Archive for September, 2010
The leader of the DA, Mrs Helen Zille has written at length about the need for empowerment to be broad-based. The DA has had a broad-based policy for a long time, but for unknown reason has never publicised it widely. Nevertheless we congratulate Premier Zille’s call for broad-based empowerment. However the DA’s policy falls way short of the dti’s codes of good practice. It offers no objective measurement, like the scorecard does, and it gives no targets or indicators to guide compliancy. It falls back onto a subjective approach to broad-based black economic empowerment.
Congratulations today must also go to the department of trade and industry – and the specific people how guided the original act through parliament, and then spent many years developing the codes. In researching this article we looked back at the draft codes of 2005 and 2006 and compared them to 2007. It is very instructive to see how they progressed and improved to the final stage.
Congratulations must also go to the tens of thousands of companies that are making an effort to comply and have produced their own scorecard or verified certificate. While there is a long way to go, some progress is being made towards true, and broad-based empowerment. Many companies are spending a lot of money on skills development. Many are working very hard on enterprise development. Corporate social responsibility is still being implemented and helping the poor and poverty stricken.
Yes, there is a long way to go, but our first fight was to get everyone to start thinking broad-based. The ArcelorMittal deal, on which we were the first to comment has turned out to be the catalyst, or the final straw to narrow-based to making the whole of South Africa realize that broad-based was the way to go, and that broad-based was always the policy of the dti. We are now seeing the politicians calling for broad-based. The SACP has also condemned narrow-based, in favour of broad-based.
Most companies – our clients are very happy to follow broad-based once they know what it entails.
It’s taken some time, but we are getting very excited that broad-based is the winner.
Many people often refer to B-BBEE as a “box ticking” exercise. They use this to explain why B-BBEE can’t work, doesn’t work, won’t work. Some use it to justify the need for a change in B-BBEE policy.
The fact of the matter is B-BBEE is no box ticking exercise. You do not earn BEE points by ticking various boxes. B-BBEE is a policy that measures the success of many transformation indicators. It is similar to a company’s financial statements. No one wold say that producing financial statements is a typing exercise, or that applying for a loan a box ticking exercise. If a company has an annual turnover of R1 billion and a net profit at R75 million, then while the financial statements may only show numbers, those numbers have huge meaning and a long story behind them. To turnover R1 billion implies people have worked hard to find customers, make sales, produce goods or services and supply them to their customers. To make a profit means careful analysis of costs and turnover.
In the same way a company that states “Level 2″, is not just writing something on a piece of paper. It means that the company had made serious efforts in many areas – ownership, management, employment equity, skills development, procurement, enterprise development and socio-economic development to achieve that level 2. It may have spent R750 000 on donations to charity. t may have spent R3 million on staff training. It may have contacted 3000 suppliers to request their own scorecard. It is not an insignificant amount of work that a company must have performed in order to reach its level 2. It is definitely not ticking a box on a piece of paper.
The financial statements give a good indication of the financial well-being of a business. The statements are not perfect – there could be errors, or the full story may not be included in the statements. Items such as customer goodwill are not easily measurable, and external factors are not always taken into account. By and large the financial statements reflect as best the financial situation of the business as can be expected.
The same again goes for a B-BBEE scorecard. The scorecard tells a story – how transformed the company is. It is not always entirely accurate and sometime ignores aspects of transformation that some companies consider important. It is based on nearly 40 indicators, and is a far better indicator of the progress that a company is making than a subjective assessment.
It can be argued that some indicators are allocated have too much importance on the scorecard, or too low an importance. It can be said that some of the weightings are too low, or the targets too low and easy to achieve. It can be said that the rules and interpretations are too loosely defined. If any of the above is true, all it means is that by discussion and negotiation those rules should be changed, the weightings and targets adjusted. It does not mean that B-BBEE needs an overhaul, or that the concept of a scorecard is wrong. If we need more indicators, we sohlud add them. If B-BBEE is too complicated, with too many indicators, some should be removed.
As it stands the scorecard covers those seven elements, with nearly 40 indicators. Many of those indicators are closely linked to other indicators making it more difficult to front or misrepresent the score. Each indicator and element certainly does provide an excellent indicator of the progress that a company is making and helping there country towards true transformation.
