarious indebtedness in its total advances book of about R60bn. Let’s assume these people must be employed to get a loan but that they support at least three others who aren’t. Add that to the 10-million or so unemployed and you have a whole bunch of our population who are relying on social grants and the continuation of unsecured lending. They’re relying on Abil as a continuing source of funding. If Abil stops lending, it’ll be a matter of weeks before millions cannot buy bread.

That’s not a financial crisis, that’s a revolution. So, what must be done?

I can’t think of a solution that doesn’t require a complete rewrite of the role of government. Inequality simply won’t balance itself without intervention. The rich are not about to gratuitously pass their wealth to the poor — it doesn’t even happen in the movies. It will have to happen structurally, by law. 

It's likely Barnes wrote this before the news came that the Reserve Bank had put Abil under curatorship.

On the subject of legislated social intervention, Dirk de Vos wrote a comprehensive piece on the Employment Equity Act in the Daily Maverick today.  It's a very good piece and must be read in its entirety.  I could easily post the whole story into this blog but I won't, I'll put in the most significant pieces

Even the most aggressive proponent of affirmative action recognises that skills are important. So, while the government may promote randomly at the SABC, doctors and pilots work their way up on the basis of proven qualifications and skills. The lack of skills is generally cited as the biggest hurdle to the so called Transformation Project. To be sure, skills development or skills transfer is an important part of the EEA and all companies who employ people are subject to a skills levy. A good part of the Broad-Based Black Economic Empowerment Act is about skills development and skills transfer.

What about progress through the ranks and the question of experience and skills? Perhaps the problem with the EEA and its regulations is that the obligation to achieve targets, whatever they are, is not what stymies progress. It is the approach of those with the skills, often white employees employed on the basis of their skills or qualifications. 

What happens in a firm subject to Employment Equity rules? It is not hard to work this out – one can be sure that not many white employees see their everyday work lives in the context of the greater transformation project. Their own skills, particularly if they are critical to the company’s business, become the difference between a secure salary and being pushed out in favour of an employee from a designated group. One can be confident that the white employee, notwithstanding instructions from management who are keen not to be fined, will not easily share his/her skills or even make it easy for the black employee. Seen in this way, the problem is not the firm but the existing employees within the firm – their interests are wide apart. Even if the policy is applied rationally as our courts require – the words of the Labour Court in the Naidoo case about a “spectre of perverse race and gender rivalry” producing “in consequence confrontation and alienation” gets played out in our workplaces on a daily basis. As the salary premium for experienced and skilled black management grows, the elevator to produce these individuals is not working. The resign-one’s-position-to-be-contracted-back strategy, as an independent consultant, to perform the same tasks, does little to improve the situation.

To my mind the only successful way of making this work is where business and government start trusting each other.  I think government needs to repeal many of their draconian labour and empowerment related laws as a gesture.  If business fails to respond to this overture, then government was right, business is racist.  I don't think that this would be the case though.

 

Related articles

Measurement of ownership - when?

Marcus: Abil placed under curatorship

Lots of laws and no desire to enforce them - why do we bother? BEE Act content

Neren Rau, the CEO of the South African Chamber of Commerce and Industry, says empowerment was not supposed to have been legislated beyond the voluntary codes of good practice, but this has rapidly gained momentum to the point where it is now.

He also says foreign investors do not have to abide by the regulations, and that the "punishment" comes where companies "lie and front". But the "codes are structured so strongly that not to comply is going to be very difficult".

However, Mr Rau also says the government struggles with enforcement of legislation across the board. So, despite the strong enforcement mechanisms in the new law, including from verification agencies — and possible lengthy jail terms for those deemed noncompliant — empowerment will be no exception. "They know they can’t police this effectively."

via www.bdlive.co.za

If I may throw my opinion into the mix this is a useless and toothless piece of legislation.  I am sure they will start with a little vigour and attempt to prosecute certain companies for fronting.  The only successes they'll get will be smaller companies who can't afford a decent legal team.  The bigger companies will throw a significantly more competent legal team at the NPA, DTI or whoever chooses to prosecute and embarress them completely.  Not that they mind that.

First we have to have a BEE Commissioner, as Thalia Holmes writes in the MG, this is a long way off (be aware that she quotes Dilly in this article who once again demonstrates that he is devoid of a clue.  He really should not be talking about any business matters ever).

(A)ccording to Nomonde Mesatywa, the chief director for BEE at the trade and industry department, this reality is still a distant one.

