Archive for August, 2010
Is it a duck?
Posted by Keith in BBBEE Knowledge, General, Scorecard points, True Empowerment on August 26th, 2010
If it does not look like a duck, does not walk like a duck, does not sound like a duck, then it probably is not a duck, even if it tells you its name is “Duck”.
If they call it a BEE deal or a BEE company but it does not sound like a BEE deal or a BEE company, then it is not a BEE deal.
I’ve said this hundreds of times, and the media, commentators, businesspeople and government still insist on calling it BEE even if it is not BEE.
B-BBEE was created and defined by the Broad-Based Black Economic Empowerment Act, 53 of 2003. It defined a set of codes that set up a system of measuring B-BBEE complaincy. That system is called the scorecard. The scorecard measures various indicators against targets, and assigns weightings to each indicator which convert to points. The final result after doing all the calculations is a B-BBEE scorecard. The scorecard needs to be verified (checked) and a certificate is issued. That valid certificate is the ONLY measurement of B-BBEE compliance. If someone talks of a BEE deal, or a BEE company, the only question to ask is “How many points does this deal earn/has this BEE company achieved? ” If there is no answer, or the answer is zero, there is no B-BBEE compliance, and no one may call this a BEE deal.
Even if they say it is BEE, does not make it BEE.
Fronting and Enrichment – the solution
Posted by Keith in BBBEE Knowledge, politics, procurement on August 20th, 2010
Government tenders awarded to tenderpreneurs, and enrichment via dodgy ownership deals causes a lot of anguish for many South Africans. Currently government tenders are awarded on the basis of many factors: price, performance and “empowerment credentials”. This loosely translates to asking a company for its black ownership and details of its directors.
Section 10 of the B-BBEE act makes it compulsory for organs of state and public entities to take into account the B-BBEE status of the supplier in setting up preferential procurement policies. Virtually no public entity is doing this. Those that do not are in breach of the constitution. A tender, license or disposal of state assets can only be awarded to a business if government takes into account the B-BBEE status of the tenderer. The act states further “..and as far as is reasonably possible apply any relevant code of good practice issued in terms of this act.”
Although the act does not give a clear definition of “take into account” or ” reasonably possible apply”, and does not state how it should be applied, what is clear is that every state entity MUST at least ask for a valid B-BBEE certificate, and should give their own reasonable interpretation of how they are going to apply the codes to their particular tender or license.
Any government agency that does not do this is in breach of the act and therefore in breach of the constitution.
The act was signed into law in January 2004, and the Codes of Good Practice were gazetted in February 2007, so government has had more than 3.5 to implement its own policies.
There is no discretion at to whether or not government applies this clause.
Once they do, the affect will be that all organs of state will be asking all suppliers for their valid B-BBEE scorecards. This will result in focusing government on broad-based issues, rather than the old, discredited and annoying narrow-based method that they currently use. It will result in more compliance and improved transformation.
Fronting
Posted by Keith in Fronting, Verification on August 20th, 2010
There are two types of fronting taking place.
Fronting Activity 1:
The first, and most important, and most harmful is where a company allocates, or pretends to allocate shares to a black person, and puts him on the board, with the express intention of misrepresenting their business.
This is wrong, but happens in reaction to requests from predominantly government and public enterprises for details of the black ownership of the entity.
It is becoming commonly accepted that to do business with government or a public enterprise, you need to have anywhere between 25% and 60% black ownership.
There is no consistency: Various public enterprises and government departments have different requirements. Even within the same department, tenders have different requirements.
All public tenders are governed by the PPPFA (preferential procurement policy framework act) which lay down procedures and process from evaluating tenders. It even states that all tenders must take into account the empowerment credentials of each tenderer. It does not give any specific details on how those empowerment credentials will be evaluated, which is why each tender document looks different.
There is no clear interpretation of black ownership. As a result many unethical companies are creating front companies that are 51% black owned – where in some cases the black ownership has no idea he is even a shareholder, or has signed a proxy giving the other owners full rights to run the business as they please. There are cases where the new owner is only a temporary owner, and HAS to sell the shares back to the company some time in the future. While the ArcelorMittal deal is not necessarily fronting, this is exactly what their share deal is doing.
