20 March 2013

Presentation to the Portfolio Committee on Trade and Industry

Potential implications of the proposed amendments to the Broad-Based Black Economic Empowerment Amendment Bill

1 Introduction

Rothschild welcomes the opportunity to present its observations vis-à-vis the Broad-Based Black

Economic Empowerment (“BBBEE”) Amendment Bill to the Portfolio Committee of Trade and Industry

BBBEE is a key instrument of economic transformation and is vital to the delivery of Government’s

objectives

Key to addressing growth, job creation and the elimination of socio-economic imbalances in order to

improve the quality of life for South Africans

BBBEE continues to be an evolving process

Its implementation is complex and requires detailed analysis, planning, execution and sustained

commitment

The proposed amendments to the BBBEE Act along with the Revised DTI Codes, represent the most

fundamental changes to the BEE regulatory framework since its inception, with a widespread impact on

business strategies

Government, with input from stakeholders, needs to create a BBBEE framework and related policies

that are consistent, transparent and predictable

This is critical considering the importance of BBBEE in South Africa and its impact on stakeholders, and

more particularly given the need to attract and retain the capital investment that underpins growth

– The proposed amendments contribute towards this objective

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2 Inadequate progress on broad-based transformation

19 years after the 1994 elections and 6 years since the publication of the DTI Codes, transformation is

not progressing at the pace expected by government and other stakeholders as a result of, inter alia,

regulatory challenges and non-compliance

There have been major events in the BBBEE regulatory landscape since December 2011

In December 2011, the DTI released the Amendment Bill, aimed at amending the BBBEE Act

– The Amendment Bill includes the most fundamental proposed changes to BBBEE legislation since its

inception and is still to be finalised

The ICT Charter was released on 6 June 2012 and gazetted according to Section 9.1 of the BBBEE Act

The Revised DTI Codes were released on 5 October 2012 for public comment

The FSC was gazetted in terms of S9(1) in November 2012

This presentation focuses specifically on potential implications and observations that Rothschild

believes may require clarification in the BBBEE Act

“The following shortcomings have emerged in the implementation of BEE.

First, ownership and senior management issues receive disproportionate emphasis. The unintended

consequences of this trend include “fronting”, speculation and tender abuse.

Second, the regulations do not adequately incentivise employment creation, support for small enterprises

and local procurement. The preferential procurement regulations aggravate this situation by privileging

ownership over local production.

Finally, the broad-based BEE regulations penalise public entities as suppliers. The democratic state owns public

entities on behalf of our people yet the regulations do not count them as “black empowered”

A major re-think is needed of the BEE framework and policy to achieve South Africa’s developmental and

growth goals”

Source New Growth Path Framework, 23-11-2010

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“The corporate

landscape of South

Africa has changed

remarkably since

1994. However, it

remains highly

concentrated. This

poses a barrier to

business entry and

expansion in key

markets, which are

essential for

employment creation.

Present forms of

BEE are not

achieving all the

desired objectives.”

Source National Development

Plan, 15-08-2012

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3 Regulatory progress on BEE

BBBEE regulations have been gaining momentum over the past two years. This has resulted in an increased degree of complexity, contradiction as well as overlap in regulatory requirements

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Increased regulatory activity over the past few years

1993

First BEE

transaction

Methold (later

New African

Investment

Limited)

acquired 10%

of Metropolitan

Life from

Sanlam

1 1999

BEE

Commission

established

to investigate

methods for

government

to assist in

implementing

BEE

3

2003

Regulations

DTI published

a strategy

document on

BBBEE

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1993-1998 2004-2008 1999-2003

1994

First BEE listing

Listing of New

African Investment

Limited on the JSE

2

2002

Regulations

Mining Charter

released

6

2007

Regulations

DTI Codes gazetted in

January 2007

Sector Charters gazetted

-Property;

-Financial;

-Agri-BEE and

-Marketing,

Advertising and

Communication

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2004

Legislation / regulations

-BBBEE Act enacted

-Financial Sector

Charter came into effect

-First draft of the DTI

Codes issued

8

2000

BEE

Commission

report

released

4

2009

BEE Advisory

Council appointed

to advise

government on

BEE

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2008

Regulations

Sector Charters published

-Transport;

