This resource is hosted by the Nelson Mandela Foundation, but was compiled and authored by Padraig O’Malley. It is the product of almost two decades of research and includes analyses, chronologies, historical documents, and interviews from the apartheid and post-apartheid eras.

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Black Economic Empowerment

Black Economic Empowerment (BEE) refers to the set of legislative measures the government put in place to ensure that Black South Africans can participate on an equitable in the economy in terms of ownership, income sharing and decision-making. Ownership of the economy in 1994 was almost entirely concentrated in the white minority. BEE sought to rectify that. The BEE strategy document defines BEE as a 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 own, manage, and control the country's economy as well as significant decreases in the income inequalities.' In essence BEE is about creating a black capitalist class. It is not about job creation or reducing poverty, but about creating the number of black people who are in positions to influence how South Africa's financial resources will be invested. Hence the tension between the government and ANC Alliance partners COSATU and the SACP. Jenny Cargill writes 'A substantial proportion of labour, left wing and populist organizations see little distinction between corruption and the sometimes dazzling enrichment sponsored by BEE.' ('Black corporate ownership: complex codes can impede,' in Conflict and Governance. She concludes that ' While BEE ownership answers a strong political need right now, the numbers suggest that if commercial value cannot be injected into the process, the net results could be extremely negative for the economy in the medium to longer term – growth and poverty alleviation could be put at risk.' See also Patrick Laurence, 'Rising black elite haunts Cosatu,' Star 7 Dec 2004

Initially it focused on structuring business transactions that would result in a share of the equity of a company transferred to black owned entities. Up until 2005, BEE deals were almost exclusively concerned with equity transactions. Many high profile companies listed on the Johannesburg entered black empowerment arrangements where the individuals that stood to gain the most had close connections to the leadership of the government, the ANC or senior government officials or parliamentarians. Thus entering into empowerment deals bought political access. Increasingly, a small number of individuals were involved in multiple empowerment deals where the net benefit appeared to be the enrichment of a few rather than the broad based economic empowerment of large numbers of the previously disadvantaged.

In 2004 BEE deals amounted to R 80 billion ($ 13.3 billion) double that of 2003. However, 72 percent of the deals involved at least one of the six leading black empowerment companies raising more concerns that empowerment was not broad based. Archbishop Tutu speaks of a 'recycled elite.' See Business Day 7 December 2004. Many deals are debt financed i.e. the collateral for borrowing the capital to purchase equity was guaranteed by the values of the shares at some future point in time.

The Broad-based Black Economic Act of 2003 attempted ion its score board to give additional weight to job creation, skill creation, employment equity. Transformation charters have been drawn up for different sectors of the economy setting among other goals, equity targets, management and employment objectives, gender balance, increasing the extent to which communities, cooperatives sand other collectives own and manage businesses etc. The Charters – Mining, Tourism, Financial Services, Information Technology etc set specific goals to be achieved within specified time frames.

Different weightings were allotted to different empowerment components. For example, typically, a weighting of 20 percent is awarded for ownership, 10 percent for management control, 20 percent for skills spending as a proportion of payroll; 20 per cent procurement from black owned and empowered enterprises, 10 percent for enterprise development and 10 percent for residual CSI.

Key criticisms of BEE practices were the bias towards ownership, the lack of sustainability of BEE shareholding, enrichment, opportunism and cronyism, fronting (A black person or a number 'sell' their names to a white-owned business so that on paper the company appears to have complied with regulatory standards when they apply for government contracts, which are awarded only to companies that comply with equity and management targets), and the apparent lack of productiveness of BEE investments.

In November 2005, the government published a second set of BEE codes to address shortcomings in existing codes and to ensure that empowerment was more broad based. Under the new codes a weighting of 20 percent is awarded for ownership, plus 3 bonus points per new entrant, 10 percent for management control, plus one bonus point per new executive board membership. More emphasis is put on skills development, etc. The new codes exempted multinational companies from having to sell equity to local black people, but more emphasis was put on their meeting higher empowerment goals in other areas. Stringent conditions are attached to the sale of subsidiaries in empowerment deals. The selling company is practically obliged to the success of its deals over a ten year period, otherwise it will be deemed not to have met its empowerment target. Such deals will be measured on whether sustainable businesses are created, skills are transferred and the deal is done at fair value, and jobs created or lost Business Report 21 December 2005 opined that 'The days of high profile black businessmen representing 'faceless' members of 'broad based' groups in empowerment deals are numbered,' an opinion that may be a little premature.'. .