Fronting Activity 2:
The second type of fronting relates to the B-BBEE scorecard/certificate. A scorecard is usually only asked for by private enterprise, and measures the entities B-BBEE status against a wide rage of indicators – that is why it is called “broad-based”. Some companies will misrepresent their B-BBEE status to obtain a higher score than they would otherwise achieve. One recent example is of Shield Chemicals who forged their B-BBEE certificate – a fraudulent activity.
Because a certificate is based on up to 30 indicators, it becomes more difficult for a company to front, and it becomes easier for an analyst to identify that fronting. If a company used the dubious ownership methods mentioned previously, a consultant or rating/verification agency would quite easily pick it up and award zero points to the company as we estimated with the ArcelorMittal deal. The indicators are cleverly interlinked – if a company earns zero points on ownership and employment equity, it would be unusual, though not impossible if it earned full marks on management control and skills development, and these specific indicators would be checked by the rating agency.
Conclusion:
A verified scorecard becomes a public document that is scrutinized, and is more likely to be caught out if fronting than where a company submits a tender to a government department, and includes falsified information. It is most likely that the customer will identify an invalid scorecard, or even a competitor. A verification agency will also examine certificates to see if there is an indication of fronting.
Most incidences of fronting are due to fronting activity 1, not 2. A broad-based scorecard is less likely to be fronting than a share certificate.
The best way to reduce fronting is for government to follow the B-BBEE scorecard approach.
Business Report Interview with Sandile Zungu
Posted by Keith in BBBEE Knowledge, Interpretations, Ownership, Scorecard points, True Empowerment on August 19th, 2010
The Business Report has conducted an interview with Sandile Zungu, a well known businessman and partner in the ArcelorMittal deal. He is also a member of the BEE Council.
Read http://www.busrep.co.za/index.php?fSectionId=553&fArticleId=5598094
Some of the questions asked of him was:
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BR: Some of the BEE score agencies rate it as not a particularly good deal with low scores.
SZ: I suspect that they have jumped the gun, in terms of the value in empowerment hands. I doubt there are many deals that would surpass this one. Number one, the empowerment shareholders, in terms of how the deal has been structured, is guaranteed the minimum returns. And most of the empowerment deals there is almost like speculation as to in five years’ time, in seven years’ time, how much money am I going to make? When the share price collapses, a deal that was deep in the money suddenly is getting wrecked. We have removed that uncertainty in this transaction. And I think that’s a very positive attribute, so it’s very empowering. I think also we have a further share in the upside in the share price of ArcelorMittal as it goes up, and we expect it to go up, of course up to a certain cap. We’ve agreed to that. But there’s further upside and that’s very important for empowerment, and therefore it’s a very empowering deal. Now the people who have actually gone further to score it using the balanced score card, I suspect they have jumped the gun in my opinion. Because a balanced scorecard would want to explore the issues of contribution towards (indistinct)… We want to explore the issues of skills development, management control. I’m not so sure how those have done that without having spoken to us as Ayigobi as well as the management of ArcelorMittal.
BR: Have you done your own scorecard or had it done on your behalf?
SZ: The transaction is not completed, that’s the problem. As ArcelorMittal has indicated, they have only now just commissioned a rating agency to do their scoring. This thing is not an overnight thing, it’s a process, and in the fullness of time I think people will be very pleased indeed that this transaction would score highly.
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Our comment as the BEE consultancy that broke this story:
Yes, of course we did a quick assessment. It’s not jumping the gun, but doing a quick analysis, in the interests of B-BBEE and the shareholders.
What continues to give us concern is that ArcelorMittal did not evaluate the deal BEFORE signing it, to maximise the points. To state that they have now called in a rating agency is of course the wrong organisation to call in. A verification agency’s job is to verify the points earned, not award and calculate the points for them. They should have done this already! The Verification Manual repeatedly mentions that the task of the verification agency is to RE-CALCULATE the score, clearly implying that the measured entity should have a score, and evidence or suitable documentation to justify that score. If they don’t then zero points must be allocated or else they could be accused of fronting!
The most concerning part is Mr Zungu is a member of the BEE Council, and should know all this.
