20 March 2013
Presentation to the Portfolio Committee on Trade and Industry
Potential implications of the proposed amendments to the Broad-Based Black Economic Empowerment Amendment Bill
1 Introduction
Rothschild welcomes the opportunity to present its observations vis-à-vis the Broad-Based Black
Economic Empowerment (“BBBEE”) Amendment Bill to the Portfolio Committee of Trade and Industry
BBBEE is a key instrument of economic transformation and is vital to the delivery of Government’s
objectives
Key to addressing growth, job creation and the elimination of socio-economic imbalances in order to
improve the quality of life for South Africans
BBBEE continues to be an evolving process
Its implementation is complex and requires detailed analysis, planning, execution and sustained
commitment
The proposed amendments to the BBBEE Act along with the Revised DTI Codes, represent the most
fundamental changes to the BEE regulatory framework since its inception, with a widespread impact on
business strategies
Government, with input from stakeholders, needs to create a BBBEE framework and related policies
that are consistent, transparent and predictable
This is critical considering the importance of BBBEE in South Africa and its impact on stakeholders, and
more particularly given the need to attract and retain the capital investment that underpins growth
– The proposed amendments contribute towards this objective
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2 Inadequate progress on broad-based transformation
19 years after the 1994 elections and 6 years since the publication of the DTI Codes, transformation is
not progressing at the pace expected by government and other stakeholders as a result of, inter alia,
regulatory challenges and non-compliance
There have been major events in the BBBEE regulatory landscape since December 2011
In December 2011, the DTI released the Amendment Bill, aimed at amending the BBBEE Act
– The Amendment Bill includes the most fundamental proposed changes to BBBEE legislation since its
inception and is still to be finalised
The ICT Charter was released on 6 June 2012 and gazetted according to Section 9.1 of the BBBEE Act
The Revised DTI Codes were released on 5 October 2012 for public comment
The FSC was gazetted in terms of S9(1) in November 2012
This presentation focuses specifically on potential implications and observations that Rothschild
believes may require clarification in the BBBEE Act
“The following shortcomings have emerged in the implementation of BEE.
First, ownership and senior management issues receive disproportionate emphasis. The unintended
consequences of this trend include “fronting”, speculation and tender abuse.
Second, the regulations do not adequately incentivise employment creation, support for small enterprises
and local procurement. The preferential procurement regulations aggravate this situation by privileging
ownership over local production.
Finally, the broad-based BEE regulations penalise public entities as suppliers. The democratic state owns public
entities on behalf of our people yet the regulations do not count them as “black empowered”
A major re-think is needed of the BEE framework and policy to achieve South Africa’s developmental and
growth goals”
Source New Growth Path Framework, 23-11-2010
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“The corporate
landscape of South
Africa has changed
remarkably since
1994. However, it
remains highly
concentrated. This
poses a barrier to
business entry and
expansion in key
markets, which are
essential for
employment creation.
Present forms of
BEE are not
achieving all the
desired objectives.”