The new industry on the block will be the 'verification' industry. Companies in industries affected by empowerment charters have to receive a rating within 12 months of the codes being gazetted. The codes however are not compulsory. A company in non compliance does not break the law. Compliance is compulsory in government agencies and parastatals. Levels of compliance will be measured on an annual basis

For more information on Black Economic Empowerment, including codes, documents and updates visit South Africa's Department of Trade and Industry website at www.dti.gov.za

Additional information and news regarding BEE available at www.southafrica.info/doing_business/trends/empowerment/bee.htm

Black Economic Empowerment Commission Executive Summary Report. Page 1 of 3

EXECUTIVE SUMMARY REPORT OF THE BEEC 2001

AN INTEGRATED NATIONAL BEE STRATEGY

1. Introduction

The domination of business activities by white business and the exclusion of black people and women from the mainstream of economic activity are causes for great concern for the reconstruction and development process. A central objective of the RDP is to deracialise business ownership and control completely through focused policies of black economic empowerment. These policies must aim to make it easier for black people to gain access to capital for business development. The democratic Government must ensure that no discrimination occurs in financial institutions. State and parastatal institutions will also provide capital for the attainment of BEE objectives. The democratic Government must also introduce tendering out procedures, which facilitate BEE. Special emphasis must also be placed on training, upgrading and real participation in ownership. (RDP 4.4.6.3)

The idea of a Black Economic Empowerment Commission (BEECom) arose out of a resolution taken at the Black Management Forum (BMF) National Conference, held from 14 to 15 November 1997, in Stellenbosch. The prevailing view was that black people should direct and take charge of a new vision for Black Economic Empowerment (BEE) a process that, until then, had been conceptualised, controlled and driven by the private sector.

The BEECom was formally established in May 1998 under the auspices of the Black Business Council (BBC), an umbrella body representing 11 black business organisations. The Commission conducted extensive research and embarked on wide ranging consultations. A consultative conference was held on 30 September 2000. The views of these and subsequent discussions with stakeholders were incorporated into the report.

The following definition of BEE was adopted by the Commission:

Ø. It is an integrated and coherent socio-economic process.

Ø. It is located within the context of the country's national transformation programme, namely the RDP.

Ø. It is aimed at redressing the imbalances of the past by seeking to substantially and equitably transfer and confer the ownership, management and control of South Africa's financial and economic resources to the majority of its citizens.

•. It seeks to ensure broader and meaningful participation in the economy by black people in order to achieve sustainable development and prosperity.

The definition has been tested both in debate and in the media, and has been broadly accepted by the represented constituency. According to this definition, BEE should be viewed within the broad scope of empowerment processes including job creation, rural development, urban renewal, poverty alleviation, specific measures to empower black women, skills and management development, education, meaningful ownership, and access to finance for households and for the purpose of conducting business.

2. Meeting the Challenge of Disempowerment

The report presents an opportunity for South Africa to break the cycle of under-development and continued marginalization of the majority of people within the mainstream economy, thereby launching the country onto a course of sustained, even spectacular, rates of economic growth. The BEECom believes that the legacies of Colonialism and Apartheid and deliberate disempowerment provide a sufficient moral and political basis on which to justify an Integrated National BEE Strategy.

South Africa's present Government inherited a mismanaged economy, designed to serve the needs of a minority of the population and condemning the black majority to a vicious cycle of extreme poverty, unemployment and underdevelopment. These policies resulted in significant structural distortions in the economy and finally, a crisis in the Apartheid economy, the consequences of which are still with us today.

Seven years ago, a transformation programme was implemented which fundamentally changed the country's political, economic and social landscape. It firmly entrenched the values of equality and freedom, laying the foundations for the country to chart a new path to economic development, which other developing nations could follow.

Despite the implementation of this programme, South Africa's economic growth performance remains disappointing.

Continued high levels of unemployment and ever-increasing poverty threaten to undermine the stability of our new democracy. The country still has one of the most unequal distributions of income in the world. This is a reflection of the extremely low levels of black participation in the economy.

The report concludes that the reason for this is that the country has not yet overcome the Apartheid crisis. If a fundamental cause of the crisis was the marginalization of the black majority, it follows that insufficient measures were taken to significantly increase black participation in the mainstream economy, hence the continued low economic growth rate.

Furthermore, racism remains ingrained across all sectors of South African society. This structural impediment negatively affects the efficient functioning of markets in South Africa, reinforcing marginalization and preventing the black majority from participating in the economy.