Fronting should be criminalised
Posted by Keith in BBBEE Knowledge, Fronting, True Empowerment on August 19th, 2010
See http://www.busrep.co.za/index.php?fArticleId=5607784
Parliament wants to criminalise fronting. My point is it is fraud, and action can be taken, especially is a company director commits fraud.
I don’t think the dti has the capacity to stop it. I think a good way is to name and shame, like I did on Monday to Shield Chemicals.
Another point is there is fronting going on, not only in the B-BBEE space, but on government tenders which has nothing to do with B-BBEE. Parliament, and the public are more concerned about irregular tenders and fronting than a forged B-BBEE certificate. And in this case the dti is the wrong department to do something about it. Tendering and government procurement is the realm of the Treasury Department.
The anger of many people directed at B-BBEE is completed mis-placed. The responsible act is the PPPFA.
Government is doing nothing to further the good cause of B-BBEE
Posted by Keith in BBBEE Knowledge, politics on August 17th, 2010
I’ve come to the conclusion that government is doing nothing to further the cause of B-BBEE. The only organizations doing anything are in the private sector. Thousands of businesses have worked towards compliancy and obtained a scorecard. They give their scorecards to each other, because that is how B-BBEE is supposed to work. Each company asks the next one for a scorecard: there is no law forcing a company to get a scorecard, just the pressure from their customer in the private sector. When it comes to government, t stops working. Government does not ask for your scorecard, and few public enteprises and government departments even have their own scorecard. The incidence of compliance in the public sector is almost zero.
Some time back a survey was done by Consulta Research, purporting to show that government has made enormous strides in B-BBEE. That survey was flawed. They forgot the ask the only question that should have been in the survey: “Can you please give me your B-BBEE scorecard or B-BEE certificate.” That would have shown that private enterprise leads the way over government – in most cases the relevant government department or enterprise does not even know what B-BBEE means.
Government and departments have no scorecard, and neither do they ask for a scorecard when you may want to do business with government. If I want to do business with many of the large corporations MTN, Vodacom, FNB – the will ask for my B-BEE scorecard. This polite request, not always an demand has been sufficient for many thousands of businesses to work towards achieving a B-BBEE certificate. If government has to ask the same, the incidence of compliance would increase – probably double overnight.
Instead government chooses to focus on other areas, in contradiction to the B-BBEE codes. The debacle over ArcelorMittal is a case in point. Governmentis interested in 26% black ownership, which has almost nothing to do with B-BBEE. ArcelorMittal would want to get a B-BBEE certificate because their customers are asking, and ArcelorMittal has been promising this for years! Instead ArcelorMittal want to allocate 26% of their shares to meets government’s requirements, but this goes nowhere to helping ArcelorMittal get a scorecard.
Instead of furthering B-BBEE, and supporting those companies that have made a sincere effort, goverment is hindering B-BBEE.
ArcelorMittal – a B-BBEE Pointless Deal
Posted by Keith in BBBEE Knowledge, Ownership on August 16th, 2010
The ArcelorMittal deal was done in order to comply with the B-BBEE codes. If that is their intention they have done a very bad job.
Based on their published SENS announcement we have calculated the points they could earn this year, and made various estimates where we felt it appropriate.
Ownership is made up of 23 points.
Voting rights of black people in the organization: Target 25% plus 1 vote: 3 points
The participants hold 26% of the shares, though some of the participants are not black as defined (the Gupta family). If the Gupta family owns 10% of the BEE SPV consortium that is a 21% shareholder then effective ownership would be 23.9% and not 26%. However the modified flow through principle applies, ensuring that targets are reached and 3 points earned.
Points earned: 3
Voting rights of black women the organization: Target 10% plus 1 vote: 2 points
The BEE SPV has stated that 25% of its shareholding will be black women, and using the flow through principle black women will own 5.25% of the business.
The ESOP is reserved for employees and holds 5% of the business. If black women account for half, there would be 2.5% black women ownership, though based no the ArcelorMittal business it is reasonable to estimate that 80% of its black employees are male.
