/ 23 December 2010

BBBEE code versus sector charters

When they were new, transformation charters seemed to be a blueprint for black economic empowerment.

Now that we have broad-based BEE codes of good practice, which represent a kind of super-charter, I cannot see much reason for their existence. I think they may even suppress competition.

I argued as much at the recent EES-Siyakha BEE conference, eliciting a strong response from Thabo Masombuka of the department of trade and industry, who maintains that charters are still necessary, to fine tune the otherwise one-size-fits-all code for each sector.

With the gazetting of the codes, which give teeth to the BBBEE Act, existing charters — with the exception of the mining charter — were supposed to be aligned with the codes or fall away. When trade and industry is satisfied with the revamped charters, they are gazetted as sector codes, which have the same standing as the codes of good practice.

Two years after the gazetting of the codes, only four sector codes have been gazetted, and two of the most important charters remain in limbo.
The charters that have been gazetted as sector codes are the:

  • Integrated transport sector codes (with eight subsectors),
  • Forest sector code,
  • Construction sector code, and
  • Tourism sector code

The two charters that remain outside the process are the financial sector charter and the ICT charter. The process of converting the finance charter has been revived, according to the department, but the ICT charter seems a long way off.

The question is: Because the codes are a kind of super-charter, what’s the incentive for the companies in a sector to have a transformation charter?

The initial incentive for charters has been to avoid the threat of state intervention and to have trade-off s in other areas for less ambitious ownership transfer targets. For the highly regulated, foreign-owned oil industry, empowerment was part of an energy white paper
and became linked to reregulation of the industry.

In mining, nationalisation of mineral rights meant that the state had a powerful weapon in the
granting of licences to mine. State buying power, along with intense political pressure, was the
spur for a marketing, advertising and communication charter.

By the time the finance sector charter was signed, it became clear that business could not ignore the drive for racial transformation. The charters clearly played a pioneering role in BEE.

The first transformation charter, the liquid fuels charter signed in 2000, included, alongside
an ownership target of 25%, a number of other commitments. These were for preferential procurement, employment equity and skills development for black people.

They were vague, but the start of a process of thinking about empowerment more broadly than in terms of ownership. The mining charter had, with a 26% ownership target, even more social commitments, including those directly affecting labour.

The finance sector charter, had a lower direct-ownership target of 10%, and contained a set of initiatives around financial exclusion that were about long-term poverty alleviation. Simply having a charter did not insulate companies in those sectors from criticism, though for a while at least state intervention was avoided.

Representatives of the oil industry, soon after the charter was signed that committed the industry to meeting targets over a period of 10 years, found themselves being grilled in Parliament about their failure to meet charter targets immediately. Yet the charter has not helped avoid state competition in the form of a massive state oil refi nery being planned for Coega.

Most disturbingly, ownership still seems to trump other aspects of transformation. Disagreements between stakeholders over the ownership target have meant the carefully crafted finance sector charter has been in limbo, unable to be converted to a sector code, with the communist party switching from warm praise of the charter to richly rhetorical condemnation.

Trade and industry says the process of converting the finance charter has now been revived, but the experience must have been galling, and underlines
the importance of ownership. Indeed, the commonality in the charters so far gazetted as sector codes is that equity targets are higher than in the codes, typically 30%, and there seems to be little trade-off for innovation in other areas.

One of the aspects of the bus commuter service subsector of the transport codes is a 35% black-ownership target, to be achieved within five years. Worryingly, there could be an anti-competitive bias in legally binding codes being negotiated at sector level, though compliance is at company level.

Take for instance, the tourism sector code. It halves the normal turnover level for exemption from BEE compliance to R2.5-million. Though there are specifi c reasons for doing this, it does remove the advantage for smaller businesses.

Putting in place a transformation charter that becomes a sector code looks like a time-consuming and costly process, judging by the steps prescribed by the department, and the long delays in some existing charters being gazetted. Many firms would prefer simply to comply with the codes, but they may not have the option.

One reason for going the transformation charter route, whether it becomes a sector code or not, would be to fend off political pressure, at least temporarily.

The newspaper industry, which will inevitably be hauled before Parliament to explain its transformation profile, as the marketing and advertising industry was before it, should consider this carefully.