The BEECom concludes that South Africa cannot attain sustained high levels of economic growth in the absence of deliberate measures by the State to include black people in the economy on a massive scale and increase black incomes. The Strategy must emphasize access to productive assets and targeted measures to improve the productivity of those assets.

The challenge facing South Africa dictates a fundamental change in approach within all sectors of society, particularly established business. There should be sustained effort to mobilize all South Africans to arrive at a national consensus on the priorities of economic transformation and the roles and obligations of all stakeholders in helping achieve these objectives. The BEECom believes that an Integrated National BEE Strategy is integral to transformation and growth.

This, by definition, has to be a State-driven programme. Markets tend to reinforce an existing distribution of incomes and assets. This is unacceptable in a country such as South Africa, where the market mechanism was deliberately distorted to allocate incomes and assets on non-price criteria such as race.

The private sector needs to recognize its collective responsibility to invest in the country and assist Government in achieving development goals. The private sector should be encouraged to take into account private and social returns and factor longer term and strategic considerations when making investment decisions. This is an inclusive process and its outcomes are for the benefit of the whole nation and future generations.

Government is responsible for increasing the efficiency of the public sector, State-owned enterprises included. This will result in higher levels of fixed investment and an improvement in the delivery of services. Prerequisites are a strong political will, commitment and leadership skills to enable institutions to implement goals effectively.

All stakeholders need an easily comprehensible, uniform and consistent approach, along with clear guidelines and targets. A regulatory framework outlining incentives and disincentives is needed to steer the economy in strategic directions that create additional employment opportunities and increase in the level of black incomes.

The national strategy should therefore create a coordinated, simplified and streamlined set of guidelines and regulations that provide targets and demarcate roles and obligations of the private sector, the public sector and civil society over a period of 10 years.

The key components of the Integrated National BEE Strategy include:

•. An Investment for Growth Accord between business, labour and Government aimed at reaching agreement on a concrete strategy to lift the country's levels of fixed investment and economic growth.

. The design and implementation of an Integrated Human Resources Development (HRD) Strategy.

. The implementation of the Integrated Sustainable Rural Development Strategy and the creation of an agency which streamlines and co-ordinates funding initiatives in rural areas.

•. A National Procurement Agency located within the Department of Trade and Industry aimed at transforming the public and private sector procurement environment.

Ø. An Enabling Legislative Framework creating uniformity in policy and establishing the necessary institutional support and instruments with which to drive the BEE strategy. The commission is proposing a National Black Economic Empowerment Act that defines BEE and sets uniform guidelines which will ultimately facilitate deracialisation of business ownership in the private sector.

•. An Empowerment Framework for Public Sector Restructuring that outlines principles to be followed in the restructuring process.

An affordable and appropriate framework aimed at improving access to finance for households and businesses through the creation of new institutions, disclosure and reporting requirements in the banking sector as well as targets encouraging service delivery.

•. Recommendations on the streamlining and co-ordination of public sector funding initiatives through a National Empowerment Funding Agency.

•. Recommendations on building the capacity of black business structures.

•. The strategy should also incorporate national targets to be met by stakeholders. The BEECom proposes that the following targets, to be achieved within a period of ten years, should guide the Integrated National BEE Strategy (with black women accounting for 35% of all the targets below and disabled persons accounting for 5%).

At least 30% of productive land should be in black hands, including individuals and collective enterprises.

Black equity participation in each sector of the economy should be increased to at least 25% including individuals and collective enterprises. Equity participation refers to ownership measured in terms of economic interest in each sector over the period specified. Where equity is near to 25% continued efforts must be made to increase the figure.

Black people (including businesses and collective enterprises) should hold at least 25% of the shares of companies listed on the JSE.

At least 40% of non-executive and executive directors of companies listed on the JSE should be black.

At least 50% of SOE and Government procurement – at national, provincial and local levels – should go to black companies and collective enterprises as defined in this document. At least 30% of these companies should be black-owned SMEs.

At least 30% of private sector procurement should be to black-owned companies, including SMEs and collective enterprises.

At least 40% of senior and executive management in private sector companies (with more than 50 employees) should be black.

The National HRD Strategy should ensure that black people comprise at least 40% of the number of people in the professions and in professional training.

The National HRD Strategy should ensure that the country's Higher Education and Training (HET) system should increase the participation rate to 20%.

At least 50% of borrowers (by value) on the loan books of National Development Finance institutions should be black-owned companies and collective enterprises.

