Black Economic Empowerment Commission presentation prepared for the Portfolio Committee on Trade and Industry
September 13, 2000
1. The Formation of the Black Economic Empowerment Commission The Black Economic Empowerment Commission was formed with the objective of developing a powerful case for an accelerated National Black Economic Empowerment Strategy and to design concrete recommendations that could be accepted and implemented by government.
The idea originated at a Black Management Forum (BMF) Conference two years ago where many concerns were raised about the weaknesses and inadequacies in the BEE process until then. The BMF handed over the task of forming and driving the Commission to the Black Business Council, a federation of 11 black business organisations.
The Black Economic Empowerment Commission has since conducted extensive research and wide ranging consultations with stakeholders, including a team of specialists from the financial sector, public sector experts and key individuals in the public sector and in SOE's.
We are now heading towards the release of a discussion document at a National Consultative Conference on the 29th & 30th of September. The Commission will then revise its recommendations and present a final report to President Thabo Mbeki at the end of October.
The discussion document will contain recommendations that call for significant changes in the way South Africans do business. It also makes suggestions on ways to accelerate economic growth and deepen transformation.
The Black Economic Empowerment Commission mission is still consulting various stakeholders to refine our proposals and to ensure that they are acceptable and workable. We will take seriously all concrete suggestions presented to us during this final round of consultations.
We hope to emerge from today's discussion having achieved two objectives:
-To enrich our report with input from one of the critical stakeholders to help us find solutions aimed at meeting the countries transformation objectives
-To give you a broad outline of our preliminary findings and recommendations.
2. Preliminary Definition of BEE The Commission believes that BEE is a strategy aimed at substantially increasing black participation at all levels in the economy. We have therefore defined BEE in a broad manner.
-It is an integrated and coherent socio-economic process located within the context of national transformation
-It is aimed at redressing the imbalances of the past by seeking to substantially and equitably transfer ownership, management and control of South Africa's financial and economic resources to the majority of its citizens.
-It aims to ensure broader and meaningful participation in the economy by black people.
BEE must therefore be viewed within the broad net of empowerment processes that include, amongst others:
Job creation, Rural development, Poverty alleviation, Specific measures to empower black women, Skills transfer and management development, Education, Meaningful ownership, Access to finance to conduct business.
3. The rationale The Black Economic Empowerment Commission will present a case for South Africa to break the cycle of underdevelopment and continued marginalisation of the majority of its people from the mainstream economy and launch the country onto a course of sustained, even spectacular, economic growth.
In making this case, the Black Economic Empowerment Commission believes that the legacies of colonial and apartheid oppression and deliberate disempowerment provide a sufficient moral and political basis to justify a National BEE Strategy.
Furthermore, the economic consequences of apartheid are such that the economy's decline over the past 25 years can only be reversed through a National BEE strategy.
South Africa's democratic government inherited a mismanaged economy designed and structured to serve the needs of a minority of the population and confining to the periphery and trapping the black majority in a vicious cycle of extreme poverty, unemployment and underdevelopment.
Since the early 1990s, the private sector has embarked on a number of BEE initiatives. These gave impetus to a flurry of activities during 1996/98, in particular. However, these activities did not translate into a meaningful transfer of ownership to the black majority.
Our democratic government has also:
-Introduced hundreds of new laws that have fundamentally transformed South African society.
-Restructured inherited institutions and started new ones
Despite the adoption of transformative policies implemented within a framework of sound fiscal and monetary management, South Africa's economic growth performance remains disappointing. Continued levels of unemployment and increasing poverty threaten to undermine the stability of our new democracy.
The country still has one of the most unequal distributions of income in the world. This is a direct result of the extremely low levels of black participation in the economy.
