Paul Janisch

Transformation or a smokescreen - the BEE codes are more of the latter

This is a post that I have been wanting to write for a long time.  I eventually wrote it as an article for Moneyweb, who published it on Friday and syndicated it to the Citizen (now I'm really famous).  I have been mulling this over for a long time.  Why is it that these BEE codes are more focused on driving a change of ownership than the broad-based emphasis they purport to advocate?  It's patently obvious that everything broad-based is a falsehood.  I found the answer in bolshie bob's Youth Employment Service practice note, specifically paragraph 1.13

1.13 EMEs and at least 51% Black Owned or more QSEs that participate within the Y.E.S Initiative will be verified against the Qualifying Small Enterprise Scorecard and the B-BBEE Certificate will be issued by an Accredited SANAS B-BBEE Verification Agency. This is also applicable to Sector Codes of Good Practice utilising the respective QSE Scorecard.

Here is the article.  It was cleaned up a bit by a MoneyWeb editor. You'll notice that I haven't referred to bolshie bob or the awesome awdoz.  Their real names are Rob Davies and Zodwa Ntuli (uppercase is an exception on this blog)

There is a very interesting clause in the practice note for the Youth Employment Service (YES) document that appears to defy any form of logic. 

The YES programme is now linked to the black economic empowerment (BEE) scorecard and promises to promote companies up to two levels if they employ unemployed black youth for a period of 12 months.

The clause states that exempted micro enterprises (EMEs) or 51% black-owned qualifying small enterprises (QSEs) that wish to claim this benefit need to get measured on the full scorecard before they can benefit from the YES promotion.

For the uninitiated, an EME turns over less than R10 million per year and a QSE between R10 million and R50 million. EMEs with less than 51% black ownership are level 4 BEE contributors, 51%+ black-owned EMEs are automatically level 2, and 100% black-owned businesses are level 1 – which is the top of the BEE pile. The same levels apply to 51% black-owned and 100% black-owned QSEs. All other QSEs need to go through the rigorous, onerous and expensive process of implementing a BEE scorecard and taking the level that this process delivers.

It must be stressed that the process is costly, complicated and unlikely to deliver great results if your company has little (10% or less) or no black ownership. In my experience, a level 8 (which is the entry level to the scorecard) is pretty much what most companies would have to settle for without black ownership.

Why?

This begs the question – why would an exempt micro enterprise that is automatically a level 4 go through a verification to get to a level 7 or 8 and then embark on the YES programme to be promoted to a level 5 when they are already a level 4?

Similarly, why would a 51% black-owned QSE want to get verified in the hope that they come up with a level 3 and then go through the YES process to get to a level 1, when they are automatically a level 2?

And why would a 100% black-owned company even bother with YES?

Herein lies the conundrum. Minister of trade and industry Rob Davies has been forced to exclude smaller businesses from his YES programme even though they are the most likely employers of black youth under the YES programme.

The only logical reason he has done this is because a level 4 can get to a level 2 within a year just by employing a number of people that the business might actually need. But then this would pose a threat to black-owned level 2 and 1 businesses when it comes to state procurement.

There is a five and six preference point advantage, depending on the value of the tender, between a level 4 and a level 2 under the 2017 Preferential Procurement Policy Frameworks Act (PPPFA) regulations. This perceived threat to smaller black-owned businesses has to be mitigated against by discouraging lesser owned competitors from reaching their own BEE levels through any programme that promises a promotion of a couple of levels.

The minister himself has tacitly confirmed the onerous nature of the revised BEE scorecard by publishing a proposition that all 51%+ black-owned companies should all be promoted to level 2 irrespective of their turnover. I have a 100% black-owned client that is over the R50 million turnover threshold that could not get better than a level 5 when we took them through the whole BEE scorecard. This company would have truly appreciated the instant promotion that would have come at a fraction of the cost and hassle.

Dubious motive

These developments have me questioning the motive behind the revised BEE codes.

The department of trade and industry (dti) crowed that these codes were more broad-based than ever, stating that they will touch more of the people who need this empowerment than its predecessor.

But if this is the case then surely all companies, irrespective of ownership levels, should be involved in the process? The more companies that hire black people, train them and buy from black-owned businesses and support the black poor, the greater the impact on the economy and society in general.

Yet 51% black-owned companies that turn over less than R50 million don’t have to contribute to any of this because they aren’t measured on it.

I think the reasons behind this are simple, and I must confess that I have been unduly influenced by Institute of Race Relations CEO Dr Frans Cronje’s arguments about the national democratic revolution.