In the event of restructuring, at least 30% of the equity of restructured SOEs should be owned by black companies and collective enterprises.

At least 30% of long-term contracts and concessions (PPPs) within the public sector should incorporate black-owned companies and collective enterprises up front.

At least 40% of Government incentives to the private sector should go to black companies.

The banking sector and Government should agree on targets with respect to accessibility of financial services (Community Reinvestment) that should ensure an increase in advances to black entrepreneurs, SMEs and black households in rural and urban areas.

This Integrated National BEE Strategy provides a framework for economic growth with black participation as a fundamental pillar. The recommendations contained within this document need to form part of an Economic Growth and Development Plan for the 21st Century. Much effort is required to incorporate the work done across all spheres of Government into a coherent plan for the economy. We recommend that an appropriate process be agreed upon to take forward the development of an integrated plan.

The BEECom believes that business, especially black business, should be a key player in the development of this Economic Growth and Development Plan. We therefore call upon all black business people to play a role in the transformation of the economy in the following manner:

•. Encourage investments in areas of national priority and job creation by mobilising support for this objective within the boards of pension and provident funds.

•. Mobilise and build support for a broad understanding of BEE amongst all business.

•. Implement programmes aimed at building capacity in business structures.

•. Provide services to members (of business organisations) such as management training, small business support, marketing of Government programmes and incentives.

•. Promote compliance with the full spectrum of labour relations policies and legislation and encourage members to go beyond the minimum requirements of the law.

•. Promote compliance with principles of corporate governance and encourage members to go beyond the minimum requirements of the law.

•. Promote the development of new forms of ownership, including ESOPs and retail schemes, affirmative procurement practices and support for small businesses (including community and worker-owned businesses).

•. Always make attempts to include women and women-owned businesses in the economy.

•. Empower local communities through procurement and programmes in communities, focused on infrastructure provision and job creation and, as far as possible encourage the use of local content.

3. Investment for Growth - A New Path to Development

3.1 The BEECom recommends that stakeholders should reach consensus on an Investment for Growth Accord highlighting their participation in a Targeted Development Investment (TDI) strategy to make investments in areas of national priority. The Accord will substantially increase the levels of fixed investments and elevate the economy's growth path. Stakeholders would need to make the following commitments:

3.1.1 Government's commitment should have three components:

•. After consultations with labour, the Government Employees Pension Fund (GEPF) should invest 10% of its assets in productive investments in areas of national priority over an adjustment period of five to seven years. (The GEPF has already allocated 3% to the Isibaya Fund with a mandate to invest in BEE.)

•. Government should invest a portion of privatisation proceeds in an agency dedicated towards rural development. (Already, Government has foregone privatisation revenues to start the NEF).

•. Government should implement its Restructuring of State Assets Programme to increase levels of foreign and domestic direct investment and to upgrade infrastructure provision. The State should allocate a greater segment of the budget towards capital expenditure.

3.1.2 Business commitment should have three components:

•. The financial sector (life and retirement companies in particular) should divert a specified, significant percentage of its total assets towards productive investments in areas of national priority over an adjustment period of five to seven years. The BEECom recommends a minimum of 10%.

•. The private sector should commit to active participation in rural developments and related infrastructural and economic initiatives in rural areas, including anchor projects aimed at attracting investments to Industrial Development Zones (IDZs).

•. The banking sector should set reviewable targets for its investments in underdeveloped areas, as per the BEECom's proposed Community Reinvestment requirements.

3.1.3 Labour's commitment could have the following components:

•. The BEECom calls the trade union movement to participate in the design of the Accord. A conference with all parties present to discuss the Accord should be held as soon as possible.

•. With the considerable influence the trade union movement has over the allocations of savings made by its members in life assurance companies and retirement funds, the movement should commit itself to expedite the design of investment guidelines for union trustees.

•. A concerted effort must be made to launch a trade union-driven training programme for trustees to encourage responsible, prudent decision-making, that also achieves social objectives.

•. A policy framework should be developed enabling workers to exercise more control over sector-based retirement funds and utilising them to increase black participation in the economy. Trade unions should explore the feasibility of using joint employer/employee pension contributions to increase worker ownership in specific companies and industries.

3.2 The strategy will require the design of specific projects at which investments may be directed.

3.3 The strategy would be guided by the principles of joint public-private partnerships and include those private ventures which are currently capable of implementing a strategy of this nature – for example, the Business Trust, accredited fund management companies and organisations such as the IDT, that have acquired expertise in RDP-related investments.