Source National Development
Plan, 15-08-2012
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3 Regulatory progress on BEE
BBBEE regulations have been gaining momentum over the past two years. This has resulted in an increased degree of complexity, contradiction as well as overlap in regulatory requirements
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Increased regulatory activity over the past few years
1993
First BEE
transaction
Methold (later
New African
Investment
Limited)
acquired 10%
of Metropolitan
Life from
Sanlam
1 1999
BEE
Commission
established
to investigate
methods for
government
to assist in
implementing
BEE
3
2003
Regulations
DTI published
a strategy
document on
BBBEE
7
1993-1998 2004-2008 1999-2003
1994
First BEE listing
Listing of New
African Investment
Limited on the JSE
2
2002
Regulations
Mining Charter
released
6
2007
Regulations
DTI Codes gazetted in
January 2007
Sector Charters gazetted
-Property;
-Financial;
-Agri-BEE and
-Marketing,
Advertising and
Communication
10
2004
Legislation / regulations
-BBBEE Act enacted
-Financial Sector
Charter came into effect
-First draft of the DTI
Codes issued
8
2000
BEE
Commission
report
released
4
2009
BEE Advisory
Council appointed
to advise
government on
BEE
13
2008
Regulations
Sector Charters published
-Transport;
-Forestry;
-Construction and
-Tourism
11
2009
Regulations
Mining Code
gazetted
ahead of the
Mining Charter
review
12
2009 - Present
2010
Regulations
Revised
Mining
Charter
released
14
2000
Regulations
Petroleum and
Liquid Fuels Charter
released
5
2005
Regulations
Final Version of
the Draft ICT
Charter released
9
2011
Regulations
Draft ICT
Charter
gazetted in
terms of
Section 9(5)
15
2011
Regulations
Amendment Bill
released for
public comment
(Dec)
16
2012
Regulations
FSC gazetted in
under S 9(5)
ICT gazetted under
S9(1)
18
2012
Regulations
Revised DTI Codes
released for public
comment
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4 Rothschild’s BEE experience
De Beers
Sale of a 26% equity
interest in De Beers
Consolidated Mines to
Ponahalo Holdings, a
BEE company
R3.8bn
2006
2007
Anglo Coal
Advised Anglo Coal on its
BEE transaction
Thelo Incwala
Current
Advising on a broad based
Black Economic
Empowerment transaction
Palabora Mining
2005
KTI, MIT, WDBI
Acquisition of an interest in
the FirstRand Group
R4.5bn
2007
Anglo American plc and
Anglo Platinum Limited
R35bn Black Economic
Empowerment
transactions
2008
Anglo Platinum Limited
Advised Anglo Platinum on
its community initiative
2009
Anglo American
Strategic and debt advice
to Anglo American on the
restructuring of its BEE
transaction with Anooraq
2010
Anglo American
Advised Anglo American’s
transformation committee
Current
Xstrata
Advised on R2.6bn ESOP
Thelo Incwala
2006
Acquisition of a further 3%
interest in Incwala
Resources by Thelo
Incwala and refinancing of
senior debt
R251m
Thelo Incwala
Acquisition by KTI of a
10% BEE stake in
Metropolitan
2004
KTI
2004
Ukhamba Trust
Acquisition of a 10.1%
interest in Imperial
Holdings
R1.3bn
2005
Life Healthcare
Acquisition of Afrox
Healthcare by BEE
Consortium
R3.4bn
2006
Lafarge South Africa
Lafarge’s R1bn BEE
transaction
2006
Anglo American plc
Kumba BEE transaction
and the formation of
Exxaro – R20bn
2006
African Rainbow Minerals
R2.4bn acquisition of 29%
stake in Xstrata’s South
African Coal operations
2005
Impala Platinum
R4.1bn BEE transaction
with Royal Bafokeng
Resources
2005
Old Mutual plc
R7.2bn BEE transaction
with respect to Mutual &
Federal, Nedbank Group
and Old Mutual South
Africa
2004
SA Chrome
Merger of SA Chrome and
Xstrata’s ferrochrome
assets – R8.2bn
2004
Sanlam
R2bn BEE transaction
2004
AVMIN
Avmin, ARM, Harmony
BEE Transactions - R7bn
Notes
Includes transactions on which current Rothschild team members worked prior to joining Rothschild
Rothschild has played and
continues to play an active
role in the development of
BEE:
Directly, through the
implementation and
design of BBBEE
transactions, on behalf
of our clients
Indirectly, through our
ongoing dialogue with
government, State
Owned Enterprises, the
private sector as well
as various
representative bodies
for the private sector
In addition, members of
the team have assisted in
the design and
establishment of
transformation committees
at a number of leading
organisations including
KTI, Xstrata, Anglo
American and Impala
Platinum
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5 Rothschild’s review of BEE
Rothschild’s analysis was shared with key stakeholders and highlighted a number of challenges and issues in the BEE environment
Source Average BEE scores since 2007 – KPMG BEE Survey 2011
Transformation is not progressing at the pace expected by stakeholders Key observations
In 2011, Rothschild conducted an independent review of
the progress of transformation, which was shared with
key role players, including Government, large corporates,
BEE players and other opinion formers
We identified the following challenges and issues in the
current BEE environment:
An over-emphasis on ownership
Requirement for increased broad based participation
Unsustainable funding structures
Challenges in delivering real benefits to communities
and employees
The strong correlation between education, skills
development and employment equity progress