Almost every complaint about B-BBEE can be answered by looking at the indicators, for example “It enriches only a few”. Not so – if only a few people are involved in an ownership deal the company will only earn a few points. The only way to earn lots of points is by working on all the elements.
The indicators award points for diverse activities, such as “black new entrants” – including people in an ownership deal who are “new entrants” i.e.have not done any big deals previously. Points are awarded for employing black disabled people, and bonuses for training those disabled people. Points are awarded for purchasing from small businesses, black owned and even black female owned businesses. Points are awarded for helping small businesses and donating to certain charitable institutions.
If one had to try to identify what is needed to transform the country, they would probably come up with the exact B-BBEE policy that we have – and it is no box ticking exercise.
“The minister said the reviewed Mining Charter represented collaborative work among stakeholders under the auspices of Mining Industry Growth, Development and Employment Task Team (MIGDETT).”
I wonder why the dti was not represented?
In my opinion Broad-based Black Economic Empowerment is the best economic growth policy that any country or economist has ever designed. We need to grow the economy AND redress the wrongs of the past.
Like any growing economy we have a very poor sector – in our case the income differential is larger than most other countries. We have some very wealthy people, and some who are poverty stricken. We have people who want to go into business, but lack the knowledge, life skills and capital to start and run a business. We have a severe skills shortage. I have repeatedly said that we don’t have as much an unemployment problem as an unemployable one. We have other economic, social and political issues to solve.
B-BBEE was designed to address all these issues.
Like it or not when one refers to the poverty stricken, squatters, we are in the main referring to black people. When we see a big income differential the lowest paid are black South Africans. The previous government, in the past specifically targeted black people, thereby exacerbating the situation. To call a policy broad-based black economic empowerment, when it specifically is aimed to address the problems I have highlighted in the previous paragraph is simply stating the truth.
The DA has a policy called broad-based economic empowerment that has similarities with B-BBEE. They choose to ignore the word “black”, probably to satisfy their voter base.
The best part of B-BBEE is the approach used as an economic policy: The designers/economists decided to identify those many aspects of the economy and society that need remedial action. They called those aspects “elements”, and identified 7 elements. Within those 7 elements they decided to work out an objective way of measuring how well the policy is working. They created the concept of a scorecard. Without an objective measurement, it is impossible to state clearly how this is affecting the economy. We cannot use subjective measurements – it has be be based on empirical evidence. A good analogy is a rugby and soccer match that has a winner when the winning team scores more goals or points. In rugby it is possible to score more tries and still lose the match. Spectators like to see tries scored, rather than penalties, but the team that wins, i.e is best is the one with the most points. The scorecard works on the same basis.
The scorecard concept of B-BBEE was a mark of genius.
Better was to come:
The scorecard alone does not explain why it is so good. The designers came up with an even better plan: In many other economies governments increase tax and uses that money for economic growth, education and training, offers tax incentives to growing business and helps the very poor with housing, water, health care etc. South Africa does this, but as an additional point, and instead of further raising taxes, which are not very high compared to Europe, the designers of B-BBEE decided to ask corporate South Africa to contribute. The incentive offered is more government business: The companies that score highest on their B-BBEE scorecard will stand a small chance of getting more government business than those who don’t. This incentive should encourage businesses to comply, i.e. earn as many points as possible on the scorecard and achieve the objective of the act. It was an unusual step to ask corporate South Africa (not force) them to contribute towards B-BBEE. It had to be done that way, because some of the problems of our society like racial intolerance can better be addressed at work, than yet another law. You cannot force someone to like someone else – you have make the conditions conducive. Governments still do use the stick approach, and the tax approach. Recently carbon tax was implemented to try to make South Africans more aware of the damage that fuel guzzling cars do to the environment. In the case of the B-BBEE scorecard, one of the very clever elements was preferential procurement which has the affect of increasing a company’s own B-BEE score if it procures (purchases) from other companies that themselves have a good B-BBEE scorecard. Corporate SA has made good strides in encouraging their own suppliers to become complaint – i.e. follow a scorecard that has some very good intentions.
I have previously stated that the theory behind the B-BBEE codes deserves a Nobel Prize for economics. I like the clever way that they have developed the combination of an objective measure of broad-based principles, the scorecard, the approach to rewarding corporate SA fro doing what they should be doing anyway, the procurement approach to widening the net to include smaller businesses that are suppliers to the bigger businesses. They have thought it through very carefully by making compliance easier for smaller business, and even reward smaller business more than larger ones. I stand behind my call for the economists to be recognised for designing this excellent policy.