Furthermore, racism remains fundamentally ingrained across all sectors of SA society. It is a structural impediment that continues to distort the efficient functioning of markets in SA and reinforce the marginalisation of the black majority from viable economic participation
The Black Economic Empowerment Commission believes that the country cannot break out of the cycle of underdevelopment and attain sustained high levels of economic growth in the absence of deliberate measures by the state to facilitate the meaningful participation of black people in the economy.
The Black Economic Empowerment Commission therefore believes that a coherent and integrated National Black Economic Empowerment Strategy must be adopted as a national imperative. The key components of the National Strategy include:
-An Investment for Growth Accord between business, labour and government aimed at reaching agreement on a concrete strategy to lift the country's levels of fixed investment and economic growth.
-A National Black Economic Empowerment Act that aims to define BEE and set uniform guidelines against which the public and private sectors can implement BEE.
-The establishment of institutions aimed at addressing market failures and transforming existing government structures:
· A National Empowerment Commission (NEC) reporting to the President's Office.
· A National Empowerment Funding Agency (NEFA) within the Department of Trade & Industry
· A National Procurement Agency located within the Department of Finance or DTI
The Black Economic Empowerment Commission is also proposing an approach to the following areas, to ensure integration with a National BEE strategy:
-An Integrated Rural Development Strategy and the establishment of A Rural Development Agency reporting to the Department of Agriculture and Land Affairs.
-An integrated Human Resources Development (HRD) Strategy
-A framework for Public Sector Restructuring for Empowerment
4. Investment for Growth Accord Six years after South Africa's first democratic elections, the country is still experiencing low levels of fixed investment and economic growth despite all government's achievements in creating an investor-friendly economic environment.
Our Gear economic strategy has not resulted in the expected planned increases in private sector investment. The Black Economic Empowerment Commission believes that there is a case for targeted measures to launch the country onto a new growth path.
Our proposal is that the all stake holders should reach agreement on an Investment for Growth Accord aimed at guiding the participation in an Integrated Strategy to make investments of national priority and to substantially increase the country's levels of fixed investments. The key elements of this strategy include
Government's commitment could have three components: -The Government Employees Pension Fund should invest 10% of its assets in productive investments in areas of national priority over an adjustment period of, say, three years. This would amount to R2Obn of new investments. the GEPF has already allocated 3% to the lsibaya Fund with a mandate to investment in BEE).
-Government should invest a portion of privatisation proceeds in a proposed Rural Development Agency (RDA). (Already, government has foregone privatisation revenues to start the NEF).
-Government should implement its Restructuring of State assets programme to increase levels of Foreign Direct Investment. It should also commit to divert an increasing portion of the budget towards capital expenditure.
Business's commitmentcouldhave threecomponents: -The financial sector, particularly life companies, should commit itself to invest a specified percentage of its total assets in productive investments in areas of national priority over an adjustment period. The percentage should not be so low that it fails to stimulate new investments. It should not be so high as to negatively affect the performance of its portfolios.
-The private sector should be encouraged to make a concrete commitment to participate in The proposed Rural Development Agency (RDA) and other infrastructural and economic initiatives in rural areas, especially the anchor projects aimed at attracting investments into spatially defined areas (SDls)
-Guidelines and targets for the private sector to increase black participation in the economy, including HRD, small and medium enterprise development and black ownership.
-The banking sector should disclose its investments in underdeveloped areas in terms of the Commission's proposed community re-Investment requirements
Labour's commitment could have two components: -The trade union movement must recognise the considerable influence it has over the allocation of the savings of its members that are invested in life assurance companies. The trade union movement must accelerate efforts to design investment guidelines for union trustees.
-There must be a concerted effort to launch a trade union-driven training programme that empowers trustees to make responsible and prudent decisions that achieve social objectives and job creation.
-Such a strategy will require the design of specific vehicles and projects towards which investments can be directed. A concrete programme, which sets guidelines, defines qualifying vehicles for investment can be designed by the all stakeholders
The Black Economic Empowerment Commission believes such an Investment for Growth accord would kick-start the economy onto a higher growth path if it receives the support of all stakeholders.