A compliance based mentality (“tick-the-box”)
reflected in the behaviour of many corporates,
undermines the spirit and objectives of BEE
The complexities of assessing the progress made on
transformation given the lack of reliable, objective and
consistent data
Regulatory uncertainties and costs of implementation
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6 Revisions to the 2011 BBBEE Amendment Bill
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The current draft incorporates important amendments from the 2011 Amendment Bill, including
Definition of BBBEE
The definition referred to “sustainable” economic empowerment
This could have presented challenges in determining what entails a sustainable transaction e.g. once off
grants which are not ongoing
“Sustainable” has been replaced with “viable” thereby providing clarity and reducing potential
misinterpretation
Definition of BBBEE “transaction”
The definition referred to any “transaction, practice scheme or other initiative which affects or may affect the
BBBEE compliance of any person”
– Implied that a BBBEE transaction was not limited to ownership transactions and could, for example,
include enterprise development initiatives
“Transaction” has been replaced with “initiative” thereby providing clarity and allowing for a wider set of
activities
Deletion of the definition for “local content” in the Act and inclusion of the concept under S9 (creation
of sector codes)
Allows for sectors to determine their own local content requirements taking into consideration sector specific
capacity constraints
Deletion of the “trumping provision”
This provision stated that if any conflict arose between the provisions of the Act and any other act (save the
Constitution) with regards to BBBEE matters, the Act would take precedence
This implied that companies who have previously complied with other regulations would have to measure
compliance in respect of the Codes or seek to gazette a sector specific code under S9 of the Act (the latter
would also need to be aligned to the Act)
– Created concern for certain sectors, for example the mining sector, which did not have a gazetted sector
code
The deletion of this provision provides greater certainty and avoids conflict with respect to compliance
requirements 6
Rothschild
believes that
these
amendments are
valuable as they
seek to provide
clarity and
reduce conflicts
7 Amendments and potential implications
Amendments Potential implications and observations
If requested to do so, the Minister may permit organs of state or public entities to determine their own qualification criteria for procurement and other economic activities which exceed those in sector codes
The procurement policies of organs of
state and public entities is critical to economic transformation
Practical qualification criteria taking into consideration capacity constraints will need to be set
Proposed qualification criteria by organs of state and public entities
– Should take into account sector specific capacity constraints
– Should follow a public process before implementation
– Should not differ materially between organs of state and public entities
Where a sector code has been gazetted in terms of S9 of the Act, enterprises in that sector may only be measured in terms of that sector code
May negatively impact compliance
scores in relation to previous measurement criteria
Amendments in
measurement
criteria may risk
dissipating the
energy and
commitment
already expended
by stakeholders
Clarification of the application and interpretation of the Act
S9(6)
S10(2)
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Black bold font relates to
key implications and
observations
Blue bold font relates to
potential
considerations/alternatives
7 Amendments and potential implications
Amendments Potential implications and observations
Establishment of BBBEE Commission
– As a trading entity within the administration of the DTI
The establishment of the BBBEE
Commission should improve the effectiveness and consistency of BBBEE compliance and reporting
It is imperative that
– The independence of the BBBEE Commission is unquestioned
– The BBBEE Commission is fully operational as soon as the Amendment Bill is passed into law
Consideration should be given to how conflicts of interest affecting the Commissioner and staff will be identified and managed
The inter-
relationship
between the
BBBEE
Commission and
other stakeholders
(Governmental
departments such
as the DTI; BBBEE
Advisory Council)
will need to be
clearly set out so
as to avoid
confusion
regarding lines of
authority
Establishment of the BBBEE Commission to deal with compliance
S13
(B,E)
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Black bold font relates to
key implications and
observations
Blue bold font relates to
potential
considerations/alternatives
7 Amendments and potential implications
Amendments Potential implications and observations
Functions conferred on the BBBEE Commission to evaluate and monitor progress include
– The maintenance of a registry of major BBBEE transactions above a certain threshold
– The receiving and analyzing of reports concerning BBBEE compliance
This will ensure consistent application of
scoring criteria to measure compliance