3.4 The BEECom believes an Investment for Growth Accord would kick-start the economy if it receives the support of all stakeholders. It could quantify the value of new Investments – and their additional contribution to GDP - over the duration of the Accord. After a few years, the additional growth in the economy would draw new investment, creating a virtuous cycle of economic growth.

. Such an Accord would increase black participation in the economy because new investments in areas of national priority would create formal sector jobs, stimulate rural economies, and promote the development of a new class of SMEs. In addition, a mutually agreeable Accord would eliminate the possibility of lower levels of investor confidence.

•. The BEECom is of the view that the Investment for Growth Accord should focus specifically on identifying projects that will enhance fixed investment and economic growth in the same way that the Job Summit concentrated on identifying projects that would create employment opportunities.

4. An Integrated HRD Strategy

4.1 The BEECom believes that Government, the private sector and civil society must urgently design and implement an integrated National Human Resource Development Strategy.

'HRD is most often used narrowly to describe matters to do with personnel management. However, it entails more than 'personnel management' or 'education and training' (ET). It is a cross-sectoral concept which seeks to incorporate the education and training pipeline which best meets the needs of our country's economy in order to build globally competitive human capital.

The HRD Strategy should incorporate the full spectrum of learning, including primary school, higher education, adult basic education and training, life long learning, learnerships for the youth, SME skills development, entrepreneurship, innovation and on-the-job training in both the public and private sectors.

4.1.1. The BEECom believes that the conceptualisation and implementation of the national strategy should be taken through a consultative process, aimed at receiving input from all stakeholders. The feasibility of establishing a review body or advisory panel for long-term oversight should be considered.

A "Champion" should be appointed ideally located within the Office of the President of South Africa. The responsible person will oversee the design, co-ordination and formulation of policies, fulfil an advocacy role in the public and private sectors and report on the stakeholders' respective responses.

4.1.2 The first step in the development of an HRD strategy is the acquisition of detailed quantitative and qualitative information on education and training, the labour market, industrial growth and employment trends. Once a comprehensive, viable management information database has been established, medium- to long-term cross-sectoral planning can commence.

4.1.3 The second is to develop coherence and cross-sectoral linkages across the education and training, labour market, industrial and employment divides. Policy effectiveness must be underpinned by a strategy of co-ordination and planning. For example, the industrial policies (within the Department of Trade and Industry) must be communicated to the various supply-side initiatives (within the Departments of Education, Labour, Communications and Arts, Culture, Science and Technology), giving details about the growth points in the economy and their requirements over the next few years.

4.2 The BEECom recommends that Government introduce:

•. measures to ensure that the HET system substantially increases its output of black graduates, especially in the fields of science, technology, business and engineering. Incentives and penalties need to be employed to steer the system towards this goal.

•. clear output targets for each of the country's 36 universities and technikons. These targets will be set according to the requirements of the National HRD Strategy.

. the imposition of penalties on those institutions that fail to meet target. These penalties will be linked to the current subsidy formula. Financial incentives will be awarded to those institutions that meet target.

•. incentive schemes for the HET system to enter into creative partnerships with secondary schools. For example, all institutions should use their infrastructure to design innovative programmes to help upgrade the quality of teaching for students in grades 10 - 12, thereby improving matriculation pass rates.

•. design programmes aimed at promoting entrepreneurship. The programmes should explore ways of incorporating entrepreneurship into school and higher education curricula, SETA training initiatives and DTI enterprise development strategies.

4.3 Government should introduce clear targets to be achieved by tertiary institutions in respect of transforming staff profiles

Institutions should submit reports (in their three-year plans) to the Minister of Education, giving details on how they intend to achieve these targets. Penalties linked to the current subsidy formula, should be imposed on those institutions that fail to achieve targets. Incentives will be given to those institutions that do achieve these equity targets.

4.4 The current percentage set aside for the Skills Levy must be gradually increased. With an unemployment rate of 30% the current skills levy of 0,5% - 1% is far removed from the 1996 national growth and development strategy suggestion of 5%.

4.5 The HRD Strategy should be integrated with the country's policies to develop the ICT sector, thereby providing a pool of skills to develop the ICT and ICT-Enabled Industries.

. A truly integrated HRD/ICT strategy would require input from all the sectors regarding infrastructure upgrades, growth point identification, increased accessibility and the improvement of black participation in the industry.

Ø. Programmes are required to develop ICT literacy and skills within the education system.