Cronje argues that the National Democratic Revolution (NDR) led by the ANC strives to rid South Africa of all the vestiges of its colonial past. Part of this process would see 51% of the entire economy in black hands. The reward for those companies reaching 51% would be that they may never have to implement a BEE scorecard at all. Everyone would be a level two or higher. And the need to support black-owned businesses and charities would disappear because all businesses would be black-owned.

Punitive

To someone like Davies, a member of the South African Communist Party, this is the purest and cleanest form of transformation.

But it is a very lofty ideal that is unlikely to be achieved in a free market economy. Those companies that do not wish to adhere to this ownership target will be forced to implement the complex BEE scorecard.

This is simply a punitive alternative. Its punitiveness is enhanced when you consider that the targets for elements like skills development, procurement and enterprise/supplier development are not only complex but extremely costly. It attempts to force smaller businesses to get to the 51% black ownership level in the quickest possible way. This pressure has resulted in many smaller white-owned businesses moving to 51% ownership through elaborate empowerment schemes that irritate BEE Commissioner Zodwa Ntuli because she is powerless to curtail them.

Once this concept is understood it becomes quite clear that the codes are less concerned about broad-based transformation and more concerned about giving black-owned businesses a massive competitive advantage over their lesser owned competitors, specifically in procurement that is subject to the PPPFA. To ensure that this advantage is maintained Davies has set up a series of codes that render it almost impossible to meet those levels when a company has to implement the BEE scorecard.

The exception that should be the rule

What is interesting though is that there is one sector code that is never expected to achieve 51% black ownership – the Financial Sector BEE Code (FSC).

This is because of listed shareholding and the requirement of the Banks Act that any shareholder with more than a 15% stake in a bank must meet certain liquidity requirements in the event that the bank requires the shareholder to bail it out.

The FSC is the only BEE code that focuses on the transformation of the entire sector by encouraging those companies to embark a wide range of initiatives that reach the largest amount of people.

I would argue that it is truly a broad-based code.

As for the other codes – they are a smokescreen and if they actually achieve any form of transformation in the future it will be an unintended consequence.

The transformation of South Africa will not come about as a result of those codes. Corporate South Africa needs to prepare to shoulder the blame from this fallout as it has for the government’s failures in the last two decades.

 

 

New Equitable Economic Empowerment Framework (NEEEF) conference 28 June 2017

What is it about Namibia and Namibians? They are so different to us.  They just want to get on with their lives and business and are willing to talk to each other in a constructive way to do this.  I was invited to present a paper at a NEEEF conference in Windhoek a few weeks' ago, as it turns out I ended up chairing it (they told me when I arrived I was the man to do this).  They asked me to speak about a localisation strategy but I chose to speak about what Namibia could learn from South Africa - I'll save the cynicism for a later post.  

Namibia is about 15 years behind South Africa when it comes to a national empowerment policy.  Established business is nervous about the policy and the policy is vague and in draft format.  What I found interesting was how white business was nervous and government saw the need for the policy (like we were fifteen years ago), but they want to talk to each other.  This conference was apparently a political hot potato.  The organisers had been trying to arrange it for the last year and had come across major hurdles.  The public wanted the conference because they wanted some information and so they got it.  The speakers were extraordinary (I thought I was pretty good too), I don't know if I have been to a conference where speakers managed to hold the attention of the entire hall for the whole day.  

Each speaker put their case strongly from the objective Ngoni Bopoto, the Namibian economist who painted a solid picture on Namibia's current economy through to Phillip Ellis, who made no bones about his capitalist slant.  On the way we were given an overview of the Employment Equity Commissioner's thoughts on the necessity for redress.  The commissioner, Vilbard Usiku, is one of those rare policy makers who comes across as objective (like Thuli was when she was public protector).  I learned more about South Africa's apartheid legislation from Vilbard than I will from any of the current anc politicians.  He has given me a copy of his speech which I would be more than happy to disseminate to anyone who requires it.  We heard from the lawyers tasked with getting the draft bill promulgated.  Again there was no "like or lump it" attitude here, I got the distinct impression that they want the process to be accepted by those who need to implement it.  The highlight of the conference for me was Phillip Ellis.  Phillip was concerned about NEEEF (pronounced NeeYIF) because it had been a mooted policy for years. It started off its life as TESEF,  and slowly migrated across to NEEEF.  A draft of the NEEEF bill has been available for comment for the last few years.  Phillip is a very respected businessman and adviser to many businesses (both local and foreign)  and he reckons that this uncertainty is hampering investment in the country.  He told an interesting anecdote how a certain large South African company wanted to uproot to Namibia after zuma's Nene firing but refused to come because of the existence of the policy in draft format. Phillip quipped that people would prefer to have the finalised policy than the sword of Damocles.   This is about policy certainty,  Namibia has known about this for years and it gets delayed and reformatted.