5. A Black Economic Empowerment Act Black people remain at the periphery of the economy, confined to low-value-added activities that add little growth to the economy. The major impediments to increasing black participation in the economy are access to funding and markets.
Another consequence of the country's colonial and apartheid legacy is the criminally low level of participation of black women in the economy.
Black women remain the most disadvantaged sector in SA society, with only 30% of African women engaged in formal sector economic activities.
Black women have benefited little from BEE initiatives thus far. A recent survey of the top 103 listed companies, conducted by the Commission on Gender equality, found that there were:
-2 African females in non executive director positions.
-3 executive directors
-6 senior executive managers
Furthermore, systematic and institutionalised racism in South African society continues to restrict black business access to the public and private sector contracts required to grow black businesses into a new and dynamic force in the economy.
Although BEE has been a fundamental pillar of government policies it has not been implemented in a co-ordinated and integrated fashion. There is a lack of capacity to implement and monitor empowerment across all sectors of government. This is partly to due the absence of a uniform and commonly accepted definition of BEE.
For this reason the private sector was able to set the BEE agenda. The result is that BEE has been implemented in an inadequate and unsustainable manner. The activities, which the private sector have engaged in, have not resulted in meaningful economic participation of the majority of our people.
All sectors of the economy remain dominated by white companies and white skilled people; Black penetration in most sectors (in terms of ownership) of the economy is still miniscule.
An obligation should be placed on all stakeholders - public and private - to implement strategies aimed at transformation, such as an effective and best practice procurement policy and strategies, which broaden black ownership.
The Black Economic Empowerment Commission is therefore recommending the drafting of a Black Economic Empowerment Act The Act must aim to achieve the following:
1. The Act should provide an unambiguous definition of BEE.
2. Set uniform guidelines and indicators against which the private and pubic sector (including parastatals, regulatory authorities and other agencies) can measure their performance in achieving the objectives of BEE.
3. Set procurement targets for the public sector departments - national, provincial and local - and SOEs.
4. It should require all government departments to submit an annual black economic empowerment report.
The Act should cater for the establishment three implementation agencies: -The National Empowerment Commission (NEC), which will report to the office of the President, will oversee the implementation of the Integrated National BEE strategy. The NEC will be an oversight body with a limited staff complement.
-The National Procurement Agency (NPA) with an Accreditation Unit and the,
-The National Empowerment Funding Agency (NEFA); within the Department of Trade & Industry
6. The National Procurement Agency (NPA) Government departments (national, provincial and local) and SOEs procure goods and services worth more than R110bn a year. Government has recognised that these budgets could be utilised as a powerful mechanism to promote the development small and medium businesses and the broader objectives of the RDP.
However, current government procurement policy and legislation has proved inadequate.
-Firstly, it is difficult to estimate what portion goes to small and medium businesses and black entrepreneurs because of poor monitoring and evaluation of contract awards.
-Secondly, there are inconsistent definitional yardsticks against which to monitor performance. Government departments arid SOEs use different definitions of a black company.
-Thirdly, there are major institutional weaknesses within tender boards, procurement offices and government departments that contribute towards abuse of the system and ineffective empowerment outcomes.
The Black Economic Empowerment Commission recommends that there should be an overhaul of the entire public sector procurement system with the view towards ensuring Procurement meets the objectives of the RDP. The commission is therefore recommending the establishment of a National Procurement Agency (NPA):
-The NPA's primary function would be to revamp the national tendering and licensing system to ensure that empowerment is central.
-The NPA will be a streamlined structure focusing its efforts on setting guidelines and standards, monitoring the procurement and licensing system, training and building capacity. It will not be involved in actual adjudication of tenders; however, it could provide a review mechanism.
-It should set up an Accreditation Unit to rate companies tendering for government contracts and licenses and other private sector companies. The Unit will also set up a national database of black companies for the use of the public and private sectors.
