BEE: Govt is undermining its own policy on BBE deals that have a ‘broad base’

Posted on Feb 12, 2021 in News

“Many broad-based black economic empowerment transactions benefiting the poor have been delayed for more than two years. Is this due to government failure, or is there a method to the madness? There is an apparent lapse in governance that has undermined initiatives that benefit poor black communities,” writes Martin Nicol.

Since April 2019, the Broad-Based Black Economic Empowerment (BEE) commissioner Zodwa Ntuli has been on the warpath, insisting that several of the longest-established black empowerment schemes are operating in breach of the legislation, claiming BEE “ownership points” to which they are not entitled.

This is surprising for several reasons, not least because there has been no change in the intricate laws and regulations covering approved BEE since 2015.

Ntuli is an employee of the Department of Trade, Industry and Competition (DTIC) who was appointed by the minister in early 2019.

The main Broad-Based Ownership Schemes (BBOS) have made repeated calls on the DTIC to clarify the situation. The most recent was on 8 February 2021. But they have got the run-around from government.

Wiphold, one of the pioneer schemes, commented to the Sunday Times: “You talk to the commissioner and she says one thing. You talk to the minister and the minister says another thing… You have a commissioner who seems to be fighting and wanting to come up with her own interpretation of this policy. Then you talk to the department and they seem to be understanding and supportive of our broad-based ownership.”

The lack of certainty had a disastrous impact on the investment strategies and effectiveness of BBOS and undermined their standing. Significant business opportunities have been lost and lasting damage has already been done. A formal clarification from the DTIC was requested for two years, without result.

Why would the ANC government want to take BEE benefits away from poor black communities, workers and NGOs? Why would it penalise innovators who have managed to structure share transactions with businesses that benefit the broader black community?

The story is complicated; a lot of it is secret (the commission hides its policies and actions behind the screen of confidentiality) and ultimately it appears completely inexplicable.

Why are the department and its commissioner on different pages?

The short answer, from a Business Day editorial last November, is that the commissioner has “gone rogue – the broad-based BEE commissioner is abusing her power and only minister Ebrahim Patel can stop her”.

This is an extreme statement about both a public official and a government minister. The MacBook dictionary says that the phrase “go rogue” – often used to describe elephants – means to “behave erratically or dangerously, especially by disregarding the rules or the usual way of doing something”.

To say the commissioner has “gone rogue” is to condemn both the commissioner and the minister (who has failed to call her to account).

The ability and power of the minister to intervene is beyond question. The BBBEE Act specifically states that the commission is “an entity within the administration of the Department” (section 13B (1)) and that “the Minister may issue directives of a general nature, which are consistent with this Act, to the Commission concerning the performance of its functions and the Commission must comply with any such directive” (section 13B (4)).

But it is too easy to blame it all on an out-of-control commissioner and a minister who fails to give leadership and direction. There are material reasons government feels pressure to move to a new, more limited model of empowerment, one that needs less emphasis on the “broad base”.

This is not a recent development, a fact illustrated by history and a most unusual instance of a minister making a heartfelt apology to Parliament.

The mechanics of BEE are complicated. At first it was a gesture of reconciliation (and co-option!) – as the big company players of the apartheid years handed out shares, directorships and business opportunities to carefully selected black people.

Soon, BEE became sensible business practice. From the late 1990s, different sectors adopted voluntary “charters” to promote black advancement.

Government stepped in with a binding legal framework for BEE in 2003. This was managed by the Department of Trade and Industry (the dti), which developed a bewildering array of regulations in Codes 000 to 500.

A parallel policy process managed by National Treasury linked the BEE points of a company to its qualification to tender for government business.

If a company was a perfect BEE candidate (with what is now called a No 1 verified BEE rating) it could win a public tender, even if it charged a higher price than other, less-empowered bidders.

Over time, tendering companies could win extra points for their BEE prowess if their own suppliers were BEE compliant, say with a 26% black shareholding, a majority of black executives and a bursary scheme for black students.

Even if companies doing business with government were not themselves BEE compliant, it made a difference if their clients were. In effect, all companies have been incentivised to get with the BEE programme – or to pretend that they are.

This is where “fronting” comes in.

Fronting (which is a crime in terms of the BEE laws) often takes the form of “window-dressing” where a business lists low-level black workers, such as secretaries, gardeners or security staff, as company directors or shareholders so that the company can appear to be more compliant with BEE transformation goals and qualify for government tenders. The workers are often unaware of this deception.

Several of the most notorious examples of fronting have been provided by Angelo Agrizzi, the former chief operating officer of Bosasa, a catering services company, who published a riveting confessional biography last year: “Inside the Belly of the Beast, the REAL Bosasa Story”.

Gavin Watson, the effective owner of the company, “became the master of BEE fronting in South Africa… Veiled in contorted, elaborate (and encumbered) share structures, together with handsome salaries and other benefits, there was very little true empowerment.

