International companies operating in South Africa are gearing up for intense debate over codes governing the implementation of black economic empowerment (BEE).
Multinational firms and foreign chambers of commerce informally surveyed by the Mail & Guardian last week identified a raft of problems, ranging from concerns around ownership requirements to costs and compliance issues.
Several spoke only on condition of anonymity, saying the government was sensitive to media discussion of the issues in question.
Under debate are the Codes of Good Practice for Broad-Based Black Economic Empowerment, which set the criteria that will enable a firm’s BEE status to be scored.
The calculation considers the extent to which a company is owned by black South Africans, procures locally and from BEE firms, and promotes skills development and employment equity.
“Most multinationals would want to comply with the code generally,” says the acting chief director in the BEE unit of the Department of Trade and Industry, Polo Radebe. “The main issue has been ownership.”
Foreign firms are wary of being forced to hook up with unknown empowerment partners, said one official in the European chamber of commerce. Ownership requirements would be particularly difficult for new entrants to the market, and firms from countries with risk-averse business cultures, the official suggested.
Some locally-based firms with multinational structures see it a little differently.
“It’s good as a multinational to have tentacles around the world, but the challenge is to balance that with the South African environment,” says Jacques Kotze at Africon, a South African multinational. “[The codes] will influence us to convince our international partners to maybe also contribute their shares to BEE or sell back some of their shares.”
As alternative to the ownership requirements, the codes do allow multinationals to make “equity equivalents” or investments in approved areas that will qualify as ownership by black people on the BEE scorecard.
Under the codes, a multinational firm may qualify for equity equivalents if it has a global policy prohibiting the sale of equity in its affiliates or if the firm would suffer commercial harm by complying with the codes’ ownership requirements.
“It’s very important that multinationals have the opportunity, if they choose, not to sell equity,” says Michael McDonald from the Steel and Engineering Industries Federation of South Africa. “If you sell 25% to a local partner, that bloc plus one vote would be able to prevent any motion coming before the board.”
But concerns persist.
“[The equity equivalent section] is going to need to be changed,” said one commentator, who argued that multinationals will be reluctant to invest in public programmes that are approved for investment under the codes if they have no control over how the cash is used.
Another chamber of commerce said the criteria for equity equivalents are both “too stringent” and “too vague”.
“People must be careful not to assume that the equity equivalents are the easier alternative. An argument can be made that it is quite an onerous requirement,” says Radebe.
Procurement rules are seen as problematic too: local subsidiaries of multinationals may not have discretion over buying decisions. They may, for example, be bound by global supply contracts and would thus score poorly on procurement, says a foreign chamber of commerce source.
But firms do not source all of their inputs internationally and should procure locally where possible, Radebe adds.
Firms may be less worried about the scorecard’s skills development and employment equity components, some respondents say, because multinationals conform to similar legislation in their home countries in these areas.
Foreign chambers of commerce have also expressed dissatisfaction with the current system of BEE rating. Although the Department of Trade and Industry views the rating industry as a way to grow BEE firms, says one commentator, relatively new BEE firms may lack the capacity to rate the business divisions of large multinationals. The respondent also says that firms undergoing BEE rating have experienced confidentiality breaches.
Business representatives have asked the government to make established auditors such as KPMG responsbile for BEE rating. Radebe says the Department of Trade and Industry acknowledges rating problems and is trying to resolve them.
The executive director of the Japanese External Trade Organisation, Katsumi Harano, says that the BEE codes are an “African cost” that Japanese business understands as “an obligation to doing business in South Africa”.
“It’s not an obstacle to Japanese business but one of the hurdles,” says Harano, adding that similar legislation exists elsewhere in Asia.
And Kotze says South Africa is not unique. Africon comes under “pressure to localise” in countries such as Mozambique and Angola, he explains, pointing out that the company’s Malaysian partners come from a country that also has an empowerment background.