-The BEE Act will require that all companies bidding for government contracts and licenses to be accredited by an Accreditation Unit within the proposed National Procurement Agency.
The Black Economic Empowerment Commission is also recommending that Government and the South African Management Development Institute (Samdi) investigate the feasibility of establishing a procurement institute to ensure the ups killing of existing staff and training of new staff in Procurement.
The current system places too much reliance on a formula with little attention paid to providing guidelines or mechanisms aimed at revamping the system. Institutionalising a formula - as has been done in the preferential procurement Act - will not eradicate obstacles in the way of increasing black participation in the economy. Developing black business should involve comprehensive strategies to aimed at supporting the growth of suppliers.
7. The National Empowerment Funding Agency (NEFA) NEFA will address the chronic shortage of affordable finance for black entrepreneurs and streamline existing government initiatives in this area. It will also be designed to support national savings and new forms of ownership, such as retail schemes, community ownership, broad-based share schemes and worker-owned cooperatives.
Existing National Development Finance Institutions (NDFIS) have had limited impact and outreach when measured against the demand for the services provided by the DFIs. These initiatives have suffered from institutional resistance to far-reaching changes, a lack of co-ordination and focus, weak institutional support and capacity and unclear institutional mandates.
A key finding is that In essence, government resources have been directed towards survivalist enterprises and white and male SMEs - rather than the promotion of sustainable small and medium black business with the potential to create jobs.
Furthermore, there has been no support from government for broader-based share initiatives.
The Black Economic Empowerment Commission recommends that the state must establish a new DFI institutional framework with a view towards revamping the sector to achieve the objectives encapsulated in the RDP.
The Black Economic Empowerment Commission therefore recommends the establishment of the National Empowerment Funding Agency (NEFA) with a mandate to:
-Improve policy and co-ordination between NDFI 5 that fund empowerment.
-Consolidate and rationalise existing funding initiatives with the aim of creating an efficient pipeline of products and services that systematically meet the needs of entrepreneurs at various stages of development.
-Set policy to guide the private sector's participation in the BEE funding arena
-It will ensure that entrepreneurs are able to source a mix of grant based funding, micro-loans, venture capital and debt funding.
This will be done through four agencies within NEFA: NEFA ONE: This agency will target black businesses that require debt and equity funding (private equity and venture capital) of more than R5m, including big ticket mergers and acquisitions, management buy-outs and leveraged buyouts. It will also provide non-financial support services. It will include the Isibaya Fund and parts of the IDC.
NEFA TWO: This agency will target small and medium businesses requiring debt and equity funding (private equity and venture capital) in the R50 000 to R5m range. It will incorporate the following: Khula Regional Equity Funds, the Umsobomvu Trust, NEF Ventures and the PDCs. In addition, it could receive funding from: the lsibaya Fund and the NEF. It will source funding from the private sector and the donor community. It will also provide non-financial support services.
NEFA THREE: This agency will incorporate Khula and Ntsika with the objective of strengthening their services to the micro-enterprise sector. The Post Office network could be utilised to enhance savings and to provide affordable financial services.
NEFA FOUR: This agency, which could include the bulk of the National Empowerment Fund's operations. It will provide support to facilitate broad-based BEE schemes, including retail offers, large employee share ownership vehicles, worker-owned and community enterprises and co-operatives. It will primarily focus on administrative support, evaluation and advice. It will have a fund to assist, workers and communities to acquire stakes in restructured SOEs, listed and unlisted companies.
Each of the above agencies should ensure that appropriate support packages are available for different types of entrepreneurs. The support can be provided in-house or through professional companies that provide business advisory and/or strategic management services for small and medium business, including black investment companies. The costs could be priced into the loans or cross-subsidised through selling the services at market-related prices to market players.
8. An Integrated HRD Strategy Colonial and apartheid policies had a devastating impact on the development of black human capital. The scars caused by this criminal neglect of the country's most important economic resource - its people - will haunt us for many years to come and put a ceiling on the potential growth rate.