“In terms of the company’s shareholding, when it was time to update Bosasa’s annual BEE certificate, all this lily-white-over-the-age-of-fifty-owned company had to do to claim the right amount of points was to appoint a corrupt verifications agent and pay them R20,000 for every level they wanted the company raised by.”

Government may not have acted against Bosasa – many ANC leaders benefited directly from its operations – but it was fully aware of fronting and how it undermined policy.

The then minister Rob Davies told the Financial Times in 2010 how tenderpreneurs had won government tenders on the basis of their BEE credentials, although they had no experience or expertise and had to outsource the actual work to less BEE-compliant companies. This both defeated the intention of BEE and increased costs for public sector purchasers.

After long deliberations, the BBBEE Act 53 of 2003 was tightened up with a major amendment in 2013. This provided for, inter alia, the establishment of the BBBEE Commission to oversee the implementation of a revised framework. (This was set up, as an entity within the dti, only in 2016.)

Why did the minister have to apologise?

The new BEE legislative system, buttressed with revised regulations, came into force on 1 May 2015.

On 5 May 2015 – without consultation, and long before the commission was formed – the dti issued a “clarification notice”.

“It came as a bolt from the blue,” said Tony Balshaw at Mazars, a law firm. The dti announced that the number of BEE ownership points that could be earned by black participants in Broad-Based Ownership Schemes (BBOS) and Employee Share Ownership Plans (ESOPs) had been reduced to only three points out of the available 25 points.

These schemes had been purposefully designed not to benefit black individuals as such, but to give black communities and black organisations a share in the economy. But now the dti said these schemes would count for much less than individual black share ownership when assessing black empowerment status. This was a fundamental change to the Revised BEE Codes that had just come into effect.

Analysts said that the significant cut in the BBBEE ownership points that could be claimed by many companies removed any significant benefit of including employees, communities or foundations in black ownership structures. Some of the largest, established BBOS with either union members, or black community projects as shareholders, would receive less black ownership recognition.

There was an immediate horrified reaction from the BBOS and their advisers.

Three days later, on 8 May, the dti issued a media statement to clarify the earlier clarification notice. The lower ownership points would only apply to transactions after 1 May 2015, they said.

Then, four days after that, the dti completely withdrew the clarification on ownership and a new “Revised Notice of Clarification” appeared in the Government Gazette, signed by then minister Rob Davies (who had been abroad the week before.)

The dti made a complete and abject climb-down.

Davies spoke to the Portfolio Committee on Trade and Industry in Parliament on 19 May 2015. He acknowledged the dti had made a mistake in sending out a message that collective “schemes were not encouraged, when in fact the opposite was the case”. The notice had now been withdrawn and it was “back to the status quo”.

In response to members’ questions on 9 June 2015, director-general Lionel October made another unequivocal statement in Parliament:

“… the ownership card remained unchanged… dti fully retracted the [5 May 2015 clarification] notice… The Minister [first] indicated that it could work for future transactions, but the implication was that many companies doing full broad-based empowerment would have been excluded from getting full points in perpetuity. The Minister then withdrew the proposal after understanding the full implications.” (As reported by the Parliamentary Monitoring Group)

The historical record shows that there is a determined faction within the dti that seeks to favour individual black ownership in BBBEE transactions, and to back-pedal on broad-based schemes.

They think government transformation policy should be focused on creating black capitalists. If share transactions that benefit the poor and the disadvantaged can no longer earn investors points to boost their empowerment rating, they will have to be redirected to black individuals.

There are plainly people in the dti who believe this is a good thing. They lost their first, clumsy battle in 2015 – but they came back in 2019. And this time they had full ministerial support.

The current assault against BBBEE came from what should have been the least expected quarter – the BBBEE Commission itself.

It started in April 2019, with a letter to the majority of broad-based trusts to inform them that the newly-minted commission did not regard them as black-owned, but as illegal black ownership fronts (as defined in the legislation). They had “to rectify their ownership structure and undergo reverification of their BEE status or face investigation for fronting”.

This letter posed a major threat to the very existence of the many broad-based trusts whose participation in investments was based on being recognised as a vehicle of empowerment at an ownership level.

It was also preposterous. How could government believe that entities such as the Mineworkers Investment Company (MIC) or the Mineworkers Investment Trust (MIT) are examples of fronting?

Mary Bomela, the CEO of the MIC, which is owned by the MIT, said “the MIT represents a broad base of black beneficiaries from the National Union of Mineworkers, their dependents and the communities they come from or in which they live. These are all black individuals, and predominantly black, rural women given the focus of some of the programmes being funded by the MIT such as the Mineworkers Development Agency. The MIT also has a long track record of supporting this beneficiary base many years before the Codes were published.”

Many of the trusts immediately appealed to minister Ebrahim Patel to gazette a clarification that broad-based ownership schemes are legitimate black owners.

These included the Kagiso Charitable Trust, the MIT, HCI, the WDB Trust, Ditikeni Trust and Wiphold Trusts.

This should not have been a problem, but 18 months later, Sidwell Medupe, the departmental spokesperson, said that issuing the clarification notice that the schemes had requested was still under consideration.

