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B-BBEE AN 18-YEAR OVERVIEW
B-BBEE AN 18-YEAR OVERVIEW
This year marks 27 years since the advent of democracy as well as 18 years since the enactment of the Broad Based Black Economic Empowerment (B-BBEE) legislation and policy. Almost three decades into our democracy, and close to two decades of the B-BBEE Act, a real and honest reflection on the state of economic empowerment of black people in South Africa is warranted.
We cannot properly reflect without recalling the reasons for laws addressing the empowerment of black people, in the context of the economy. The equality clause in the Constitution of South Africa was carefully considered as the authority for the notion of redressing economic inequalities and deracialising the economy. Then the government adopted the B-BBEE strategy, and later the B-BBEE Act (Act 53 of 2003, as amended by Act 46 of 2013), as a mechanism to bring to reality the Constitutions aspiration: bridging economic inequalities in South Africa. In essence, the meaning behind the laws was far greater than mere compliance with legislation and adherence to policy.
The implementation of the B-BBEE Act 53 of 2003 was met with many structural challenges, including: the failure by organs of state and public entities to implement B-BBEE; the scourge of fronting; lack of effective regulation of verification agencies; as well as the absence of mechanisms to measure progress and address circumvention of the B-BBEE Act. This then necessitated that a mechanism be introduced to monitor B-BBEE implementation and safeguard equality as the cornerstone of B-BBEE.
As the B-BBEE Commission, in 2016 we began to regulate, monitor and oversee the progress made against the aspirations of the B-BBEE Act. To do this, we adopted a compliance strategy to encourage voluntary compliance and the corrective enforcement strategy to compel compliance where wrongdoing has been identified, with criminal matters being referred to relevant law enforcement agencies, strategies which have so far given results.
Just to remind ourselves, the implementation of the legislation is measured through five key elements of B-BBEE which are ownership, management control, skills development, enterprise and supplier development, as well as socio-economic development, and these are factored into the codes of good practice, including sector codes. They apply to both public and private sectors.
In five years of regulating B-BBEE in South Africa, it has become evident that while progress was made in a few elements of B-BBEE, such progress is yet to yield the impact needed to change the economic landscape in a meaningful way. Why do we say so?
Previously people lamented lack of data to track how the country is doing on B-BBEE and we introduced the annual National Status and Trends on B-BBEE Report from 2017. The report is based on compliance reports submitted by JSE listed entities, organs of state and public entities, as well as SETAs, on how they are performing on B-BBEE. There is no doubt that entities are implementing initiatives to comply with B-BBEE requirements, the reports submitted show the spend in annual financial statements and we see major ownership deals registered with us daily. However, most have not translated into real impact on the quality of lives and livelihood for black people, the majority of whom still languish in poverty and unemployment.
On ownership patterns, our Annual National Status and Trends on B-BBEE Report for 2020 shows that black ownership moved from 29% in 2019 to 31%, with black women ownership up from 12% to 14%, but still low compared to the 2016 benchmark study of 32%. Closely related to this was a slight increase in management control from 39% in 2019 to 57%. The report also shows that the least transformed sectors are the property, financial and tourism sectors. In 2019 only 3.3% of the JSE listed entities were 100% black owned, fast forward to 2020, the report shows 0%.
The noted increase in ownership and management control elements of B-BBEE is negated by reduced voting rights, as well as direct economic benefits for black people, and the decrease of new black players in major deals, all of which are influenced mainly by limited funding available to black people. This calls for a less complex funding model from both the public and private sector entities to accelerate the state of empowerment for black people, without which economic empowerment will remain a pipe dream for black South Africans.
We have also noted progress in skills development (up from 49% to 60%), enterprise and supplier development (up from 51% to 61%) and socio-economic development (up from 68% to 90%). Preferential procurement policies are considered a key driver in making a contribution to the development of rural and township economies that continue to face challenges in accessing the markets amid entrenched value chains, high barriers and monopolistic/ exclusionary market structures, which impacts sustainability of black owned entities, particularly SMMEs. Whilst enterprise and supplier development is at the center of growing sustainable black enterprises that can transform the South African value chains and increase manufacturing capabilities, the loose and non-committal approach to enterprise and supplier development initiatives by entities leaves some black entrepreneurs impoverished and out to dry, due to contracts that can be terminated unilaterally at any time without any recourse. Basically, the livelihood of black entrepreneurs is at the mercy of corporations.