Of all the crimes against humanity committed under apartheid, the denial of education and the deliberate enforcement of an inferior education rank amongst the world's most evil abuses of human rights this century.
SA education, Management and skills levels therefore continue to reflect apartheid era patterns.
A huge blockage to equitable growth remains this inequitable distribution of skills and qualifications. This is a fundamental weakness of our economy that has been repeatedly acknowledged by international competitiveness surveys and rating agencies.
The development of the country's human resources, which includes increasing access to education and training at all levels for the poor arid historically disadvantaged has been a priority for Government.
Some indicators since 1994:
- A breakdown in the composition of management shows that the percentage of Africans in management has increased by only 2% over the past three years, whilst the percentage of women in management has increased by 4%.
- At the same time there has been an alarming drop in enrolment to the higher education system and outputs from the system. The planned massification of higher education has not taken place.
The Black Economic Empowerment Commission believes that government, the private sector and civil society must reach agreement on an Integrated National Human Resource Development Strategy. The key elements of a national human resources development strategy should include:
- Finding ways of substantially increasing the number of black high-level skills produced by the country's institutes of higher learning, especially in ICT
-Long term planning guided by a sophisticated Management Information Service.
-There is a need for targeted programmes to significantly enhance black participation in the professions. Black participation in the professions remains dramatically low
-Identify the skills needs of the country over the next five years and agree on priority areas in which to fast-track black participation.
A key first step in the development of HRD policies is the acquisition of detailed quantitative and qualitative info.
The second would involve the design of "carrots and sticks" - incentives and penalties -to get our higher education system to produce the outputs required by the HRD Strategy.
9. Rural Developmentand Access to Land The millions of blacks living in rural areas have been denied opportunities to develop their human potential. As a result, there are high levels of illiteracy and low levels of formal education. The majority of rural people are either unemployed or engaged in marginal activities that add little to the economy. Human migration has resulted in these areas being populated by women, the young, elderly, sickly and unemployed.
This gives way to a vicious cycle of crushing poverty, under-developed markets, dismal rates of public and private sector investment and a lack of infrastructure that re-enforces the cycle by impacting on the ability of rural communities to engage in economic activities. The country's rural areas, where just over half of the country's population lives, are devoid of basic infrastructure and economic activity.
As a result of these Colonial and Apartheid polices, only 28% of SA's rural populations live on 88% of agricultural land; the remaining 12% of agricultural land supports 72% of the rural population. About 53,4% of South Africans (20,3m people) live in rural areas.
The rural population contains many more women than men Incomes earned by black women in rural areas are much lower than those earned by black men for comparable work.
Agricultural production reflects apartheid era patterns with limited black involvement.
Only about 26% of African rural households currently have access to a plot of land for crop cultivation, while some 24% of African rural households own livestock. Ownership of agricultural and other productive equipment is limited to 18% and 8% of rural African households respectively
The governments Integrated National Rural Development Strategy aims to address the current fragmented approach to alleviating the plight of the rural poor.
The Black Economic Empowerment Commission supports this initiative and believes that many aspects of this strategy are integral to a National BEE strategy.
-A comprehensive land reform and land-use programme to reverse the injustices of apartheid land policies is an essential element of BEE. This was first recognised in the RDP document and followed up with legislation aimed at redistributing 30% of the country's land towards the black majority. The increasing availability of state and private sector land for reform programmes and the mechanisms of ownership need further consideration.
-There is an urgent need for the institutional and structured reform of those institutions
currently involved with the implementation of rural development programmes. The creation of a dedicated Rural Development Agency (RDA), from reform of the current NDFI's would be an important mechanism to gear up activities aimed at ensuring the availability of funds for land acquisitions and land-use and infrastructural development. The RDA should be located within the Department of Land and Agricultural Affairs. It would work closely with NEFA
-Support for broad ownership initiatives through vehicles such as NEFA 4 and the Post Office Network. (Retail schemes; consortium purchases and co-operative -worker or community schemes)
-Community reinvestment requirements aimed at enhancing the availability of affordable funding to mral areas and access to finance for households will be a critical component of a BEE strategy.