The 2019 letter – which is neither based in law nor official government policy – has had a chilling effect on the ability of broad-based schemes to develop their investment portfolios for almost two years.

Bomela said in November 2020: “The current lack of policy certainty is placing in jeopardy the investments held by the trusts and their continued ability to reduce poverty, improve skills and create black entrepreneurs…

“Growth and expansion initiatives valued at millions of rands – which would not only stimulate black ownership of the economy, but also its overall recovery – have had to be put on ice.

“Transactions which would stimulate the growth of these trusts and the economy as a whole are stalled because of the uncertainty and the scent of ‘investigations’.”

Louisa Mojela, co-founder and group CEO of pioneer women’s empowerment vehicle Women Investment Portfolio Holdings (Wiphold), told the Sunday Times “instead of more BBBEE there is going to be less”.

She said that “uncertainty over the interpretation of the codes by the commission has created an untenable environment for Wiphold because investors are wary of entering into empowerment transactions if there is doubt about the black ownership status of their BEE partner”.

“Wiphold and other pioneer empowerment vehicles have been pleading with the department of trade and industry to publish a clarification notice, but to no avail.”

The new stance of DTIC will deprive the most-deserving empowerment beneficiaries of their long-standing, official BEE status. This means less broad-based participation in BEE and the threat to cut off BEE benefits from charitable trusts that benefit black children, black women and poor black communities.

The BBOS have found minister Ebrahim Patel and his department to be two-faced in their interactions. The BBOS need to understand that there are advantages for the minister – and the department (with all its factions) ‑ in moving towards a model of BEE that is based on state support for individual black capitalists and their firms.

Performance targets are easier to achieve when BEE points can be scored by fewer companies. Reporting on compliance is easier for the department when criteria are narrower.

But the main reason is to make BEE a more efficient engine for building the black middle class in the private sector. This is vital for the ANC, as budget difficulties are compelling government to limit both employment and salary levels in the civil service (the main vehicle for black advancement to date).

Cynical observers will also see a potential here for what Karl von Holdt has termed “managed corruption”, where the rent paid to corrupt officials is kept within reasonable limits, and the wheels of bureaucracy turn efficiently.

Kickbacks to individuals or parties can be extorted more easily when it is clear what the rules are – and what adjustments need to be made (by both regulator and applicant) to move a compliance rating from level 2 to level 1.

They are angling to make the BBBEE commission the gatekeeper for government contracts.

Gatekeeper for state contracts

The commission has a way to go before it can be a credible gatekeeper, but it is barely two years old. The assault on BBOS seems to be a case of picking the low-hanging fruit first.

BBOS represents levels of flexibility in the law that regulatory compliance checkers want to set aside. The compromise most likely is that past transactions will be exempted and allowed to retain their points, while new transactions will be bound by the stricter BBBEE rules.

This is exactly what was attempted in 2015 – in the 8 May press statement – but was abandoned in the face of pressure. The pressure from BBOS worked in 2015 within days. In 2019, more intense lobbying and pressure has yielded no results in more than two years!

The commission reports every year on compliance with BEE legislation – and things are not going at all well. The majority of “measured entities” are still not compliant with the law in their reporting.

The 2019 commission report on the national status and trends on broad-based economic empowerment showed a decrease in the number of compliance reports that had to be submitted by JSE-listed entities, from 43% in 2018 to 42%.

State-owned enterprises all have to comply with BBBEE legislation, but most do not. In 2019, only 43 organs of state (15% of the total) complied.

The commission is struggling to get the BEE framework to deliver.

Private sector compliance is totally voluntary – unless the company is listed on the JSE or does business with the state. And here there are major incentives for ensuring you get a good BEE rating – by hook or by crook.

So the commission is confronted with many instances where companies claim BEE status irregularly. This is often by using complicated company ownership structures – which may include trusts (where beneficiaries can be hidden without breaking any laws).

The refuge of the commission is to tighten and restrict criteria for recognising BEE ownership. The 2015 attempt to reduce ownership points for BBOS and ESOPS was described by then minister Rob Davies as using “a rather large sledgehammer to hit a fly”.

In 2019, the commission used a fly-swatter – and this has been successful, so far. They did not illegally and unprocedurally seek to change the law; they simply “interpreted” the law.

Turning BEE into an effective tool – regulated by the BBBEE commission – is increasingly important for government, so that the billions spent on public procurement are effectively used for transformation, and to boost the participation of black people in jobs and leadership positions in an economy that remains dominated by whites.

But this should not be at the expense of cutting broad-based empowerment schemes off at the knees.

Ending BBOS is not inevitable. It does not have to happen.

Things can take a different course if some people make better choices. They have every reason to do so. The DTIC should issue the clarification notice requested by the broad-based investment schemes – without further delay. DM

  • Martin Nicol is a senior consultant for the Institute for African Alternatives and guest editor of its journal, New Agenda.
  • This article appeared on the website of Daily Maverick on 10 February 2021.