-Forestry;

-Construction and

-Tourism

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2009

Regulations

Mining Code

gazetted

ahead of the

Mining Charter

review

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2009 - Present

2010

Regulations

Revised

Mining

Charter

released

14

2000

Regulations

Petroleum and

Liquid Fuels Charter

released

5

2005

Regulations

Final Version of

the Draft ICT

Charter released

9

2011

Regulations

Draft ICT

Charter

gazetted in

terms of

Section 9(5)

15

2011

Regulations

Amendment Bill

released for

public comment

(Dec)

16

2012

Regulations

FSC gazetted in

under S 9(5)

ICT gazetted under

S9(1)

18

2012

Regulations

Revised DTI Codes

released for public

comment

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4 Rothschild’s BEE experience

De Beers

Sale of a 26% equity

interest in De Beers

Consolidated Mines to

Ponahalo Holdings, a

BEE company

R3.8bn

2006

2007

Anglo Coal

Advised Anglo Coal on its

BEE transaction

Thelo Incwala

Current

Advising on a broad based

Black Economic

Empowerment transaction

Palabora Mining

2005

KTI, MIT, WDBI

Acquisition of an interest in

the FirstRand Group

R4.5bn

2007

Anglo American plc and

Anglo Platinum Limited

R35bn Black Economic

Empowerment

transactions

2008

Anglo Platinum Limited

Advised Anglo Platinum on

its community initiative

2009

Anglo American

Strategic and debt advice

to Anglo American on the

restructuring of its BEE

transaction with Anooraq

2010

Anglo American

Advised Anglo American’s

transformation committee

Current

Xstrata

Advised on R2.6bn ESOP

Thelo Incwala

2006

Acquisition of a further 3%

interest in Incwala

Resources by Thelo

Incwala and refinancing of

senior debt

R251m

Thelo Incwala

Acquisition by KTI of a

10% BEE stake in

Metropolitan

2004

KTI

2004

Ukhamba Trust

Acquisition of a 10.1%

interest in Imperial

Holdings

R1.3bn

2005

Life Healthcare

Acquisition of Afrox

Healthcare by BEE

Consortium

R3.4bn

2006

Lafarge South Africa

Lafarge’s R1bn BEE

transaction

2006

Anglo American plc

Kumba BEE transaction

and the formation of

Exxaro – R20bn

2006

African Rainbow Minerals

R2.4bn acquisition of 29%

stake in Xstrata’s South

African Coal operations

2005

Impala Platinum

R4.1bn BEE transaction

with Royal Bafokeng

Resources

2005

Old Mutual plc

R7.2bn BEE transaction

with respect to Mutual &

Federal, Nedbank Group

and Old Mutual South

Africa

2004

SA Chrome

Merger of SA Chrome and

Xstrata’s ferrochrome

assets – R8.2bn

2004

Sanlam

R2bn BEE transaction

2004

AVMIN

Avmin, ARM, Harmony

BEE Transactions - R7bn

Notes

Includes transactions on which current Rothschild team members worked prior to joining Rothschild

Rothschild has played and

continues to play an active

role in the development of

BEE:

Directly, through the

implementation and

design of BBBEE

transactions, on behalf

of our clients

Indirectly, through our

ongoing dialogue with

government, State

Owned Enterprises, the

private sector as well

as various

representative bodies

for the private sector

In addition, members of

the team have assisted in

the design and

establishment of

transformation committees

at a number of leading

organisations including

KTI, Xstrata, Anglo

American and Impala

Platinum

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5 Rothschild’s review of BEE

Rothschild’s analysis was shared with key stakeholders and highlighted a number of challenges and issues in the BEE environment

Source Average BEE scores since 2007 – KPMG BEE Survey 2011

Transformation is not progressing at the pace expected by stakeholders Key observations

In 2011, Rothschild conducted an independent review of

the progress of transformation, which was shared with

key role players, including Government, large corporates,

BEE players and other opinion formers

We identified the following challenges and issues in the

current BEE environment:

