Business is beating a path to the door of the department of trade & industry in a frantic lobbying effort to iron out inconsistencies between government's empowerment codes and the plethora of charters negotiated between individual ministries and particular business sectors.
The frenetic activity reflects growing concern among black and white businessmen that the country's drive for black economic empowerment (BEE) could suffer a serious setback unless government urgently takes a leadership role to clear up the confusion. Even trade union federation Cosatu has submitted a detailed comment calling for clarity as well as a two-day meeting between the DTI and those involved in the sectoral charters.
Solving the problem isn't going to be easy, which is what's driving business and other lobby groups to Pretoria.
The fact is that the codes have created uncertainty in the business community and empowerment deals are being put on ice. On top of that, the codes as they stand would result in a devaluation of many empowerment transactions done so far. Companies would find themselves earning far fewer empowerment points than expected from deals evaluated under the charters.
This is particularly true of deals done under the financial sector charter. "If the codes remain as they are, which I don't think they will, it would create substantial problems for the banking sector," says Cas Coovadia, MD of the Banking Association of SA. "We would set back three years of negotiations. The implication is that we would have to renegotiate everything."
He says the association recognises a serious need for "some ground rules and alignment in BEE processes" but that "we need to ensure government also sees the importance of sector flexibility".
There is an additional fear that the incompatibility between the codes and sectoral charters is creating uncertainty, which is slowing the pace of empowerment transactions. "People out there are confused. The requirements of the codes and the requirements of the charters clash. They are not sure whether to follow the industry, or whether to follow the DTI," says a senior executive of a leading black empowerment company.
The urgency of the situation has come to the attention of President Thabo Mbeki, who has demanded that the DTI be ready to table the codes as a bill by June. "Deals are not being done. People are hanging fire, which is why the president wants this to be cleaned up by June," says a senior white executive.
Some empowerment consultants are advising their clients to wait for the final blueprint before they comply.
"We are saying to our clients, negotiate BEE deals but don't sign on the dotted line until the BEE codes are passed in parliament," says Vuyo Jack of Empowerdex.
These delays threaten to slow down the pace of empowerment deals, which have been growing at a rapid pace over the past three years. Accounting firm Ernst & Young reports in its latest survey on SA mergers and acquisitions that the number of BEE deals increased more than fourfold in value between 2002 and last year, from R12,4bn to R52,9bn.
Hugo Steyn of Investec's corporate finance division says there "is a huge amount of goodwill to do BEE deals" but that it is difficult "if you don't know if you are going to get the points". He says there is concern among businesses that "the charters will be revisited by government and that companies will have to do it all over again".
The problem facing the DTI is that as fast as it tries to harmonise the codes, new sectoral charters keep popping up. This week the final touches were being put to the financial sector charter, which has taken two years to negotiate, and one for the technology, information & communication sector.
"It's not a crisis now but it will fast develop into one if there's no leadership provided by government. Right now various sectors are doing their own thing. How much is being co-ordinated? You get the impression the answer is not very much. Government hasn't even bothered to say who is in charge," says the empowerment company executive, adding that what the country needs is an "empowerment tsar".
The codes, tabled by the DTI in December, were designed to provide a uniform definition of broad-based BEE and to provide common rules for all empowerment transactions. They were drawn up in response to calls from black lobby groups which argued that many of the charters were flawed and were allowing deals to be done that fell far short of meaningful economic empowerment. The other motivation for the codes was to ensure that companies not covered by sectoral charters were brought in under the empowerment umbrella.
Lionel October, the DTI's deputy director-general, says the ownership regulations set out in the codes are designed to measure "real empowerment", pointing out that there have been several cases where empowerment beneficiaries have had shares allocated to them but have never been able to take ownership of those shares because they could not service the debt. Yet the white companies that sold the shares gained empowerment credits and benefited from government tenders.
The codes are also meant to guard against fronting - the practice of white companies using black business people to present a veneer of empowerment without any transfer of wealth or control taking place - and poorly structured deals that have collapsed, says October.
He says that government, as the country's biggest spender, wants to ensure that the contracts it awards are going to genuinely empowered entities.
October says charters will be given enough time to align themselves with the BEE codes, though he isn't prepared to commit the department to a definite deadline for harmonisation. He says trade & industry minister Mandisi Mpahlwa is holding talks with several constituencies that have raised concerns. He says some of the comments from business are useful and will be considered when drafting the bill.
Under the charters, companies score points according to how they have advanced empowerment in particular areas such as ownership, employment equity, procurement and social spending. All are given different weightings depending on the sector in which they operate.
The codes apply the same principle but in some instances give different weightings and definitions of what constitutes empowerment.
If implemented in their present form, the codes will result in many companies that have done empowerment deals using a range of debt instruments, including preference shares, loans and options, having their empowerment transaction downgraded. They will not qualify for ownership credits in terms of the ownership regulations while they are lumbered with debt financing.