Subject to confidentiality requirements, the registry and the BBBEE Commission’s reports/findings should be made available to the public annually
The BBBEE Commission should also take responsibility for facilitating the dialogue between Government and the private sector to ensure:
– Stronger alignment between BEE initiatives and sectoral / national needs with respect to Corporate Social Investment spend/Preferential Procurement
– Increased Government and private sector co-operation in the implementation of effective learnership programmes (Skills Development)
– Increased co-operation between corporates and DFIs to ensure that enterprise development expenditure is directed to the most deserving beneficiaries
The standardised
nature of reporting
to the BBBEE
Commission
should eradicate
the current lack of
consistent, reliable
data required to
assess the
progress of BBBEE
Establishment of the BBBEE Commission to deal with compliance
S13F
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Black bold font relates to
key implications and
observations
Blue bold font relates to
potential
considerations/alternatives
7 Amendments and potential implications
Amendments Potential implications and observations
The BBBEE Commission may, on its own initiative, or on receipt of a complaint in the prescribed form, investigate any matter arising from the application of the Act, including any BBBEE initiative or category of BBBEE initiatives
Gives the BBBEE Commission the
power to evaluate all BBEE initiatives for compliance with BBBEE regulations
It is not clear how and when new BBBEE initiatives will be evaluated
– It might be appropriate for new initiatives to be reviewed and approved before implementation
Further consideration to be given as to how to reduce superfluous and unfounded complaints
An appropriate appeal process should be set up to allow those found guilty of an offence to appeal such findings
The BBBEE Commission may issue summons to any person who is believed to be able to furnish any information which may assist in an investigation
Confers on the BBBEE Commission
the same powers held by a court
It is questionable whether the BBBEE Commission should be given the same authority as a court
The BBBEE
Commission’s ability
to investigate
initiatives may be
interpreted as having
the ability to sanction
initiatives
If this is the intention,
then further clarity is
required as to how
this will be practically
implemented
S13J
S13K
Strengthening the evaluation and monitoring of compliance with the Act
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Black bold font relates to
key implications and
observations
Blue bold font relates to
potential
considerations/alternatives
7 Amendments and potential implications
Amendments Potential implications and observations
All spheres of government, public entities, organs of state and JSE listed companies to report on their compliance with BBBEE legislation
Unlisted public companies are
excluded from reporting obligations
– A consideration may be for all public companies with a predetermined minimum public interest score to comply
This amendment provides clarification as to what will be considered to be an offence under the Act and the fines thereof
Fines not exceeding 10% of annual turnover taking into account the value of the transaction
Refusal to disclose confidential information is an offence under S13N(1)
Linking fines to the value of the
transaction rather than only the turnover of a company provides for penalisation on a fair and equitable basis
It is not clear whether non-compliance is included as an offence
– Whilst the definition of fronting may be considered wide enough to include non-compliance, it would be helpful if the Act specifically addresses this
Further consideration
should be given to
how large unlisted
public companies
could be included in
the group of entities
required to report on
their compliance with
BBBEE legislation
S13G
S13N,
O
Strengthening the evaluation and monitoring of compliance with the Act
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Black bold font relates to
key implications and
observations
Blue bold font relates to
potential
considerations/alternatives
8 Concluding remarks
Most of the proposed amendments to the Act are likely to be viewed positively as these
amendments should assist to
Support sustainable economic transformation
Align the many complex and different BBBEE regulations
Provide consistent, reliable data to assess the progress of BBBEE
Due consideration will need to be given to the unintended consequences of these amendments,
including
Ensuring that the energy and commitment levels expended by companies is maintained
Providing targets which are realistic and, therefore, achievable
Clearly articulating the authority and mandate of the BBBEE Commission
Precisely stipulating instances of non-compliance and ramifications thereof
Rothschild welcomes the opportunity provided by the Portfolio Committee to provide its comments
on the BBBEE Amendment Bill. We acknowledge the efforts of the DTI in engaging with all
stakeholders to formulate clear, concise and aligned regulations for the benefit of all stakeholders
Whilst the Amendment Bill provides significant clarification on key elements of BBBEE, further detail is required in key areas
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