•. Government should be responsible for promoting innovative partnerships between private sector partners (local and international) and academic and research institutions with the view to establishing centres of technology excellence, particularly within historically disadvantaged institutions.

•. An HRD/ICT strategy requires a in depth analysis of demand and supply trends and the identification of institutions best suited to increase the supply of ICT professionals.

•. The capacity of existing research organisations needs to be increased to perform ICT intelligence, research and development.

•. Innovation will be a critical component of the HRD/ICT strategy, centres such as the Innovation Hub which link innovation, skills development and entrepreneurship, should be promoted.

4.6.The BEECom believes that the private sector needs to demonstrate far greater commitment to the implementation of a national human resources plan.

•. Private sector involvement in upgrading and providing infrastructure for schooling needs to be expanded through Business organisations. For example, a large-scale project to link schools by region to the internet could be undertaken.

. Private sector collaborations with FET and HET institutions on specific sector-focused projects need to be explored. For example, participation in ICT Centres of Excellence and in innovation projects.

•. The private sector must ensure life long learning and skills upgrading in the work place.

4.7. As a matter of urgency, Government should expedite programmes which address the problems of youth unemployment. These include the National Youth Service initiative, learnerships, the restructuring of the further education and training sector and the targeting of youth in other Government job creation and training projects.

5. Access to financial services and capital

The BEECom believes Government should intervene in the financial sector to ensure increased levels of support for black ownership and savings. To this end the public and private sectors should have the following obligations:

5.1 Government should sell its current stake in Business Partners to raise funds for targeted support through existing structures.

5.2 Khula must exit the business of providing financial guarantees for banks and focus on building a sustainable and larger network of retail financial intermediaries that promote development oriented micro finance.

5.3 Government should direct more financial and human resources towards developing sustainable SMEs. 5.4 Government should consider providing incentives in the following areas:

Ø. Encouraging the development of ESOPs, co-operatives and retail schemes.

Ø. Stimulating a venture capital industry (as a means of stimulating private sector participation in the industry, Government could exempt funds accredited by both SAVCA and NEFA from capital gains tax)

Ø. Extending the current tax incentives for SMEs.

•. Giving a specified percentage of current incentives to black SMEs.

5.5 The BEECom recommends that the State establish a new Development Finance Institution (DFI) framework aimed at co-ordinating, streamlining and rationalising the activities of all DFIs, with a view towards revamping the sector to achieve the objectives encapsulated in the RDP. The proposed Trade and Industrial Council or the DFI Co-ordinating Council should drive the formulation of the framework and the setting of guidelines and targets for DFIs.

5.6 The BEECom further recommends that the Government establish a National Empowerment Funding Agency (NEFA). The NEFA will operate alongside the DFIs as a structure providing oversight and ensuring co-ordination of financial and non-financial support, thereby facilitating black ownership.

The objective is to promote a single, co-ordinated DFI system and broader ownership in the economy. The NEFA aims to ensure that the State provides an efficient pipeline of products and services that systematically meet the needs of black entrepreneurs, and different types of owners.

•. The NEFA will be located within the Department of Trade and Industry (DTI).

•. "But the realisation of economic empowerment necessitates a long-term consolidation of these institutions as well as their refocusing" (Economic Empowerment Strategy, a discussion document prepared for the DTI)

•. The NEFA would segment the market according to sector, size and type of entrepreneur. Institutions would have to agree upon which segment to focus on. Targets should be set which each DFI should aim to achieve. Risk spreading mechanisms for institutions should be considered.

•. Government is already in the process of setting up a number of new institutions – including the National Empowerment Fund (NEF), NEF Ventures, the Umsobomvu Trust and three Khula regional equity funds. These institutions must pool and co-ordinate financial and human resources to streamline mandates and avoid duplication of efforts and resources.

•. The NEFA should source additional support through strategic partnerships with the private sector and the donor community, both locally and internationally. Each of the four arms of NEFA should be encouraged to find strategic equity partners with a proven record of best practice in their field. NEFA should monitor the performance of the DFIs against the BEE targets agreed upon by all DFIs.

5.6.1 NEFA should consist of four arms:

• NEFA 1 should address the segment of funding aimed at black businesses that require debt and equity funding of more than R5m. It will also provide non-financial support services. It could incorporate the Isibaya Fund and the IDC's empowerment funds.

