Paul Janisch

Minimum targets for a minor(ity)

The Mining Charter is coming out in June I think. I found numerous articles on this subject. As an aside a MiningMX article highlights the biggest challenges that the industry faces and empowerment is not one of them.

One of the key deterrents to investment in South Africa has been the energy crisis, which culminated in the mines being shut for a week in January 2008 when there just wasn't enough power to go round. There is an accelerated build programme that will start delivering power in 2013, but there are major price hikes in the offing to pay for it and a lack of certainty about the time line. "A shortage of energy generation capacity has already stalled further investment in mining and beneficiation capacity, losing with it the potential for thousands of jobs and the associated revenue and foreign exchange this production would earn for the country," Mick Davis, CEO, Xstrata said.

Back to the Mining conference last week. Moneyweb published a statement by Sandile Nogxina, director general of the Department of Mineral Resources

The requirement that South African mines be at least 26% black-owned by 2014 is a "base" and the proportion will need to be higher to "deracialise" the industry, the director general of the national mining department said. "That 26% was not the maximum, it was the minimum, that was the base."

Now there is a thought. I was asked whether the BEE targets in the codes are a minimum yesterday. They can't be a minimum because no maximum is stated – these targets are the minimum, medium and maximum. How Sandile is going to incentivise any mining company to part with a greater shareholding when they need 26% to get the licence I have no idea.

Allow me to put you at rest dear reader – these targets are all you'll ever need to achieve. There is no commercial, tax or other reason to exceed them.

Now Sandile, if you go and speak to Pravin and tell him to give us tax breaks then we will exceed them.

Davies and the empowerment goliath

Rob Davies has been doing some reading and is now talking about empowerment (after a year's silence). The good news is that he is most concerned important things like ownership – which the mining sector is most concerned about. Rob is worried about things like enterprise development and skills development. It shouldn't be such a surprise – he's just launched the IPAP which is very dependent on both. I had to laugh at a quote from Engineering News Online

Speaking at a media conference in Pretoria, Davies said that even though most share transactions included a BEE component, 75% of companies in the private sector were still not fully compliant. Davies told Engineering News Online that this was mainly owing to companies using BEE scorecards as "tick-boxes", and not as a "dynamic tool" to empower and train people from ground level upwards.

 

Why the hell is he so surprised by this? When you look at the scorecard all you see is something that says you need to shell out a bunch of cash for points. After all the codes are all about quantity and not quality. When you tell a company that they have to spend money on the following each year, they are never going to "embrace it".

An empowerment shopping list

Description	Annual contribution	Once off
Sale of shares (likely financed by the company)		√
Black independent non-executive directors' fees	√
Skills development spend on black people (3%)	√
Procurement analysis (id est begging for scorecards)	√
Enterprise development (3% of NPAT)	√
Enterprise development (1% of NPAT)	√
Verification	√

 

In order to get what he wants, Rob reckons he's going to use Section 10 of the BEE Act

"Government will be looking at article 10, where we, as organs of the State, will assist with the broader implementation of BEE codes. We may consider forming partnerships with companies within the private sector to promote further enterprise and skills development in accordance with the codes."

Does this mean that the DTI is going to start making it a requirement to get a licence to conduct any form of business activity? I sincerely hope not.

Give us tax breaks

Rob, it is the private sector that has made the biggest strides in empowerment. They've been doing it for years and they are starting to get good at it. The government and especially the parastatals have been dismal at it – take a look at the mess with the Captain Barnard case and ESKOM's procurement policies. Stop using the stick – it's hard enough doing business in this country as it is. Give us tax breaks, especially for effective skills development, enterprise development and SED projects.

I want to do this - BEE tax breaks. Join me in my crusade

There is a skill to sending out a press release.  You need to write a decent one, have a good mailing list and choose the perfect moment.  I did none of the three, well I wrote the basis of the press release, everything else was done by Lesley-Ann van Niftrik of Image Communications.  This is how it worked

1. I sent her a press release about tax breaks for BEE
2. She shortened it and made it press-friendly
3. She sent it out
4. It was published in many publications
5. Just in time for Pravin's budget speech

And now onto the coverage - Iafrica.com, Business Report, Fin24, Times Live and I believe that Business Day made mention of it.  I also was interviewed by Jacaranda in both English and Afrikaans nog al.

Thanks Lesley-Ann - the coverage was overwhelming.

Back to the press release

I am serious about this.  We've got to change the way we go about this transformation thing. I mentioned to Mark that I want to try and get some big hitters behind me on this before I go on a social-media thing.  I'll start lobbying my friends.