Therefore we estimate that there is 6.5% black women ownership, and 1.3 points will be earned
Points earned: 1.3
Economic interest of black people in the enterprise: Target 25%: 4 points
The participants will only earn 5% of ordinary dividends and 0% of extraordinary dividends for at least 5 years. Economic interest, using the modified flow through principle will be less than 5% of 26%=1.3 % out of a target of 25%. We would estimate 0.21 points will be earned for economic interest, though the key principle of substance over form suggests that zero economic interest will be earned.
Points earned: 0.21
Economic interest of black women in the enterprise: Target 10%: 2 points
Based on 6.5% black women ownership who receive less than 5% of dividends, economic interest will be less than 0.325% and 0.06 points earned.
Points earned: 0.06
Economic interest of black natural people in the organization: Target 2.5%: 1 point
This would include employee share ownership schemes, and it is likely that some of the participants in the BEE SPV fall within this category. We estimate that 6% of the shareholders fall into this category but they only earn 5% of the economic interest and 0.1 point earned.
Points earned: 0.01
Ownership Fulfillment: 1 point
Ownership fulfillment has not taken place so zero points are earned.
Points earned: 0
Net Value: 7 points
Net value is based on economic interest and the repayment schedule. Payment would have been made in full, but economic interest is only 1.3% out of a target of 25%.
Points earned: 0.36
Bonus points:
Involvement in the ownership of the enterprise of black new entrants: Target 10%: Points 2
The ESOP is likely to be black new entrants, and part of the consortium is likely to be new entrants. Out of the 26% ownership we could expect 8% to be black new entrants. However points are earned only based on economic interest. Economic interest of the entire consortium is only 1.3%, so the share of black new entrants is about 0.04% out of 10%
Points earned: 0.01
Involvement in the ownership of the enterprise of ESOPs: Target 10%: Points 1
This is also based on economic interest, and less than 0.01 points will be earned.
Points earned: 0
Grand Total: 4.95 points out of 23
Not many points….
Comments on ArcelorMittal BEE Deal
Posted by Keith in BBBEE Knowledge, Ownership on August 16th, 2010
Salient features:
ArcelorMittal is creating a new business OPCO which will carry on business in South Africa as Mittal.
South African assets of ArcelorMittal will be transferred to OPCO.
OPCO is effectively the new ArcelorMittal in South Africa.
OPCO will be owned by:
ArcelorMittal – 74%
BEE SPV – 21% (a BEE consortium)
ESOP Newco – 5% (an employee share options scheme)
OPCA has share capital of R1000, and has 1000 shares in issue.
Payment:
BEE SPV will subscribe to 210 “A” shares of OPCO at a subscription price of R1 per share
ESOP Newco will subscribe to 50 “B” shares of OPCO at a subscription price of R1 per share
The BEE SPV is a consortium of:
ZICO SPV (led by Sandile Zungu);
Mabelindile Archibald Luhlabo;
Mojalefa Mbete;
Pragat Investments (Jagdish Parekh);
Prudence Zerah Mtshali;
Phemelo Ohentse Robert Sehunelo;
Zebo Lesego Edwin Tshetlho;
Oakbay Investments (Gupta family members); and
Mabengela Investments (led by Duduzane Zuma).
Approximately 25% of the shareholding in BEE SPV remains to be allocated to a women-led consortium.
It should be noted that Oakbay Investments is the Gupta family, and Indian national, and therefore not “black” as defined in the codes.
The ESOP Newco is a special purpose vehicle for facilitating an employee share ownership plan in relation to OPCO shares
Voting Rights:
All parties will have full voting for the duration of the ownership of the shares.
Economic Interest:
The “A” shares will receive 5% of the ordinary dividends per share and nothing on extraordinary dividends.
The “B” shares will also only receive 5% of the dividends until the fifth year of the deal.
This implies that there is effectively zero economic interest.
Put option
The BEE SPV will be allowed to sell the shares back to OPCO at any time after four years, provided that ArcelorMittal South Africa receives confirmation from the Department of Trade and Industry and the Department of Mineral Resources, that OPCO shall be permitted to continue to recognise the BEE rating afforded to it through the Transaction.