An over-emphasis on ownership

Requirement for increased broad based participation

Unsustainable funding structures

Challenges in delivering real benefits to communities

and employees

The strong correlation between education, skills

development and employment equity progress

A compliance based mentality (“tick-the-box”)

reflected in the behaviour of many corporates,

undermines the spirit and objectives of BEE

The complexities of assessing the progress made on

transformation given the lack of reliable, objective and

consistent data

Regulatory uncertainties and costs of implementation

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6 Revisions to the 2011 BBBEE Amendment Bill

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The current draft incorporates important amendments from the 2011 Amendment Bill, including

Definition of BBBEE

The definition referred to “sustainable” economic empowerment

This could have presented challenges in determining what entails a sustainable transaction e.g. once off

grants which are not ongoing

“Sustainable” has been replaced with “viable” thereby providing clarity and reducing potential

misinterpretation

Definition of BBBEE “transaction”

The definition referred to any “transaction, practice scheme or other initiative which affects or may affect the

BBBEE compliance of any person”

– Implied that a BBBEE transaction was not limited to ownership transactions and could, for example,

include enterprise development initiatives

“Transaction” has been replaced with “initiative” thereby providing clarity and allowing for a wider set of

activities

Deletion of the definition for “local content” in the Act and inclusion of the concept under S9 (creation

of sector codes)

Allows for sectors to determine their own local content requirements taking into consideration sector specific

capacity constraints

Deletion of the “trumping provision”

This provision stated that if any conflict arose between the provisions of the Act and any other act (save the

Constitution) with regards to BBBEE matters, the Act would take precedence

This implied that companies who have previously complied with other regulations would have to measure

compliance in respect of the Codes or seek to gazette a sector specific code under S9 of the Act (the latter

would also need to be aligned to the Act)

– Created concern for certain sectors, for example the mining sector, which did not have a gazetted sector

code

The deletion of this provision provides greater certainty and avoids conflict with respect to compliance

requirements 6

Rothschild

believes that

these

amendments are

valuable as they

seek to provide

clarity and

reduce conflicts

7 Amendments and potential implications

Amendments Potential implications and observations

If requested to do so, the Minister may permit organs of state or public entities to determine their own qualification criteria for procurement and other economic activities which exceed those in sector codes

The procurement policies of organs of

state and public entities is critical to economic transformation

Practical qualification criteria taking into consideration capacity constraints will need to be set

Proposed qualification criteria by organs of state and public entities

– Should take into account sector specific capacity constraints

– Should follow a public process before implementation

– Should not differ materially between organs of state and public entities

Where a sector code has been gazetted in terms of S9 of the Act, enterprises in that sector may only be measured in terms of that sector code

May negatively impact compliance

scores in relation to previous measurement criteria

Amendments in

measurement

criteria may risk

dissipating the

energy and

commitment

already expended

by stakeholders

Clarification of the application and interpretation of the Act

S9(6)

S10(2)

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Black bold font relates to

key implications and

observations

Blue bold font relates to

potential

considerations/alternatives

7 Amendments and potential implications

Amendments Potential implications and observations

Establishment of BBBEE Commission

– As a trading entity within the administration of the DTI

The establishment of the BBBEE

Commission should improve the effectiveness and consistency of BBBEE compliance and reporting

It is imperative that

– The independence of the BBBEE Commission is unquestioned

– The BBBEE Commission is fully operational as soon as the Amendment Bill is passed into law

Consideration should be given to how conflicts of interest affecting the Commissioner and staff will be identified and managed

The inter-

relationship

between the

BBBEE

Commission and

other stakeholders

(Governmental

departments such

as the DTI; BBBEE

Advisory Council)

will need to be

clearly set out so

as to avoid

confusion

regarding lines of

authority

Establishment of the BBBEE Commission to deal with compliance

S13

(B,E)

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Black bold font relates to

key implications and

observations

Blue bold font relates to

potential

considerations/alternatives

7 Amendments and potential implications

Amendments Potential implications and observations

Functions conferred on the BBBEE Commission to evaluate and monitor progress include

– The maintenance of a registry of major BBBEE transactions above a certain threshold