•. NEFA 2 should target small and medium businesses requiring debt and equity funding in the R50 000 to R5m range. It could incorporate the following: Khula Regional Equity Funds, NEF Ventures and the PDCs. In addition, NEFA could receive funding from the Isibaya Fund and the Umsobomvu Trust. Funding could also be sourced from the private sector and the donor community. Non-financial support services should be provided as well.

•. NEFA 3 should incorporate Khula with the objective of strengthening their services to the micro-enterprise sector. Support services should be re-aligned to bring them in line with the needs of clients of Khula RFIs. The micro sector can continue to be served by the Khula RFIs with interventions focusing on the need to expand the capacity and reach of these organisations. A three or five-year plan for the sector could include outreach targets and the consolidation of the RFIs under one brand. Khula must therefore focus on promoting a development oriented micro-finance sector.

• NEFA 4 should address broad-based ownership through support and infrastructure to facilitate and administer collective enterprise schemes (retail offers, community and large employee share ownership vehicles, worker-owned enterprises and co-operatives) within the public and private sector. NEFA 4 could provide advisory services and clear guidelines for co-operatives, ESOPs and retail schemes.

The BEECom recommends that the National Empowerment Fund (NEF) fall under NEFA 4 (in its capacity to promote savings and wealth creation for individuals, black consortia and collective groups). The venture capital component of the NEF, however, would fall under the segment supported by NEFA 2. The feasibility of providing for a special allocation of the funding available from the NEF (matched with grant-based funding) to assist community and worker groups to acquire stakes in restructured SOEs, listed and unlisted companies, needs to be investigated. The share allocations in SOE's should be transfered to the NEF at no cost.

5.6.2 Each of the above agencies should ensure that appropriate non-financial support services are available to different types of entrepreneurs.

• Support may be provided in-house or through professional companies that provide business advisory and/or strategic management services for small and medium business, including black investment companies.

• The costs could be priced into the loans or cross-subsidised through selling the services at market-related prices to the private sector. The NEFA will draw up a detailed business plan to determine the type and cost of the range of support packages. However, the NEFA could also source donor funding to support its independent advisory division.

5.6.3 The NEFA will stimulate the development of a new industry providing independent advisory capacity.

Advisors could be accredited by an appropriate authority. This process should allow for skills transfer to take place and the establishment of credible black-driven advisory businesses.

5.6.4 The restructuring of the PDCs should urgently be investigated to ensure that these institutions are integrated into a national framework on empowerment funding.

The NEFA should oversee the rationalisation and restructuring of the Provincial Development Corporations. There is a dire need to address regional and local availability of funding which, at this point, is primarily focused on large urban centres through the restructured PDCs, Khula regional equity funds and the LBSC and RFI network.

5.7 The BEECom recommends that Government should introduce Community Reinvestment (CR) legislation as part of a package of instruments to restructure the financial sector and to ensure affordable finance for households and entrepreneurs.

The CR legislation could include the following: forbidding discrimination in lending, providing for disclosure of lending information, agreeing on targets for extending services and finding mechanisms to use CRA ratings when a bank requires regulatory approval.

Community Reinvestment (CR) ratings should be published to increase consumer awareness about bank activities. This information could result in campaigns by civil society organisations against banks with poor CRA ratings. It could also promote peer pressure within the industry to improve ratings. CRA reporting should indicate the following:

* The value and quantity of all loans by race, gender, region and sector

* Reasons for turning down loan applications

* Plans to achieve specified targets for funding to black and women-owned enterprises

* Plans to reach a specified target of loans to underdeveloped regions

* The value and content of CSI spending

* Location of branches and plans to expand the network to underdeveloped regions

* Plans to improve mentoring and training of borrowers

* Support for new entrants into the financial services sector, particularly second and third tier banks

* Plans to build relationships with support providers such as Local Business Service Centres

* Accessibility to clients

5.7.1 Commercial banks could help develop and support financial co-operatives as a means of complying with the CR Act.

The CR Act should have a high weighting (in its rating system) for banks that support MFIs. This support could be provided in various ways, for example through the creation of a community development fund. (In the United States of America, large institutions contribute to a US Treasury Community Development Financial Institution Fund and provide a wide variety of assistance). The banking sector could also provide infrastructure, information technology, and human resources.

5.7.2 An amendment of the Banks Act (Act no 94 of 1990) and other legislation would ensure CR ratings are considered when a bank requires regulatory approval.

For example, the Competition Commission should consider a CRA rating. Application for banking licences should consider CR plans.

5.8 The BEECom recommends that all financial institutions should be required to submit an annual Empowerment Report to the Financial Services Board (or to the Reserve Bank).