This clause probably refers to the continued recognition of ownership after loss or sale of shares, or what some ignorant people refer to as “once empowered, always empowered”. The true situation is that the codes do not give the dti discretion to permit OPCO to continue to recognize the BEE rating as a result of the transaction. DMR is similarly excluded from the decision which is clearly covered in the codes, section 3.5 of statement 100. What they do say is at most continued recognition cannot contribute more than 40% of the score on the ownership scorecard. The repurchase of the share therefore will not happen with the codes as they are. This is a bit of a concern that this clause was inserted into their SENS announcement considering that Sandile Zungu is a member of the BEE Council and should have known better.
Repurchase of Shares:
If the BEE SPV does not exercise its put option (which as explained above is impossible for them), then OPCO has the right to repurchase some of their shares from years 5 to 20. The number of shares to be repurchased will depend on various factors including the dividends foregone over the previous years – presumably as a mechanism to use the dividends to pay for the initial cost of the shares.
27th January 2010 and Fronting
Posted by Keith in Accreditation, BBBEE Knowledge, Fronting, Verification on August 16th, 2010
1st February was a landmark day in the history of B-BBEE in South Africa. It was from that date onwards that only certificates issued by accredited verification agencies, or those in possession of a valid pre-assessment letter, would be valid.
Prior to that date other certificates, even if issued by a non-accredited agency or self ratings or BEE consultant swould be acceptable.
It is therefore quite interesting to see how many certificates were produced by consultants in the final three days before the deadline. We have seen more certificates dated 27th,28th,29th January than any other date! (30th January was a Saturday explaining why the 27th and 28th January were such popular dates). When I see a certificate dated 27th or 28th January, I examine it in a little more detail. This is not to say it should be rejected, but I am sceptical over the volume of certificates produced over that time. I look especially for certificates that do not use decimals in their calculations, or those where all the points have been earned for any one element. The mix of how points were earned is another indicator of fronting. For example if a company has earned all 23 points on ownership, but gets less than 2 points for management control, there is sufficient reason to want to double check the data. The codes do say that the measured entity must hold suitable evidence or documentation to prove their score. If they do not have the proof, then the entire scorecard must be rejected.
We do have a letter from the dti confirming that certificates produced prior to 1st February 2010 remain valid. If your verification agency does not accept certificates produced by non-accredited agencies prior to 1st February 2010, email us and request a copy of that letter.
Fronting is misrepresentation of one’s BEE position and is considered fraud. We have come across an interesting situation recently. In this case, they did not choose the 27th January date for their BEE Certificate, but used 30th November 2010 as the date on their certificate! Back-dating a scorecard is one thing, but forward-dating it is a recipe for getting caught out! A bit more research showed that they used the identical certificate last year with a date of 30th November 2009l. The certificate purported to be from EMEX (a very reputable verification agency), and was obviously forged. Investigations are continuing, and it is currently impossible to state who is at fault here, but there is no doubt that this certificate is not valid, and does not give the true BEE situation of the company.
Valid certificates – 2
Posted by Keith in Accreditation, Interpretations, Verification on August 13th, 2010
The scenario: An agency has applied to SANAS but not yet received it pre-assessment letter. The agency produced a certificate for their client on 1st June 2010.
Is it valid?
Points to consider:
1) The minister’s notices states that a valid certificate is one that is produced by an accredited agency or one that has a valid pre-assessment letter. The term “valid pre-assessment letter” is crucial. SANAS performs a pre-assessment visit to the agency and if it achieves minimum standards with its management system, SANAS will issue a pre-assessment letter. A pre-assessment letter is not the same letter that SANAS may send as an acknowledgment or acceptance that the agency has applied to be a verification agency.
2) The agency began its work with its client before its pre-asessment letter was issued, and to date, August has still not received its pre-assessment letter. It may have had reason to believe that it would receive its pre-assessment letter during the verification process.
Is the certificate they issued valid? Following the strict guidelines of the minister’s notice the answer is NO. At the exact date if issue of the certificate, it had no valid pre-assessment letter.
If the agency obtains its pre-assessment letter later this year, the inclination is to accept the certificate because the agency has subsequently received its pre-assessment letter. However all pre-assessment letters carry an inception or start date as well as an expiry date. Had there been a gap of a couple of days before receiving its pre-assessment letter, we could have believed in the interests of substance of form that the certificate is valid.
Conclusion: In our opinion the certificate is not valid.
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