– The receiving and analyzing of reports concerning BBBEE compliance

This will ensure consistent application of

scoring criteria to measure compliance

Subject to confidentiality requirements, the registry and the BBBEE Commission’s reports/findings should be made available to the public annually

The BBBEE Commission should also take responsibility for facilitating the dialogue between Government and the private sector to ensure:

– Stronger alignment between BEE initiatives and sectoral / national needs with respect to Corporate Social Investment spend/Preferential Procurement

– Increased Government and private sector co-operation in the implementation of effective learnership programmes (Skills Development)

– Increased co-operation between corporates and DFIs to ensure that enterprise development expenditure is directed to the most deserving beneficiaries

The standardised

nature of reporting

to the BBBEE

Commission

should eradicate

the current lack of

consistent, reliable

data required to

assess the

progress of BBBEE

Establishment of the BBBEE Commission to deal with compliance

S13F

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Black bold font relates to

key implications and

observations

Blue bold font relates to

potential

considerations/alternatives

7 Amendments and potential implications

Amendments Potential implications and observations

The BBBEE Commission may, on its own initiative, or on receipt of a complaint in the prescribed form, investigate any matter arising from the application of the Act, including any BBBEE initiative or category of BBBEE initiatives

Gives the BBBEE Commission the

power to evaluate all BBEE initiatives for compliance with BBBEE regulations

It is not clear how and when new BBBEE initiatives will be evaluated

– It might be appropriate for new initiatives to be reviewed and approved before implementation

Further consideration to be given as to how to reduce superfluous and unfounded complaints

An appropriate appeal process should be set up to allow those found guilty of an offence to appeal such findings

The BBBEE Commission may issue summons to any person who is believed to be able to furnish any information which may assist in an investigation

Confers on the BBBEE Commission

the same powers held by a court

It is questionable whether the BBBEE Commission should be given the same authority as a court

The BBBEE

Commission’s ability

to investigate

initiatives may be

interpreted as having

the ability to sanction

initiatives

If this is the intention,

then further clarity is

required as to how

this will be practically

implemented

S13J

S13K

Strengthening the evaluation and monitoring of compliance with the Act

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Black bold font relates to

key implications and

observations

Blue bold font relates to

potential

considerations/alternatives

7 Amendments and potential implications

Amendments Potential implications and observations

All spheres of government, public entities, organs of state and JSE listed companies to report on their compliance with BBBEE legislation

Unlisted public companies are

excluded from reporting obligations

– A consideration may be for all public companies with a predetermined minimum public interest score to comply

This amendment provides clarification as to what will be considered to be an offence under the Act and the fines thereof

Fines not exceeding 10% of annual turnover taking into account the value of the transaction

Refusal to disclose confidential information is an offence under S13N(1)

Linking fines to the value of the

transaction rather than only the turnover of a company provides for penalisation on a fair and equitable basis

It is not clear whether non-compliance is included as an offence

– Whilst the definition of fronting may be considered wide enough to include non-compliance, it would be helpful if the Act specifically addresses this

Further consideration

should be given to

how large unlisted

public companies

could be included in

the group of entities

required to report on

their compliance with

BBBEE legislation

S13G

S13N,

O

Strengthening the evaluation and monitoring of compliance with the Act

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Black bold font relates to

key implications and

observations

Blue bold font relates to

potential

considerations/alternatives

8 Concluding remarks

Most of the proposed amendments to the Act are likely to be viewed positively as these

amendments should assist to

Support sustainable economic transformation

Align the many complex and different BBBEE regulations

Provide consistent, reliable data to assess the progress of BBBEE

Due consideration will need to be given to the unintended consequences of these amendments,

including

Ensuring that the energy and commitment levels expended by companies is maintained

Providing targets which are realistic and, therefore, achievable

Clearly articulating the authority and mandate of the BBBEE Commission

Precisely stipulating instances of non-compliance and ramifications thereof

Rothschild welcomes the opportunity provided by the Portfolio Committee to provide its comments

on the BBBEE Amendment Bill. We acknowledge the efforts of the DTI in engaging with all

stakeholders to formulate clear, concise and aligned regulations for the benefit of all stakeholders

Whilst the Amendment Bill provides significant clarification on key elements of BBBEE, further detail is required in key areas

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