Companies fear that their overall BEE scorecard will be heavily diluted if they do not have credits for ownership, which accounts for 20 points. This will disadvantage them when bidding for government tenders.
Loyiso Mbabane - Welcomes the codes
Loyiso Mbabane, a senior lecturer in empowerment and human resources at the UCT Graduate School of Business, welcomes the new ownership rules, pointing out that too many empowerment beneficiaries are highly geared yet continue to acquire more and more assets.
The issue of a few black businessmen gaining a disproportionate slice of the empowerment cake has been the subject of widespread debate and concern, particularly within the ANC.
"The codes will ensure that a small empowerment elite that has been creaming it on empowerment deals will have its wings clipped," says a government commentator.
Financial institutions will be forced to do BEE deals on more favourable terms so that debt can be settled within a shorter period, he says.
But other reactions from business range from cautious warnings to thinly disguised panic.
How deals are scored is creating the biggest headache. The code makes it clear that BEE deals that rely heavily on options, deferred and preferential shares will not be given full equity accreditation. This would happen only once a black partner in any transaction held unencumbered shares - in some cases only 20 years down the line.
"It would be hard to find a deal in the financial services sector that would score full points when judged against the code ownership regulations," says Anthony Mariner, of African Merchant Bank's corporate division.
The executives of Tiso, the financial services, mining and industrial services group, argue that government should tread carefully in disqualifying ownership. "While we support the overall objective of achieving unencumbered, unrestricted ownership, we proposed that normal funding-related restrictions on ownership should not be used to disqualify achieved ownership as proposed in the codes," they wrote in an article in the FM last month.
Rather, they argue, emphasis should be placed on net equity value attributable after stripping out funding obligations.
Business Unity SA, which represents the mainstream of local business - including white and black organisations - holds the same view, as does African Merchant Bank chairman Peter Vundla.
"The codes are radical but they need to be practical, too. They have good intentions to ensure the financial practicality of empowerment deals, but they have to be realistic in their assessment of empowerment. The process should not set back companies because they have done deals using debt financing. Most people do not have millions in cash to pay for shares up front," he says.
The debate over how deals are valued is top of a long list of concerns for the banking sector. Analysts point out that every aspect of the financial sector charter will be affected by the codes if they are promulgated unchanged.
Though the financial sector charter sets the equity target at 10% by 2014, the codes set it at 25%. On the employment equity front, the goalposts are moved from 25% to 50%.
Coovadia believes a compromise can still be struck and he's confident it will be possible to realign the codes and the charter. "We don't believe that it is government's intention to create an environment where we have to revisit important aspects of the charter. The charter has been signed off by all stakeholders and the banks have already begun working on it. I can't see any sense in government creating a situation where we would have to start from scratch," he says.
The mining industry is worried, too. Ricci Schwab, director of legal firm Bell Dewar & Hall, points out two differences between the codes and the mining charter, the only one of eight charters to have been promulgated into law.
The first is the way in which procurement evaluations are done. "The mining charter only requires mining companies to procure their goods and services from black-owned or empowered enterprises," he says, adding that this method of evaluating the levels of preferential procurement only recognises suppliers' black ownership and management credentials and "may result in fronting".
Procurement evaluation under the codes, on the other hand, seeks to ensure fronting doesn't happen by requiring suppliers to meet a range of empowerment criteria.
Schwab also points out that the mining charter includes white women as well as disabled white people in its definition of historically disadvantaged South Africans, but that the codes do not.
Chamber of Mines president Con Fauconnier says the chamber has requested a meeting with minerals & energy minister Phumzile Mlambo-Ngcuka to clarify the position of the mining charter in relation to the codes.
"We need to get a view from government over what would take precedence in the event of a problem - the codes or the mining charter. The mining companies have now been working for a considerable time on the implementation of the charter."
Fauconnier believes it doesn't make sense to "get involved in a detailed examination of the codes" because the mining charter "takes precedence".
Mining executives argue a renegotiation of the charter isn't on the cards.
"In the mining industry we were given categorical, cast-iron guarantees that there would be no mission creep, no moving the goal posts. Two years later government is saying there is a whole new set of guidelines. To renegotiate the mining charter would be impossible," says one executive.
All the people the FM spoke to had very clear ideas on how the problem could be solved. All planned to table their proposals to the DTI.
The executive of the black empowerment company says clarity on three things is needed urgently:
- How do companies reconcile the differences?
- When there is a conflict, which over-rides the other?
- If there's a tender out there and I want to get empowered to win it, what do I have to do to qualify?
"What we all - BEE companies, government and business in general - require is a clear, unambiguous, simple and definite set of standards that can be applied in a consistent manner to effect visible and quantifiable economic transformation within realistic time frames," the executives of Tiso argue.
One white executive adds: "The more detailed and complex it gets, the more difficult it is to implement and follow. The economic landscape, after the plethora of charters, is not amenable to a simple new overlay. It is too late to start all over again."