This is the second NEEEF conference that I have chaired and spoken at (I'll speak at every other one too) and in each case I have put a strong argument for the procurement element.  BEE as a policy exists and can measure its success because of the private sector.  Without procurement as the glue these policies will fail.  If BEE was left to the government to implement it would have fallen by the wayside years ago.  This is the issue that I have not been able to understand, how is this supposed to succeed if a NEEEF scorecard is only required for licenses and state procurement.  All the companies will just create a company for this purpose and so fronting will continue.

My two presentations are attached.  I managed to present the one on lessons from South Africa, but couldn't tear Phillip away from the audience to present my why diets fail presentation. 

Thanks to the organisers for arranging a conference that everyone enjoyed - me especially.

The Conundrum of Tender Politics - not specifically a Namibian issue

In the final analysis, it is not about a good law or procedures, but political will, maturity, tolerance, justice and fairness to conduct equitable and fair tender procedures.

via www.informante.web.na

Beautifully summarised in the last sentence. The same allegations we South African level at our politicians are being thrown at the Namibian elite. I don't think this is a strictly African feature but it is very prevalent on our continent.

The deeper issue with Namibia is Namibianisation - a transparent and equitable state procurement system would go along way to solve this problem.

Windhoek trip at the end of the month

Obed de Swardt of BEE-Matrix and I are heading up to Namibia at the end of this month.  We've set up a few meetings in Windhoek but would like to meet as many people as possible.  If you are a reader of this blog and are available on the 29th and 30th, please send me a mail to arrange a meeting.

 

 

Namibian mining from Tim Cohen

Namibia, has also started on the nationalisation course, causing a number of mining stocks on the Australian stock exchange to tank, and showing how contagious bad policy can be.

via www.businessday.co.za

Why they don't learn from each other I don't know.  Cohen colours an interesting picture about Zim and how Morgan and his crowd might not be as angellic as they would like us to believe.

Namibia and mining and nationalisation and Malema doesn't even get a mention (must piss him off completely)

The most recent case of resource nationalism in Africa occurred last week in Namibia, the 4th biggest uranium producer in the world. Its ‘friendliest mining regime’ image evaporated on April 21 when the Minister for Mines in a budget speech in the National Assembly, somewhat out of the blue, stated that the Government’s mining company, Epangelo Mining (Pty) Ltd., will alone have all the exploration and mining rights to ‘strategic minerals’—uranium, copper, zinc, gold, and coal. On April 28, the Cabinet endorsed that position, further elaborating that the government would take-over uranium mining to ensure Epangelo participated in the industry fully. Namibia’s stance of course pales in significance to Robert Mugabe’s planned confiscation of 50 per cent foreign mining companies.

The increase in nationalist rhetoric in Namibia is not unconnected with the rising budgetary shortfalls, growing poverty and high youth unemployment, problems that will supposedly be solved through a ‘black economic empowerment’ (BEE) in mining. Government’s Transformational Economic and Social Empowerment Framework (TESEF) has yet to be finalized, but BEE advocates are borrowing from South Africa where BEE has compelled mining companies to guarantee 15-25 per cent black equity ownership and management in the sector, resulting in denunciation that the policy has only fostered a small black elite indistinguishable from their white counterparts.

Although the Namibian mining minister later assured that the new policy will not affect current mining licences, exclusive prospecting licences (EPLs) and mineral deposit retention licences, mining companies in operating in Nambia, such as Palladin, Bannerman Uranium Co., Auryx Gold and Forsys Metals have at least 10 per cent of their value since last week. The worst hit seems to be Extract Resources, whose plan to build one of the world’s biggest uranium mines at its Husab project east of Swakopmund may be in jeopardy. Trading in the company’s stock on the Australian Stock Exchange was on Monday halted at the company’s request due to uncertainties regarding China Guondong Nuclear Power Corp’s (CGNP’s) interest in acquisition Kalahari Minerals, Extract’s biggest shareholder. Husab is the largest uranium mining project in the world that could make Namibia the world’s largest producer of uranium upon completion.

via www.businessdayonline.com

Must be a bad move.  But look at the underlined section - again this type of state control is viewed as some sort of get-out-of-poverty panacea.   Totally misguided - even our esteemed mining minister has seen the mess that this has caused here. 

Caird’s letter to the Prime Minister of Namibia, HE Nahas Angula regarding TESEF

(Betcha you didn't know I could be this formal).