The notable achievements in skills development are also undermined by inadequate planning, poor and ineffective training, misaligned to critical skills required in the economy, which affects the extent to which the increase in spend by entities can make a meaningful impact, leading to increased chances of employability and the upward movement of black people.
Most people argued that B-BBEE is for a few politically connected people, a narrative which was mainly fuelled by the veil of secrecy around B-BBEE deals, mostly passive shareholding, where visible black control and participation could not be found. In 2013 Parliament included a requirement to register all major B-BBEE transactions (R25-million and more) with us, which we publish regularly. Can we now say we know who benefits from B-BBEE ownership deals?
From 2017 to 2020 we received a total of 528 transactions which were assessed, and feedback given to entities on compliance and we have published the names of all parties to these transactions as registered. A more detailed analysis on the trends in deals for 2017 and 2018 financial years showed that some deals cannot be traced to any real black person behind the corporate structure, with some broad-based ownership schemes purporting to transfer ownership to employees, communities and black people in general.
Of concern is the serious lack of transparency in who the people behind the broad-based ownership schemes are, with more entities passing off charitable schemes as ownership schemes. Ownership must come with real rights and economic benefits, with ownership ultimately vesting in the hands of black natural persons. If we cannot get in touch with the said black natural person, no recognition can be claimed. Thus, while there is some level of transparency now, the veil of secrecy is still perpetuated in some instances, and in such cases we have not issued letters of compliance.
Based on new acquisitions reported in recent times, our Major B-BBEE Transactions Analysis Report revealed that black ownership percentage increased in 2018/2019 from a 48% indicative base to 60%. Black women ownership also increased from a 20% base to 29% compared to 2017/2018. Conversely, there was a huge decrease in black voting rights from 46% to 32%. The voting rights of black women also experienced a decrease and fell from 20% to 17%. This trend of granting less voting rights to black people whilst entities claim full ownership percentages on their certificates undermines the need to increase the number of black people who own, manage and control enterprises, not tokens or fronts creating a façade of black ownership. In terms of funding methods for these ownership transactions, vendor financing dominates, followed by share swaps and bank loans, with government funding being the least used. This affects the ability of black people to create black conglomerates that can be a force to be reckoned with. Hopefully the funding deployed for black industrialists will begin to result in some progress.
The facts and figures above raise a fundamental question as to whether the implementation of B-BBEE legislation and policy framework will achieve any meaningful impact in changing the economic landscape of South Africa, if so, how soon given that we are 27 years into our democracy. For this to happen, we need to deal robustly with obstacles towards change, which are the fronting practice; failure by organs of state, public entities and private entities to implement B-BBEE; unscrupulous verification agencies; and a myriad of loopholes in the framework that enable circumvention.
Fronting entails fraud, thieving, rent-seeking, money laundering and other forms of serious commercial crimes. Although criminalised under the law, criminalisation is ineffective without the corresponding administrative penalties that can be meted out parallel to the criminal processes against offenders. Currently, we only have investigative powers without any ability to enforce any administrative remedies, which means matters must be referred to SAPS and NPA for criminal processes. Without inclusion of administrative processes to prohibit specific practices, South Africa will not eradicate or successfully combat fronting.
The current instrument that merely criminalises a practice is blunt and allows for deliberate violations since there is no prioritisation of fronting cases in criminal investigations and prosecutions. To date we have referred 30 cases to SAPS/NPA and none have been processed criminally yet. Administrative processes would thus address these violations through administrative penalties that are quick and can result in redress, hence the need to amend the legislation to give effect to this. Also, the clause in the act, dubbed by lawyers practicing in the B-BBEE space as “the gagging order”, which prohibits us from publishing our investigative findings, must be removed. This is used to frustrate the public communication of outcomes, in cases involving the regulator, for months.