"As the DTI, we are still in the process of setting up the BEE commission itself," she said. "No appointment has been made as yet. We are hopeful this will be done before the end of the 2014/15 financial year."

If Nomonde says she is hopeful then you can add another four years onto this timeline.

I have a plan for all South African owned businesses turning over less than R50m.  See the next post.

(And sorry I didn't include you in Dramatis Personae in my last post Dilly.  For those who want to know, Dilly is Andile Tlhoaele).

Litigating for results

Most of us know that if you want to get anything done by the government you either have to bribe or litigate.  Now the former is largely undesirable so the latter is unfortunately the method of choice with us law-abiding citizens.

I would have thought that litigation would have very serious negative connotations, but an interaction with a prominent Joburg lawyer explained this in a different context.  The lawyer was referring to the DMR, a department that is very familiar with the courtrooms of our nation.  He told me that many officials are very happy to accept court orders compelling them to do something or other because this is now an official sanction for a decision that they are too scared, or otherwise, to make.  In other words - a court makes their decisions for them and there's no egg on their face for not making the correct decision.

We now find ourselves in a similar position with the DTI.  The latest notice about the migration to the new targets.  I've been told that not only is this document grammatically and technically a shambles, it's also procedurally incorrect.  Take a look at section 9 of the current BEE Act (which is largely unchanged in Rob's bill)

9. Codes of good practice

1)        In order to promote the purposes of the Act, the Minister may by notice in the Gazette issue Codes of Good Practice on black economic empowerment

5)        The Minister must, before issuing, replacing or amending a code of good practice in terms of subsection (1)-

a)        publish the draft code of good practice or amendment in the Gazette for public comment; and

b)        grant interested persons a period of at least 60 days to comment on the draft code of good practice or amendment, as the case may be.

The notice about the new periods is issued under section 9(1)  - 

In terms of section 9 (1) of the B-BBEE Act, the Minister of Trade and Industry is empowered by notice in Gazette to issue the Code of Good Practice for further interpretation and understanding of B-BBEE.

This notice was not published for comment and hence is unprocedural. But will the DTI provide any clarity on this?  They won't provide any clarity on anything.  The ridiculousness of this notice shows up when you consider that very few, if any, entities that measure their financial performance over a year do so from the period 10 Feb 2011 to 9 Feb 2012.  No - they tend to use proper calendar months.  I, like many of you, have clients whose financial year ends at the end of February and are going to have to measure themselves on the new targets because of the 20 day overlap.  What we have here is retrospective legislation.

And this is but one issue that we face.  And we know that the DTI is not going to help us, neither is bribery.  Our only option is litigation to force a decision.  I know this is a risky route to take,  it could throw the whole of BEE into oblivion but I fear that we need to do this.  After all - WE NEED CLARITY.

I represent a growing group of concerned people across the board who want this issue sorted out and would be willing to litigate - they do however need the money to do this. If there is any organisation out there with a desire to help us clear up these issues through our courts, we'd like to hear from you.

 

 

A united Fronting

My last dashboard post mentioned that I will try to cuss less on the blog.  However I did get two comments suggesting that it is not as offensive as I may have thought.  Thanks for your comments - I do agree with Richard that it is more of a cry of passion than gratuitous swearing (which I am very adept at).  Nevertheless I will try to cut back on it and like Paddington Bear, save it for very special occasions.

I got a call from Mzwandile Jacks the other day asking me what I thought of the BEE Council criminalising fronting.  My response was similar to any other person - if you can prove fraud then it is already a crime.

In case you don't know what fronting is - it's not actually defined in the codes but in an annexure published a little later.  The definition is

Fronting means a deliberate circumvention or attempted circumvention of the B-BBEE Act and the Codes. Fronting commonly involves reliance on data or claims of compliance based on misrepresentations of facts, whether made by the party claiming compliance or by any other person.

It then goes into a semi-academic analysis of the various instances that fronting should occur.  There are two potential consequences to fronting (according to the code)

• the dti may completely disregard/suspend a measured entity’s B-BBEE scorecard until such time that the entity takes corrective action
• the dti will keep a database of all companies found to be engaged in fronting once all the necessary processes are completed

What must always be borne in mind is that fronting is "circumvention or attempted circumvention of the B-BBEE Act and the Codes".  In other words the very dodgy practices of many mining licence holders cannot ever be viewed as fronting.