I am writing to you, not as a citizen of Namiba, but as a keen observer of the South African broad-based black economic empowerment system. I have been eagerly awaiting the publication of the final TESEF document and would appreciate the opportunity to discuss a few aspects of the South Africa B-BBEE system that might assist TESEF in its ultimate success.

1. Identifying the underlying reasons behind B-BBEE

If recent civil unrest over service delivery and unemployment in SA are indicators then they must be pointing to the fact that South Africa needs to address these critical areas. B-BBEE does make reference to these issues but they have got lost underneath the narrow-based notion of ownership that still persists and is a fundamental driver within the public sector. South Africa (and judging by your draft document, Namibia) needs more jobs and a more skilled population. It almost appears that for SA is too late to steer the focus towards this.

A new wave of black intellectuals are now rejecting the notion of 25% ownership of a business and advocating 100% black ownership in key areas (minerals, financial services etc). South African had great success in this field during the Apartheid years where the government insisted that the Afrikaners should own certain aspects of the economy (a policy of volkskapitalisme). South Africa desperately needs this – a new financial institution that can adequately compete with other large intuitions' would have a huge impact on job creation and competition. (I am aware of the difficulties of achieving this – but the methods to achieve this have not yet been exhausted).

1. Transformation should not be enforced via a stick method. Carrots should be offered

The need to transform is often forgotten and when targets are not achieved the South African government threatens to opt for a stick approach. People by their very nature are acquisitive and as such tend to perform better when they can derive some benefit from the process. A tax rebate system (for instance for those companies that achieve the 30% target of production spend on labour) is one of the most effective methods. There is little doubt that if a rebate is offered then the transformation process will operate more effectively. Admittedly a programme like this is open to abuse – but if such a rebate is offered then it is the responsibility of the company applying for the rebate to adequately prove that they qualify for it.

1. Building on preferential procurement

The preferential procurement element is the cornerstone of BEE's adoption in South Africa. The consistent requests for BEE scorecards over the last five years has seen a large number of companies producing some form of BEE scorecard. The preferential procurement element however falls short in understanding human spending patterns. To a large extent it is a lone voice in the drive to stimulate local production. A greater harmonisation between importing tariffs, production stimulation and other types of legislation will make this a success. South Africa is trying to achieve this with the draft industrial policy action plan (IPAP).

A solution might be a relaxation of preferential procurement requirements where jobs or skills are created.

1. Celebrating successes

Transformation is a process and each step needs to be analysed and where there is success then it should be noted. This is sorely lacking in the South African context – our politicians seem to be more at home criticising the process as opposed to recognising the successes it has achieved (and there are many).

1. Public and private sector involvement

At present the South African public sector does not appear to have the legislative support to actually implement BEE. The drafters of the legislation seem to have omitted to take this into account. As a result the transformation of South Africa's economy seems to be driven by the private sector in isolation. Any far-reaching policy must have mechanisms built into that allow for all stakeholders to participate.

 

I wish you the best of luck with this process and will be watching it keenly – Namibia is in the best position to make a truly meaningful contribution to the African transformation process.

 

Paul Janisch

TESEF fest? In other words Namibia’s BEE codes are coming

Ndaambe Haikali, a banker from Namibia, very kindly sent me a notice that is circulating on paper (not on the internet). It's called "Have your say on TESEF" and invites citizens to  submit comments before the 15^th of July this year. They have committed to launching this programme sometime next year.

The document makes for interesting reading because it tells us (those of us who don't know that much) a fair amount about the Namibian economy. For instance 75% of the national productive assets are owned by 25% of the population, foreign multinationals and absentee foreign owners. When you read through the document you'll get a sense that TESEF (Transformation of Social and Economic Empowerment Framework) is very much about trying to give Namibia back to the Namibians. It is this process of Namibianisation that underpins the whole strategy.

Namibianisation in itself is nothing new – it's been around for many years and was mostly felt in the allocation of fishing rights. It is defined as "a process to encourage the active and greater involvement, participation and benefit of Namibians - especially of Namibians previously excluded (during the Apartheid regime) from the fishery sector. Incentives are offered to companies that are at least 51 percent owned by Namibians (e.g. quota levies, long-term fishing rights)." This same concept is a constant across other charters – the Namibian Financial Sector Charter being one example.

The drafters have followed the basic guidelines of South Africa's broad based BEE but have set a longer period to achieve these targets – a total of 35 years. What isn't very clear from this document is whether the time period is 35 years or whether the cut off date is 2035. Anyway by 2035 the TESEF process should have produced 60% of the population as middle class, 20% upper middle class and 20% lower middle class. 

35 years is a long time - a regime change could negate the entire process. 