Despite the challenge, we have successfully issued findings, regarding the violation of the B-BBEE Act, to 505 entities, some of which have been made to pay black shareholders, who were denied economic benefits, and restore participation of excluded black people with immediate effect. Eight entities have approached the courts to review our findings, which we are defending. We also successfully concluded 22 alternative dispute resolution agreements that have resulted in over R100- million paid to black shareholders in compensation. Recently we announced that we are now pursuing cancellation of contracts and licences for entities found to be fronting or misrepresenting.
Organs of state and public entities still do not implement the B-BBEE Act despite the mandatory requirement to do so. The legislation has no sanction whatsoever for organs of state and public entities that fail to comply with the B-BBEE Act by not reporting annually and getting measured on their B-BBEE performance. Despite this, we are issuing non-compliance notices to them and have also escalated this aspect to auditing processes of the Auditor-General. Only up to 15% of organs of state and public entities have reported as required. Equally, JSE listed entities are sluggish in reporting with less than 50% of them reporting annually. The law does not place any sanction for any entity for not implementing B-BBEE initiatives, but allows us to deal with those who front, misrepresent and obstruct our mandate, and action is being taken against these entities. So, organs of state, public entities and private sector entities are the weakest link in the drive to empower black people in South Africa.
The gaps in the verification processes still exist, although not with as much impunity since we took action against the unscrupulous verification professionals, who often hide behind loopholes in the Codes of Good Practice and are fueled by unethical behaviour between entities, consultants and ineffective regulation of verification professionals in the current framework. We are now also referring repeat offenders for de-accreditation to SANAS.
The Codes of Good Practice must further be tightened to allow for the pooling of funds available each year for direct and effective spending in that year, as entities fail to spend all funds effectively. This means a private-public fund can be created for funds to be transferred and for qualified and professional people to manage the fund, and ensure effective deployment to black learners and entrepreneurs to have the desired impact on skills and enterprise development. Also, there must be a list of do’s-and-don’ts for entities which will result in initiatives being annulled if they don’t meet the requirements, to protect vulnerable small businesses and black entrepreneurs from abuse.
The Codes of Good Practice must also close gaps that allow for manipulation of the modified flow-through principle; sale and leaseback deals that are disguised as sale of assets; abuse of recognition for mandated investments and the continued consequence principle; all of which undermine the real meaning of ownership. We must have powers to issue compliance notices to stop such practices while we are investigating matters; a power not included in the current legislation.
Lastly, we must accept that without funding for black businesses, no real economic empowerment can be achieved. We call for funding models that are less restrictive to black players who wish to own stakes in entities or create their own businesses to expand opportunities for employment. In essence, models of funding for the future should not stifle the prospects of black entrants within the economy. Government must also increase the funding available from funding institutions.
In conclusion, we need an independent and well capacitated B-BBEE Commission, at this point the effectiveness of our operations is derailed by lack of budget and human resources as we have been operating on a zero budget since 2016. We have only 22% of the 113 approved staff complement, with little resources for our compliance and investigative mandate, and are prevented from employing resources as we are not listed as a public entity. The independence and operational autonomy of the B-BBEE Commission as an impartial regulatory entity that must act without fear, favour or prejudice is critical to achieving the objectives of the B-BBEE Act. This intervention must be immediate to ensure proper investigation and monitoring of B-BBEE matters, with additional powers to implement administrative processes and sanctions.
The above said, economic empowerment of black people remains paramount and must be pursued unapologetically and robustly. With South Africa being the most unequal society in the world, we will not be able to grow the economy for as long as the majority of the citizens are spectators subjected to abject poverty and unemployment. While we are confident that our interventions are addressing some issues in complaints, we need drastic and immediate changes to the legislative framework to achieve a more systemic change to benefit black people in real terms, broadly, not in pockets, such as sector inquiries, compliance notices and administrative penalties.
It is a sad reality that we do not have much to gloat about as a country as there is no tangible change in the economic landscape to date, however, complacency is not an option. Economic recovery of this country, especially with the advent of the Covid-19 pandemic demands a more robust approach supported by adequate resources and legislative tools to drive transformation. No entity must be able to engage with the government if it does not subscribe to the economic transformation agenda adopted in the B-BBE strategy, policy and law.
By Hon. Zodwa Ntuli, Commissioner: B-BBEE Commission
