South Africa’s empowerment legislation is about to get new teeth to address issues such as fronting and local content procurement, besides others.

The Department of Trade and Industry (DTI) states that the proposed changes to the Broad-Based Black Economic Empowerment (BBBEE) Amendment Bill are aimed at making this the overarching legislation on BBBEE matters.

Minister Rob Davies tells Engineering News that the DTI is elevating the concept of a balanced scorecard from the Codes of Good Conduct to the current Act. Further, the department plans to establish a BBBEE Commission, which, besides others, will be tasked with establishing an institutional environment for monitoring and evaluating issues pertaining to BBBEE.

He says the commission will play a significant role, including, but not limited to, overseeing, supervising and promoting adherence to the Act and the Codes of Good Practice in the public interest. It will be tasked with strengthening and fostering collaboration between the public and private sectors, to promote good governance and safeguard the aims of BBBEE.

“Further, the commission will deal with noncompliance and circumvention by introducing penalties for offences, among others aspects, while the Independent Regulatory Board of Auditors (IRBA) will provide for the regulation of the verification industry,” he says.

The DTI states that enterprise development (ED) is one of the significant elements that can contribute towards the broader aims of govern- ment to support the growth of small enterprises and job creation. In the light of a new drive towards creating effective black-owned and black-female-owned and -controlled enterprises, the department has elevated ED to also focus on key sectors of the economy.

“With regard to the points system, we have ensured that entities cannot score a certain level without doing some work on ED. Preferential procurement has also been elevated in terms of the points system, with [greater] emphasis being placed on black-owned and female-owned enterprises,” he says.

The Employee Share Option Plan (Esop) will also become part of the scorecard. “When correctly applied, Esops have the potential to drive wealth and capacitate employees, as seen with iron-ore giant Kumba’s model,” he explains.

Industry Optimism

Business Unity South Africa (Busa) transformation policy and internal operations executive director Kganki Matabane says the organisation views economic transformation as a significant factor for South Africa. Any process or law that will support economic transformation should be welcomed. “We are of the opinion that the amendment process is a step in the right direction,” he says.

The Congress of South African Trade Unions (Cosatu) states that the proposed changes are well intentioned and will constitute a significant improvement over the current versions of the Act.

“This will be in relation to provisions that impose obligations to deal with and improve enforcement and compliance monitoring and reporting requirements. Further, . . . emphasising the promotion of local content procurement . . . is important in increasing job creation,” says Cosatu spokesperson Patrick Craven.

BEE rating agency Empowerdex MD Lerato Ratsoma says the proposed changes are meant to give the Act more teeth and correct some of the issues that have risen and could not be dealt with by the Codes of Good Conduct.

“The formation of the commission will provide the public with an institution to go to when reporting unfair practices relating to BBBEE.

“A fulfilling part is that there are penalties for misrepresentation of BBBEE information, as well as provision for government to cancel contracts where information provided was found to be fraudulent, especially, since there is always litigation concerning government tenders,” she says.

EconoBEE COO Gavin Levenstein adds the DTI wants more people to benefit from BBBEE through the proposed changes to the Act, as the new additions include a broader approach.

“[Implementation of the changes] is a step in the right direction and a strategy to increase the number of black people participating in the economy.”

Diversified financial services provider Maadima Group MD Khomotso Lebepe says the proposed changes that stand out for the group are the elevation of ED and preferential procurement, as these will now each require a subminimum to start achieving points.

“In addition, a penalty provision will be introduced for noncompliance with the ED and preferential procurement sections of the BBE scorecard,” says Lebepe.

Foreseeable Challenges

Levenstein argues that implementation of the final changes to the Act will be a challenge for the DTI.

Lebepe warns that companies should prepare to meet the revised preferential procurement and employment equity requirements, as they may drop a level or two if they are unprepared.

“Another significant challenge companies may face is that certain elements of the Qualifying Small Enterprise Scorecard will now be mandatory. This will force certain companies to focus on elements that were previously ignored. Companies failing to comply will lose points on the BBBEE Scorecard, which may result in losing business to competitors,” adds Lebepe.

Craven argues that the efficacy of the proposed amendments will depend on the capacity that is provided to ensure proper functioning of the commission. “We will support the appropriate resourcing of the commission.”

