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Broad-Based Black Economic Empowerment

Amendment Bill, 2012

Regulatory Impact Assessment

Contents

• Introduction

• Background

• Policy objective

• Policy options and risk assessment

• Analysis of impacts

• RIA findings, Recommendations and Responses

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Introduction

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• The presentation relates to the Regulatory

Impact Assessment (RIA) on the Broad-

Based Black Economic Empowerment

Amendment Bill, 2012

• In addition to RIA, the Broad-Based Black

Economic Empowerment Amendment Bill

was considered by NEDLAC

Background

• In 2003 the B-BBEE Act was promulgated into law, and a strategy

for Broad-Based Black Economic Empowerment (B-BBEE) was

released which defines B-BBEE as

“an integrated and coherent socio-economic process that directly

contributes to the economic transformation of South Africa and brings

about significant increases in the numbers of black people that

manage, own and control the country’s economy, as well as

significant decreases in income inequalities”.

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Background

• The B-BBEE process includes elements of human resource

development, employment equity, enterprise development,

preferential procurement, as well as investment,

ownership, and control of enterprises and economic assets.

• Regulatory impact assessment of Amendment Bills:

– Why is an amendment needed, and what does it try to achieve?

– Is the amendment likely to achieve the desired outcome?

– Evidence-based policy-making

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Policy objective

• Key objective:

– A substantial increase in the number of black people who have

ownership and control of existing and new enterprises in the key

sectors of the economy;

– A significant increase in number of black people in executive and

senior management of enterprises;

– Boost and generate higher economic growth, job creation, skills,

access to opportunities and poverty alleviation;

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Policy objective

• Key objective:

– Bridging the divide between the first and second economy;

– Linking B-BBEE with the lead sectors identified for industrial

policy to facilitate growth and employment;

– Contribute towards the sustainable growth of small and medium

enterprises;

– Accelerate the participation of black people in the mainstream of

the economy at all levels.

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Policy options and risk

assessment

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Options and risks

• Policy options:

– RIA best employed early in policy development – allows full

identification of policy options

• Risk assessment

– Risk addressed by the Bill is that the South African economy will

not perform at its optimal if majority of its citizen are still excluded

from meaningful and sustainable participation in the growth and

development of the economy. Furthermore, the Bill addresses the

circumvention of the Act and ensures alignment of B-BBEE with

other pieces of legislation.

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Analysis of impacts

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Introduction

• Impact of changes proposed by the Bill were examined in

five key policy areas, as follows:

– Circumvention : B-BBEE Fronting;

– Establishment of B-BBEE Commission;

– Alignment of the B-BBEE Act to other key pieces of legislation

and other policy instruments ( e.g. PPPFA, NGP, IPAP and Mining

Charter );

– Monitoring of B-BBEE in Public and Private sector; and

– Redesign of the B-BBEE Verification Industry.

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RIA Findings

Recommendations and

Responses

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Issue Problem/Objective Changes related to amendments

Key intended benefits (LMH)

Costs (LMH) Overall impact

Policy alignment

Problem: Non-alignment of key pieces of legislation and other policy instruments to B-BBEE policy thus leading to non-coherence when it comes to application across government, e.g. procurement and granting of licence.

Objective: Policy alignment and harmonisation

-Alignment of the B-BBEE primary legislation to other key pieces of legislation and other policy instruments (e.g. NGP, IPAP, PPPFA, MINING and LIQUID FUELS CHARTER); -B-BBEE Act to be the overarching framework for B-BBEE (mitigate conflict in law); -Transfer of general principles from the Codes to the BBBEE Act, including the concept of the balanced score-card receiving express recognition in the Act; -Trumping provision: BBBEE Act to take precedence over conflicting provisions in legislations dealing with empowerment; -Clarify the status of the BBBEE Codes and Sector Codes to ensure that they are applicable to all spheres of Government.

M benefits of a implementation nature -policy coherence will contribute to consistent application and increase in efficiency -reduced double-banking after alignment with EE Act among others

L costs since administrative issues tackled rather than actual policy objectives -Training government officials -rewriting procedures -adjusting reporting systems - possible conflict between Section 23 of BEE Act and PFMA could lead to litigation costs. The PFMA (Finance) states in section 3 (3): "In the event of any inconsistency between this Act and any other legislation, this Act prevails."

M net benefit if PFMA and other conflicts also considered

Fronting Problem: The sophistication of fronting practices has necessitated the need to amend the legislation and to strengthen enforcement in this area. Objective: To prevent fronting or the circumvention of the B-BBEE Codes.

- Inclusion of specific statutory offences involving fronting and other forms of fraudulent misrepresentation of empowerment status and the specification of penalties and blacklisting of entities and/or management for those offences; -Empowering the Special Investigation Unit to investigate all offences involving fronting or corruption with regard to the application of the Codes of Good Practice (for both public and private sector); -Collaboration between the dti and National Treasury. -Penalties for individuals include a minimum 12 months imprisonment and/or a fine -Penalties for enterprises

M benefit assuming current small beneficiary base -capital available to Black entrepreneurs for reinvestment which results in increased employment assuming the start-up of enterprises in line with IPAP for instance.

L costs assuming largely administrative costs (monitoring and application of penalties). Adding time and effort of legal officers and that of the SIU increases costs to M level. 'black listing' requires a fair administrative process. Costs might increase in relation to say PAJA.