I spoke to Kevin about it and he says it's been contemplated before

If you go back to the "Brenthurst Initiative" on BEE prepared by Bain on mandate from the Oppenheimers, you'll see that this wont be the first time that tax incentives for BEE has been considered. At that time, the response from the then Governor of the Reserve Bank and Trevor was very clear. Tax rebates and other tax incentives can only be offered for programs that actually guarantee socio-economic benefits (i.e. Learnerships)_, but high levels of BEE compliance while desirable for political reasons, will not necessarily be accompanied by substantial socio-economic benefit. You cant rob the treasury of funds required for education, health and policing in favor of rewards for compliance with a regulatory model that does not necessarily add value to the economy. My view is that you have no hope. If however you are looking for tax breaks based on job creation or implementing business strategies that result in the establishment of new industries and industrial capacity, then I am in. Only the US still persists with open ended tax breaks, generally designed to seduce particular electoral demographics. Tax breaks are a disaster because once the lawyers and consultants are let loose on qualification criteria, it becomes a free-for-all where ordinary tax funded social programs inevitably suffer most           

And it seems he's interested in helping.  This is about quantifiable development.  It'll cost more money to measure but it will achieve results.

Anyway - here is the original press release.

Joburg 15 February, 2010

The issues facing broad-based BEE is that the rewards for achieving these targets are not realistic.   At present a company is only rewarded with a BEE score for complying - and there is no guarantee that public or private sector business will follow as a result.”

“This big stick approach tends to make companies focus more on compliance than transformation, which is needed in order to benefit those most marginalised,” says Caird’s BEE compliance partner, Paul Janisch.  “The answer would be for Treasury, the DTI and the BEE Advisory Council to introduce a scheme that will incentivise companies to not only comply, but to better the targets contained in the numerous BEE scorecards.  Clearly, the most effective method would be to introduce a reduction in corporate tax if certain measured goals are achieved.”

“This motivation goes to the very core of human nature. People seldom react just because it is deemed to be lawful,” he says, “They do it because there are either positive or negative consequences involved.  Rewarding a company by reducing their tax liability because they have successfully employed and skilled a number of previously unemployable youth would have a lasting benefit all round.” 

Janisch acknowledges that under these circumstances the cost of compliance will have to increase. It is very doubtful that SARS will simply take a company’s word for their BEE performance.  But this will ensure that the verification industry becomes more professional, substantially reducing the risk of ‘fronting’.

It remains to be seen if the promises President Jacob Zuma made in his State of the Nation will materialise. Many of the socio-economic plans that he highlighted will only work if there is a reasonable commitment from both the public and private sectors.  And whilst the whole country will benefit in the long term if these goals are met, it’s the short term wins that are going to continuously inspire both sectors to keep their eye on the long term goals.

“The B-BBEE Advisory Council is a new body that has been tasked to ensure that BEE is implemented across the economy.  By taking a stronger approach we might actually see the fruits of Zuma’s socio-economic goals coming into effect,”  he says.

For more information, contact Paul Janisch, CEO of Caird at 083 2271375. Email

Ends

Editor’s note
Paul is a regular contributor to numerous publications on the subject of BEE.  He has spoken about the subject at numerous conferences and on national radio and television.  His book “Broad based BEE for small business” was published in December 2005. 

Issued by:    Lesley-Ann van Niftrik, Image Communications, Tel. 011 880 1340, Mobile: 083 378 2902, e-mail:
On behalf of:        Paul Janisch, CEO of Caird, Mobile:  083 2271375

Tax cuts for BEE performance mooted

A few years ago I was invited to speak at a conference in Stellenbosch.  I stayed with David Meintjies, who was the former CEO of UUNET South Africa (which is now MTN Business I think).  I worked for David for a few years so I know him quite well and I know him to be a very intuitive man.  On the way to the airport David suggested that if you want implement BEE properly then offer tax cuts.  Lighbulb moment.

I have blogged about this often and it is a such a valid point.  When you read comments by Ajay Lalu, jungle jim and the like - it's all about punishing companies for non-performance.  So how about actually rewarding companies for a certain performance by way of a tax break.  And this is now more pertinent with Zuma's speech last night - where he is speaking of companies hiring unskilled school-leavers.

This is the scenario that I think might work.

If we look back at Zuma's address to the BEE council - specifically

We have to think creatively about ways in which to increase the extent to which communities, workers, cooperatives and other collective enterprises own and manage existing and new enterprises and increasing their access to economic activities, infrastructure and skills training.

AND

strategies of empowering rural and local communities by enabling [their] access to economic activities, land, infrastructure, ownership and skills. 

If a corporate invests in these types of entities with a view to seeing them generate jobs in those areas in a short period of time, say five years, and they can prove that this happened, then they should be rewarded.  The reward must be a tax incentive - either a reduction in tax or the investment becomes deductable.

This will push up the burden of proof but more corporates will go for this.  In fact what you could do is say - if you achieve a certain BEE score on top of this you'll get the tax break.  Suddenly you'll have corporate South Africa running over themselves to start getting their BEE ducks in a row.

I therefore CALL on (so cheesy) Pravin and Jacob and Rob et al - to consider a new tax structure for high BEE achievers.