What an upsetting thought - I am still disgusted at Sandile Zungu and the ICT mining licence appropriation (he's not alone in this but he is a member of the BEE Council so he is going to take all the flack he deserves).  This activity could not ever be viewed as fronting - but if we are able to prove that the activity was fraudulent and induced ArcelorMittal to award the shareholding to the Ayigobi consortium, then we are onto something.

Perhaps the DMR will consider extending this fronting definition to their own act - after all a company that has no mining history that is awarded a licence under dubious conditions, who then attempts to sell (read extort) that licence to a proper mining company is fronting.  They are deliberately attempting to circumvent the intention and spirit of the MRPDA.

And as a final note - I hereby (in my capacity as a disgusted citizen) call on Jacob Zuma to remove Sandile Zungu from the BEE Advisory Council.  Feel free to join me in this crusade.

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.

---------------------------------------------------------------------------------------------------------------------------

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

Caird Code Rule #1 – Is BEE applicable to you

A while ago I was doing a presentation to the American Chamber of Commerce on Equity Equivalents. One of the delegates was an apparel manufacturer who asked my why his company should consider the programme I was proposing. I was a little surprised that such a company would even consider equity equivalents as an option. Why would they need to, they sell takkies, T shirts and caps. Every single one of their products are sold to a consumer who is very unlikely to use BEE status in their decision to buy their product. Edgars etc might ask them for their BEE status but I have my gravest doubts that they will not stock those products in their stores because that company does not comply with their BEE wishes. And it is also unlikely that Edgars will incentivise their sales staff to push a local product over the imported one. Can you imagine the conversation

Consumer: I'd like to try on these Adidas shoes.

Sales assistant: Please sir would you consider these Dlaminis. They are locally manufactured and Edgars will get more BEE points if we sell these.

Consumer: No I will not you horrid sales assistant you. I'm off to Sportsman's Warehouse.

This fictitious interaction exposes the deepest flaw in the implementation of BEE viz if the average joe is the end user then BEE is not going to be very important. This means that BEE can really only be applicable when the consumer is some sort of a corporate or government entity.

The general rule here is that if your business caters for consumers then it is unlikely that BEE will ever affect you. This would include restaurants (that don't serve alcohol), shoe shops, clothes shops, plumbers, electricians, pool companies, record shops, news agents, retail jewellers. As with any rule there are exceptions.

1. Any restaurant, hotel, pub or anything that serves alcohol requires a liquor licence. And those licenses are handed out by the DTI. And the DTI asks a bunch of BEE questions in allocating these licenses. I have written countless BEE plans for liquors wholesalers and retailers that have to be submitted with each renewal.
2. Shops looking to rent in malls that are owned by parastatals like Transnet or Eskom. I have heard that your BEE status is important to these types. ACSA is another example – the annual tender for renewals for shops in the airports require BEE credentials. I don't know who drafted those BEE questionnaires but they are so badly written they are an embarrassment (mind you so is ACSA). I haven't come across private property owners asking for BEE credentials.
3. Manufacturing jewellers have to comply with the Mineral and Petroleum Resources Development Act of 2002, (MPRDA). The requirements for this are exactly the same as those for a mining licence. I won't comment on this right now but suffice to say – this abomination requires its own future post.
4. Anything that can be used under section 10 of the BEE Act. I haven't really seen this being used, although I have worked on PPPs where the legal advisors have anticipated it in the PPP agreement. The DTI has taken a cautious path when it comes to section 10 because I believe that they recognise that over-regulation will stifle the development of the South African economy (as if we aren't over-regulated already). Technically speaking they could shove section 10 in the way of almost everything to achieve the BEE Act's transformation goals.

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

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

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

The status of Socio-Economic Development Contributions made to any of the types of entities in paragraphs 1 and 2 under Code series 700 is not dependent on such entity's scorecard result, but rather the nature of the contribution itself and the identity of that contribution's beneficiaries.

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

Entities or companies providing enterprise development services

Now this is a very common occurrence. There are many private companies providing these services, Endeavor, Raizcorp and ED Alliances are three that I know rather well. This practice is contemplated by code 600, paragraph 3.2.5.12

payments made by the Measured Entity to third parties to perform enterprise development on the Measured Entity's behalf

However it does not appear that these companies actually need to produce a BEE scorecard to provide ED services. One of the exclusions under Code 500 (Preferential Procurement) is empowerment related procurement – more specifically (paragraph 6.5.2)

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

This means that the expenditure is excluded and hence a BEE scorecard is not needed.