Black Management Forum BEE Conference

BEE Codes of Good Practice – A perspective on their effectiveness

14 April 2005

LIONEL OCTOBER

DEPUTY DIRECTOR-GENERAL

ENTERPRISE AND INDUSTRY

DEVELOPMENT DIVISION, DTI

2

Outline Economic context

Context of the Sectors

Rationale for BBBEE

BBBEE Transformation and Growth Imperative

BBBEE Act

Balanced Generic Scorecard

Transformation Charters

Code of Good Practice

Preferential Procurement

B-BBEE support i.e. Funding for B-BBEE

3

Economic context Non-racial democratic society consolidated

Education successfully de-racialised

Modest growth 2 –3 percent growth since 1994

Improvement of negative growth rate of 1980’s, but

insufficient to address social challenges

Income inequality amongst highest in the world

Massive disparity in white and black incomes, ownership

and access to employment opportunities

Economy has undergone major transformation – macro

economic stability, global integration

4

Context of the sectors

1. Very low levels of black participation

- Black senior management accounts for less than 10%

- Diminished black ownership in Sectors

2. Low levels of investments in areas of national priority

- Infrastructure, Low income Housing, Black SMEs,Black farmers, BEE Transactions

3. Low levels of provision of effective access to services and products for low income groups

5

Rational for empowerment

1. Rationale essentially economic.

2. Higher growth path not possible without broad based empowerment.

3. Skills, low levels of entrepreneurship and low incomes are major constraints to growth.

4. Human and social dimension important given historical legacy.

5. High levels of inequality poses social,political and investment risk.

6

Black Economic EmpowermentTransformation/growth Imperative

Rationale essentially “economic” Double bind of low growth , slow transformation Not possible to raise growth rate without expanding

entrepreneurial and skills base Growth/redistribution trade-off not relevant 5% Growth with significant empowerment possible in short

/medium term Equal societies grow faster because of effective

demand/consumption patterns Growth effects to be broadly distributed Equity base/shareholding to be broadened Balance operational control & passive investment

7

Brief Background to BEE Act1. The State President assented to the BEE Act No 53 on 9

January 2004. BBBEE Act sets clear objectives for broad based empowermentBBBEE Act sets clear objectives for broad based empowerment Enabling framework for Codes of Good PractiseEnabling framework for Codes of Good Practise Creation of a BEE Advisory CouncilCreation of a BEE Advisory Council Legislative endorsement for sector chartersLegislative endorsement for sector charters Enabling framework for the establishment of the BBBEE Strategy

2. Publication of Charters:

Mining

Finance

ICT

Petroleum

3. Minister may make Regulations to promote BBBEE

7

8

Policy Instruments Legislation and regulation Preferential Procurement Use of the balanced scorecard in

• Granting of licences;

• Concessions to private enterprises;

• Sale of state assets;

• Public private partnerships;

• Any economic activity

9

Definition of BBBEE DTI encourages a broad based B-BBEE definition that is

a process that:– Directly contributes to the economic transformation of South

Africa;– Brings about significant increases in the numbers of black

people who manage, own and control the country’s economy; and

– Results in significant decrease in income inequalities– B-BBEE process will include elements of human resource

development, employment equity, enterprise development, preferential procurement, as well as investment, ownership and control of enterprises and economic assets

10

BBBEE Strategy BBBEE is a process that directly contributes to the economic BBBEE is a process that directly contributes to the economic

transformation of South Africatransformation of South Africa Draft B-BBEE strategy has been issued for public comments Update B-BBEE strategy B-BBEE Strategy Objectives

Substantial increase of ownership and control of existing and new wealth;

Substantial increase ownership and control of existing and new enterprises in the priority sectors of the economy

A significant increase in the number of new black enterprises, black empowered enterprises and black engendered enterprises

A significant increase in executive and senior management of enterprises

An increase proportion of ownership and management of economic activities vested in community enterprises

Increased ownership of land and other productive assets, improved access to infrastructure,acquisition of skills and increased participation in areas identified in the Urban Renewal Programme

11

Key Principles Underpinning BBBEE

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

– B-BBEE strategy stresses a process associated with growth, development and enterprise development and not merely the redistribution of existing wealth

12

Balanced Scorecard

A basic and objective framework against which Transformation and Empowerment Achievements can be measured

Provides a balance between imperatives for sectoral transformation and black economic empowerment

Equal weighting to equity, management/ control, & enterprise development

Application of scorecard

License in regulated sectors – e.g. gambling or mining

Concession to operate an asset on behalf of state

Sale of state assets or SOE

Enter into a PPP

13

Core Component of BEE Indicators Weighting score Targets

Direct Empowerment Score

Equity Ownership % share of economic benefits 20% 25.1%

Management % black persons in executive management and/or executive board and board committees