10. An Empowerment Framework for Public Sector Restructuring (PSR) The democratic government inherited massive, inefficient and costly state machinery, including National, Provincial and local government and State Owned Enterprises. The challenge for the state is to restructure the public sector in a manner, which improves delivery of service, protects the rights of workers and achieves BEE.
So far, Government's programme to restructure SOEs has not resulted in a meaningful transfer of economic ownership to blacks, despite a clear commitment to achieve this objective
The BEE Corn recognises the need to restructure local government, however, there does not appear to be a comprehensive framework within which to achieve empowerment especially at local level.
The commission therefore recommends the adoption of an empowerment framework for restructuring and alternative service delivery that provides empowerment guidelines for all restructuring initiatives.
The key principle of the framework is that PSR should have at its core the facilitation of meaningful and sustainable empowerment at all levels. The components of the framework are:
1. The PSR programme can help finance a proposed Rural Development Agency (RDA). A portion of the proceeds from the sale of state assets should be used to stimulate the economies in rural areas by building social and economic infrastructure. The BEE Corn suggests a cap on Restructuring proceeds that are directed towards debt reduction.
2. The PSR programme is also fundamental to Investment for Growth Accord because of its ability to attract foreign and local investment.
3. The BEE Corn believes that black equity and management participation in the restructuring process must not be relegated to second-tier opportunities. We therefore recommend that black involvement must occur at all levels, including large divestitures, SEPs, concessions and strategic management partnerships. New trends in funding are enhancing participation and focus of black investment companies. The potential opportunity to fast track ernpowerment and promote skills transfer through a SEP- BEP shareholding relationship must not be lost.
4. The NEF must be operationalised as soon as possible focusing its activities on unlocking value in the fund The administrative structure for its retail component will form part of NEFA 4, this will involve retail schemes and the sale of shares to black companies and consortiums, which would have otherwise acquired smaller, stakes directly in privatised assets or IPO's.
5. The BEE Corn recommends that government should use the restructuring process to proactively develop black corporate advisory companies - across a wide spectrum of disciplines - with the potential to compete against established firms.
6. All PSR exercises must incorporate ESOPS and where possible other schemes aimed at enhancing workers participation, for example worker buy-outs and cooperatives.
7. Every IPO of an SOE must have a retail scheme with a discount to encourage black participation. A minimum of percentage for black people and or the NEF must be agreed to.
8. PSR must promote the development of SMMEs and worker and community - owned businesses through the increased use of a mix of outsourcing and other ASD models and the required contractual and performance regulations.
Community Re-investment Financial institutions have traditionally been geared to serve the needs of the minority white section of the population, including monopoly capital, resulting in a biased allocation of resources to the disadvantage of the black majority, particularly women.
There has been limited transformation in the banking, financial services and other advisory industries, with management and ownership structures still reflecting apartheid era management compositions. This has contributed towards the continued inability of these institutions to effectively support meaningful black participation in the economy.
The Black Economic Empowerment Commission believes that it is an imperative that the continued transformation of the sector to meet the needs of the RDP. In this regard we are making three suggestions:
1.The use of Equality legislation against the sector, when discrimination occurs.
2. The Black Economic Empowerment Commission recommends that the state should introduce legislation that provides criteria, derived from the national empowerment strategy, against which banks can monitor, their activities.
3. The Black Economic Empowerment Commission calls upon the government to investigate the feasibility of introducing community reinvestment requirements, which are aimed at ensuring, continued transformation through disclosure requirements and support for underdeveloped areas. The legislation should also aim to encourage the established banking sector to help set up the infrastructure and capacity for a second and third tier banking sector.