Earlier I mentioned that the whole policy is based on corporate SA standing a chance of getting more government business.
There is nothing wrong with the policy. What is terribly wrong is government, whose procurement is central to the entire success of this excellent policy, has chosen not to follow B-BBEE. That is why we hear of the tenderpreneurs, and so much unhappiness is generated over the issuing of mining licenses, and deals. We hear of people, even government complaining that B-BBEE has not been implemented properly. That is true, but it should not detract from the good policy that it is. We should rather condemn those who choose not to follow it or implement it.
We put “our money where our mouth is”. We have now asked the Public Protector, whose job is to safeguard the constitution and the laws and ensure government follow all laws, to investigate why government is choosing not to follow the B-BBEE act, and to issue a directive that they do so. See http://blog.econobee.co.za/2010/09/02/econobee-submits-complant-to-public-protector/
Complaint submitted to the Public Protector
EconoBEE has submitted a complaint to the Public Protector over the refusal of many government departments and public entities to follow the Broad-Based Black Economic Empowerment Act.
The act states that all government entities must take into account B-BBEE status in awarding tenders, issuing licenses, concessions amongst others. Most government departments and entities have steadfastly refused to follow this law. In particular, most government entities do not do this when issuing tenders or licenses, especially mining licenses. The act is clear: Section 10 of the B-BBEE Act states that government entities “..must take into account, and as far as is reasonably possible, apply any relevant code of good practice..” when an organization applies for licenses, tenders etc.
This clearly implies that every tender and license form should also ask for the B-BBEE certificate of the applicant. At the same time, government entities must disclose how they will apply that B-BBEE status. The hope is that from now on broad-based criteria will begin to be used by government in assessing tenders and licenses. Government is also bound by the PPPFA (Preferential procurement framework act) which governs how tenders are issued. Traditionally government has recognized that the PPPFA and the B-BBEE acts need to be aligned and have promised this for the past 6 years. What some people in government probably do not realize is that the B-BBEE act is in force and section 10 needs to be followed just as much as any other act. Government does not even follow “narrow based black economic empowerment” an outdated concept as defined in the codes.
There is no reason to wait for the alignment of the two acts, which has been discussed since 2004. The B-BBEE act requires government to take action, and they have not done so. Ironically the office of the Public Protector itself is in breach of the law in its own procurement processes by not taking into account, and as far as reasonably possible, applying the codes. Most government entities simply ignore the codes.
This is the reason for asking the Public Protector to get involved and order that the process be started. We would hope that once this is done, the many complaints about “tenderpreneurs” and awarding of licenses based on unfair practices and fronting will be reduced and the good cause of broad-based black economic empowerment will benefit.
A second complaint was also submitted to the Public Protector. A clause in the B-BBEE Codes of Good Practice under the section “Application of the Codes” states that public enterprises and specified government entities must produce their own B-BBEE scorecard. The clause states that those entities are “measurable” under the act, giving them no discretion to comply or not. So far, a few public enterprises have produced a scorecard. Those that have include City Power, ESKOM, SAA, Telkom and SABC. Most have not. The list of those not complying include SANAS (the very agency that accredits B-BBEE verification agencies, the BEE Council, CIPRO, National Empowerment Fund, as well as every government department. The law requires them to be measured, so we have asked the Public Protector to insist that these organizations follow the good example set by tens of thousands of private enterprise organisations and produce their own valid B-BBEE certificate, as required by section 3 of the Codes.
We hope that this will encourage more compliance amongst the rest of industry and they will see government leading the way, and implementing broad-based BEE the way to should be. It will also help these government departments to understand the trials and tribulations that private enterprise faces in becoming compliant.
The dti has released its latest schedule of verification agencies with Pre-assessment letters. Only Sanas accredited agencies or those with valid pre-assessment letters are allowed to issue valid B-BBEE certificates for QSEs and generic entities.
Please do not use any other organization for verification. We, of course, only do consulting, and are not a verification agency. If you need help in preparing for verification, call EconoBEE.
It is interesting to note how many agencies did not receive their accreditation in time.