TESEF has six elements

  1)    Ownership

Target is 80% in the period 2029 – 2034. 20% must be achieved in the next 5 years.

2)    Management

Very similar to South Africa. The difference here is that I sense that Namibianisation includes ALL Namibian citizens, not specifically black ones.

3)    Employment equity

They have suggest a target of 30% of production costs to be spent on labour. Not much else is explained here but at face value this is a scary target. Hopefully they'll tie this in with skills development to try and create a skilled labour force.

4)    Entrepreneurship development

This incorporates preferential procurement. At least 30% of procurement should be allocated to businesses owned by PDIs (yes they use that term too and define it as "victims of former apartheid policies") within the next five years (probably up to 2016).

As an aside - the biggest problem with South Africa's preferential procurement is that it wants local procurement but there is no real harmony between this and import duties and the like. In other words local production should be used even if it costs more than importing the same product. In a consumer market this just won't work. If Namibia is to achieve a similar goal then it must try to encourage value-added production. I know that the Fishing Rights programme has tried to address this.

5)    Human Resource and Skills Development

A target of 2% of turnover for skills development is very high. The only SA BEE code that I think that was properly thought out is the skills development code. The emphasis on learnerships has the greatest potential for the economy. There is talk of a Training Levy in Namibia, which is probably similar to our Skills Development Levy.

6)    Community development

No transformation or social upliftment programme can exist without this. It looks like they are going to make this a tax (2% of a wealthy individual's estate should be invested in community development) for other corporates it is 2% of profit (the type of profit is not  specified). That is not a good idea – community development is a voluntary thing and should stay like that. The introduction of BEE has seen a lot more giving in South Africa than before. Corporates are really getting behind this. I had a little debate with Kevin (holding onto confidential documents) Lester yesterday.  He is in two minds about this tax – referring to the Lotto money being distributed. I am completely anti the idea of a government distributing money to charities. Especially our esteemed government.

A few Namibian facts – not sure how accurate they are

This is taken from a letter sent to the Namibian, the writer chose to remain anonymous. I've extracted a few select facts.

Namibia is now 20 years old.

• Black Broad Based Economic Empowerment (BBBEE) and affirmative action policies have only benefited relatively few, who are connected with little change for the masses. (Got to watch out for this boys - huge problem here) Women in general, have been left behind.
• Most can't understand English (official language) – not sure whether this refers to women or the population in general
• It has 2.1 million inhabitants.
• HIV infects about 250 000 citizens.
• About one in four pregnant women is HIV positive.
• There are about 250 000 orphans and vulnerable children, mainly as a result of AIDS.
• The unemployment rate for adults is about fifty percent.
• The poverty cut-off line is about N$7 per person day.
• The average woman in Namibia has about five children.
• Rural, illiterate women tend to have more children than urban, literate women.
• The population growth is about three per cent per annum.
• In order to provide work, six per cent economic growth is needed. At present the economic growth is one per cent.
• Life expectancy has fallen to below 50 years.

If they want to fix this problem they need a properly designed TESEF policy. Not one that mimics South Africa's, but one that takes the best of SAs BEE programme (and there is a fair amount of good) and models it into the Namibian model. If anyone wants my 2 cents' worth email me.

Government officials appointed as members of the Namibia Financial Sector Charter Council

Found this on the Republikein Online website.

THE Namibian financial sector, in consultation with Government, has been engaged in sector-wide consultations for the past few years with the aim of formulating a Charter for the sector. It has been agreed that the Charter will apply to all financial institutions, except SMEs as defined in the Charter. The Charter provides the framework for transformation and economic empowerment in the sector.

The Charter’s objectives are:

• To enhance the growth and development of the Namibian economy;
• Achieving broad-based transformation of the financial sector;
• Promoting Namibianisation of enterprises in the financial sector;
•  Maintaining high standards of corporate governance in the sector. The Charter is a sector-wide consensus code of conduct for transformation of the Namibian financial industry. It sets out targets, the implementation process and mechanisms for review, monitoring and annual reporting of progress over the next ten years

The Charter is effective from 29 May 2009 and will remain valid until 31 December 2019. I can't seem to find a copy but other articles have listed other priorities as

• offering sustainable and affordable financial products and services aimed specifically at, and appropriate for, lower-income households
• addressing a number of important aspects like human resources development, affirmative procurement, access to financial services, empowerment initiatives financing, and the participation of empowerment groups in the ownership of financial institutions

If anyone has a copy of the charter I would really love to have a look at it. 

On the subject of a FSC - I have heard that certain concessions have been made over the last month or two and that our FSC might still have a little life in it yet.