However, as an organisation representing the labour force, Cosatu states that it has long been critical of BEE initiatives that can only be described as being overwhelmingly narrow BEE in character and serving the aims of promoting accumulation for the benefit of an elite few.

“Currently, the implementation of BEE is disproportionately weighted towards local companies that act as fronts for imports from foreign countries, at the expense of local manu-facturers that create employment and ensure valuable spin-offs for the domestic economy,” adds Craven.

“The Act makes provision for the creation of a regulator for the verification industry, which will be the IRBA. This will also [see] the audit firms being able to carry out BEE verifications over and above the verification agencies accredited by South African National Accreditation System.

“It remains to be seen if the interests of the verification agencies, which are usually small compared to those of big audit firms, will be protected and nurtured, as it is the intention of BBBEE to encourage entrepreneurship and provide opportunities to capable BBBEE-complaint companies,” explains Ratsoma.

Criminalising Fronting

Matabane is pleased that a definition for fronting has been provided. The Bill states that fronting relates to a transaction, arrangement or conduct that directly, or indirectly, undermines or frustrates the achievements of the aims of the Act or the implementation of any of the provisions of the Act.

“We have noticed that what is common in all forms of fronting is the intention to circum- vent BEE policies and would like to caution on the detrimental effect this has on the economy. We must all be aware that transforming the socioeconomic imbalances is crucial, not only as a social responsibility but also because it is conducive to long-term political and economic stability,” explains Matabane.

Busa notes that fronting is not only confined to the misuse of black employees or partners to improve white-owned companies’ BEE credentials unfairly. Collusion also occurs, often in the form of a black person or black-owned enterprise entering into a questionable partnership mainly and selfishly for financial gain, without any intention of making a real contribution to the business at hand.

Busa emphasises that fronting undermines ‘real transformation’ by keeping sustainable black enterprises from participating meaning- fully in the mainstream economy. It also obstructs the meaningful transfer of skills and economic benefits to black people and prevents those with skills from making a substantive contribution to the organisations they work for.

Lebepe adds that verification agencies need to report any form of fronting that they might be exposed to in their business dealings or face the consequences.

“An agency is responsible for providing an independent verification of a measured entity’s BEE status and a significant threat is that agencies derive revenue from the measured entity. This can lead to some agencies overlooking certain fronting practices for financial gain,” adds Lebepe.

Empowerdex welcomes the fact that fronting is a significant part of the Bill. “The intentions of the amendments are promising, as the changes themselves indicate shortcomings in the current legislation. We now await the appointment of the commissioner and for the new department to start being effective in dealing with such issues,” says Ratsoma.

Building Momentum

“We welcome the proposed Act in terms of what it seeks to achieve, which is to address some of the principles put in the Codes but not in the Act, and, therefore, these did not have the same legal weight, such as dealing with some of the grey areas that have affected the implementation of BBBEE,” she says.

Craven says the proposal to strengthen local content has the potential to have a much broader impact and the organisation plans to focus on having the issue strengthened in the final Act.

“Further, we are of the view that there should also be greater emphasis on social forms of ownership, for example, cooperatives, as well as on State ownership, which is currently lacking in the Bill,” adds Craven.

Meanwhile, Levenstein says the scorecard will be a more significantly required document in terms of operating a business, as all govern- ment tenders attached to the Preferential Procurement Policy Financial Act already stipulate that bidders meet BBBEE requirements. Businesses must ensure that scores are as high as possible, while also ensuring that all their transactions meet the requirements of the Act and have substance in terms of the strategy.

Matabane cautions that, while there is widespread commitment to transformation, the critical onus on the business sector is to uphold the law in a manner that goes beyond a mere ‘tick box’ approach to compliance and facilitates a commitment to the underlying aims.

He says it should be acknowledged that transformation is a process and not an event.

Busa agrees with the New Growth Path Framework proposal that has the potential to ensure continuous monitoring and evalua- tion of the impact of BBBEE on overall equity, employment creation, providing support for new entrepreneurs, supporting growth and innovation.

Further, Davies points out that the Bill makes provision for the empowerment of the Special Investigations Unit to investigate all offences involving fronting or corruption committed by both the public and private sectors in the application of the Act and the BBBEE Codes of Good Practice.

While the Bill has been out for public comment since December and the closing date is February 9, the general mood regarding the proposed amendments among industry players is positive.