10% 40%

Human Resource development and employment equity score

Skills Development Skills development expenditure as a proportion of total payroll

20% 3%

Employment Equity Weighted employment equity analysis 10% 50%

Indirect empowerment score

Preferential procurement Procurement from black owned and empowered enterprises as a proportion of total procurement

20% 50%

Enterprise Development Investment in black owned and empowered enterprises as a proportion of total assets

10% 5% (monetary investment)

10% (non-monetary investment)

Residual 10%

To be defined To be determined by sector/enterprise 10% 3% facilitate inclusion of black people

3% to promote black economic empowerment

3% social investment, health, education and

poverty alleviation

Total Score out of 100%

“The dti scorecard … will allow for a measure of flexibility…”

14

Transformation Charters [section 12]

9. (1) In order to promote the purposes of the Act, the Minister may by notice in the Gazette, issue codes of good practice on BEE that may include—(e) guidelines for stakeholders in the relevant sectors of the economy to draw up transformation charters for their sector; and

12.The Minister must publish in the Gazette for general information and promote a transformation charter for a particular sector of the economy, if the Minister is satisfied that the charter—

(a) has been developed by major stakeholders in that sector; and

(b) advances the objectives of this Act.

15

Transformation Charters

The BEE Charter should incorporate the following: The BEE challenges in that sector; The sectors’ vision for achieving BEE targets and timetables; The specific mechanism to achieve BEE targets including

financing instruments, skills development and employment equity, preferential procurement, enterprise development, as well as any additional mechanisms appropriate to specific sector;

An assessment of the financing required to fund BEE transactions; The institutional and management mechanisms that will co-

ordinate, facilitate, monitor and evaluate in the implementation of the charter; and

Any other relevant issues and commitments relevant to the sector, in order to enable its participants to advance the objectives of BBBEE

16

Transformation Charters BBBEE is legally binding on government institutions BBBEE is a voluntary process and is not legally binding on

private sector, but it is business savvy to formulate one. It is not expected that every sector will develop empowerment

charters. The charter is binding to the sector with which it was adopted. Government strongly encourages sectors that interacts and/or

transacts with any organ of the state to develop sector charter that set specific BEE targets and outline concrete plans to achieve these targets.

The sector that interacts and/or transacts with any organ of the state shall be strongly encouraged, subject to certain qualification criteria, to formulate a sector transformation charter in order to accelerate the fulfillment of the objectives of the Broad-Based BEE Act.

17

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 that may include—

(a) the further interpretation and definition of broad-based BEE and the interpretation and definition of different categories of black empowerment entities;

(b) qualification criteria for preferential purposes for procurement and other economic activities;

(c) indicators to measure broad-based BEE ; (d) the weighting to be attached to broad-based BEE indicators

referred to in paragraph (c); (e) guidelines for stakeholders in the relevant sectors of the economy

to draw up transformation charters for their sector; and (f) any other matter necessary to achieve the objectives of this Act.

18

Codes of Good Practice

10. Every organ of state and public entity must take into account and, as far as reasonably possible, 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 authorizations in terms of any law;

(b) developing and implementing a preferential procurement policy; (c) determining qualification criteria for the sale of state-owned

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

sector.

19

Preferential Procurement Framework

Changes made to the PPPFA regulations in order to align Changes made to the PPPFA regulations in order to align them with the B-BBEE strategy them with the B-BBEE strategy

Use of balanced scorecard in determining preference points Use of balanced scorecard in determining preference points (broad-based approach)(broad-based approach)

Minimum B-BBEE points required for preference points to Minimum B-BBEE points required for preference points to be givenbe given

Move from narrow-based to broad-based B-BBEE in Move from narrow-based to broad-based B-BBEE in determining preference pointsdetermining preference points

Next to review the PPPF Act to align it with the B-BBEE ActNext to review the PPPF Act to align it with the B-BBEE Act

20

BBBEE Support

Relaunch of the NEF on 31 May 2004Relaunch of the NEF on 31 May 2004 Products with focus on addressing market failuresProducts with focus on addressing market failures R2bn capitalisation from National TreasuryR2bn capitalisation from National Treasury Khula Enterprise FinanceKhula Enterprise Finance Industrial Development CorporationIndustrial Development Corporation Small and Medium Enterprise Development ProgrammeSmall and Medium Enterprise Development Programme Black Business Supplier Development ProgrammeBlack Business Supplier Development Programme

21