L to M net benefit

BBBEE ownership transactions

Problem: Lack of institutionalised environment for review of empowerment transactions to ensure that: Proper evaluation of the effectiveness and economic viability of the B-BBEE structures/vehicles and Financing Instruments/Mechanisms is conducted; Adjudication and testing of the B-BBEE transactions so to ensure that they are Broad-Based and include designated groups; B-BBEE transactions are fair, just, and promote active and meaningful participation by the intended beneficiaries; There is a properly kept B-BBEE transactions depository/database (without compromising confidentiality). Objective: To set-up an institutional and related aadministrative framework for the regulation of the BBBEE transactions

-Establishing a BBBEE Commission with the requisite authority and capacity to investigate complaints on BBBEE transactions comprehensively and, to deal with complaints, advocacy, and education; -Create a mechanism for noting of empowerment transactions (above a specified threshold), and create organizational and technical capacity. Amongst other things, this will test reasonability of the variables used in structuring the proposed transaction; conduct assessment of the business value, growth targets (terms and conditions); overall technical assessment of the deal to ensure that it is broad based and sustainable; - The amendments will specify the jurisdiction of the BEE ombudsman and the threshold applicable to transactions. It is envisaged that the jurisdiction of the Ombudsman will be limited to transactions involving substantial value; -Establishing an independent expert panel to advise the Minister in respect of decisions and transactions involving B-BBEE Act.

Benefits M (since limited to one of 7 elements) -influence more sustainable transactions through assessments of the business value and growth targets -ensure broad base of beneficiaries -increase in efficiency in terms of monitoring only high value transactions

Cost M -Operating costs of Commission, expert panel and ombudsman (salaries, rent, leases) -Other administrative costs -Legal costs

Application of BBBEE across all spheres of Government and sectors.

Problem: Lack of proper implementation by Government departments, Public entities, and Private sector. Objective: To align the implementation of BBBEE across spheres of government

-Strengthen the monitoring and evaluation of B-BBEE; -Organs of State, public entities and other enterprises to prepare BBBEE plans and to report on compliance with such plans; -All spheres of Government and public entities to submit regular reports on their compliance to B-BBEE annually; -HODs and CEOs of the public entities must have a performance obligation to report on the implementation of B-BBEE and to be part of Ministries / Departments Performance Agreements; -Participation of the following key Ministries in BEE Advisory Council: Department of Public Enterprise; Department of Finance; Department of Mineral Resources; Cooperative Governance and Traditional Affairs; Department of Transport; and Department of Public Works; -Private Sector to include B-BBEE reporting in the Sustainability Reports

M benefits of a implementation nature -policy coherence will contribute to consistent application and increase in efficiency -reliability of information for policy planning -consistent communication to investment community

L costs since administrative issues tackled rather than actual policy objectives -Training government officials -rewriting procedures -adjusting reporting systems If departmental transformational policies are not aligned to generic codes of good practice there might be conflicting programmes.

M net benefit as long as Generic Codes are followed

BBBEE Codes of Good Practice as a means of implementation

Problem: The Codes are not aligned to economic restructuring and growth goals Objective: To align Codes to economic restructuring and growth goals

-Setting sub-minimums/threshold for each element; -All companies, except Exempted Micro Enterprises will comply with all 7 elements of the BBBEE scorecard. -Enterprise Development (ED) and Procurement to be elevated with each requiring sub-minimum and enhanced recognition for ED targeted at key sectors in IPAP and NGP;-penalty for non-compliance and discount from overall score. -The appropriate integration of financial and non-financial support services is critical in ensuring the success of some of the funding interventions by both the public and the private sector; -The points for Ownership element should be broadened to include designated groups in the main points; -Alignment of the BEE Employment Equity element to the Employment Equity Act: (Targets, reporting periods, and definitions); -Skills Development Element to be aligned to the New Skills Development Strategy (NSDSIII) and to be outward focused. - Equity Equivalent statement - This statement will be reviewed and refined so to ensure that the criteria are practical and stringent. It will also ensure the development of an integrated and coordinated Equity Equivalent Investment Programmes “Menu” per Economic Sector, and these should support the new developmental policies such as IPAP and the New Growth Path, that address challenges faced by Government such as the lack of critical skills, technological skills transfer, entrepreneurship, co-operatives, start-ups, survivalist, and micro-enterprises, incubation initiatives, and the agricultural economy.

Over the medium to long term, benefits are expected to be high (H). In particular: -The elevation of enterprise development and procurement to high employment IPAP and NGP initiatives will lead to increased economic growth, reduced inequality, higher employment -The inclusion of designated groups in ownership will contribute to the goal of reducing inequality -The inclusion of new entrants in the ownership measures will contribute towards goals of job creation and economic growth -Skills and technology transfer initiatives will lead to increased innovation and a positive impact on productivity and economic growth -Skills spend on non-employees will increase reach of skills development and employability of a broader section of the population -localisation measures will increase local investments, reduce outflows and contribute towards growth and employment

Costs are also relatively high especially over the short to medium term. -Costs of achieving policy objectives including financing and investment costs (new enterprises and ownership transfers) will continue to strain financial resources of banks, private sector, and government. -Implementation costs include training procurement staff, amending procurement procedures, amending contracts where necessary, and changes to reporting systems. -There is a risk of reduced investment if firms consider the amendments stringent and resource sapping (remember firms found it easier to implement ownership relative to other elements of BBBEE)

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