• This disclosure and reporting system would enable the State to systematically evaluate financial institutions against the above indicators when awarding contracts. This would apply to all contracts entailing the provision of financial services to the State, including banking, fund management, corporate finance advisory work and capital-raising.

• The state should use its considerable influence in financial markets to develop black firms with expertise in banking, fund management, corporate finance, capital raising and advisory work, by awarding contracts to firms with strong BEE credentials. The state should have a policy of placing deposits in second and third tier banks and those with BEE credentials.

5.9 Government should develop criteria to enable the accreditation of Targeted Development Investments (previously socially responsible funds) with a view towards substantially growing the sector's funds under management. The rating would enable the state to give preference to such companies when awarding contracts.

5.10 The BEECom recommends that the State promotes a regulatory environment that can facilitate the emergence of sustainable development-oriented Micro-Finance Institutions (MFls) that can extend financial services to the poor on a large scale.

•. At present the regulatory and supervisory environment for organisations attempting to establish themselves as developmental MFIs is fragmented and confusing. The tendency has been towards regarding such institutions as exceptions to a set of rules designed for qualitatively different institutions. Exemptions are provided through subordinate legislation.

. The BEECom proposes a review of existing and planned legislation for the developmental MFls and co-operatives. For example:

Banking Legislation stipulates that deposit taking can only be undertaken by public companies that are registered as banks with very narrow exemptions. Most financial NGOs and community structures could reduce their cost of capital by taking deposits from the public, thereby stimulating broader access to capital. * An additional impediment is a limitation on the size of the loan book for MFI's. * Credit co-operatives in South Africa are among the minority of credit unions in the world that are subject to income tax and among a smaller minority (13%) of the world's credit unions that do not receive any kind of tax break. The BEECom calls for a review of tax on co-operatives.

• A review of the Micro-Finance Regulatory Council needs to be undertaken to evaluate its impact on alternative funding institutions.

A friendly regulatory environment is a necessary but not sufficient condition for the emergence of a sustainable and developmental micro-finance industry on a large scale. The other main constraints on the realisation of this vision are cost structures and distortions in South African markets generally. Relative advantages in South Africa are the advanced financial services sector and the ability to utilise ICT to enhance access. Given the need for institutional innovation, such legislation should not cater simply for the credit co-operative model, but should in addition accommodate other approaches to micro-finance.

5.11 The BEECom believes there is a need to enhance existing State capacity to allow for the establishment of a State Bank, which focuses on ensuring access to affordable financial services.

The infrastructure of the PostBank should be assessed, including the plans to roll out new infrastructure, (and the incorporation of existing financial services units in SOEs) with the objective of determining the requirements for transforming this entity into a development-oriented funding and savings institution. The mandate should be increased to allow the PostBank to offer a wide range of financial services including loans.

5.12 The BEECom proposes the review of the function and regulation of credit bureaux. Concerns were raised by the National consumer Credit Forum in 1997 and subsequently the DTI initiated an investigation.

5.13 Financial institutions should ensure that future BEE transactions are guided by what is in the long-term national interest and the principles of integrity, equity, sustainability and effective ownership. The components of a successful BEE transaction should include the following:

Ø. Clearly-defined objectives and the alignment of interests.

Ø. Appropriate pricing, preferably at a discount to market value.

Ø. Effective skills development beyond the BEE Act minimum requirements.

Ø. Creative financing structures including vendor financing, claw-back and earn-in (i.e. BEE equity holding linked to value-add).

Ø. Expected value should be quantified up front, where possible.

Ø. Clearly defined and easily measurable growth targets.

Ø. Involvement of a focused and entrepreneurial BEE group that stands to lose more than its reputation.

Ø. Effective participation at the highest level of decision-making, including the executive committee.

Ø. Long-term commitment by both parties.

5.14 The BEECom believes the JSE is a key institution in the promotion of black participation in the economy. To this end the JSE must design and implement a BEE policy framework which provides for:

•. The development of black advisors and brokers and the removal all barriers to entry.

•. Training programmes and learnerships.

•. The adoption of BEE strategies which include reporting mechanisms for all JSE listed companies.

•. The promotion of a savings and investment culture on a massive scale through an education and information campaign.

6. Affirmative Procurement

6.1 The BEECom recommends that there should be an overhaul of the entire public sector procurement system with a view towards ensuring that procurement meets the objectives of the RDP. To this end a National Procurement Agency (NPA) should be established within the DTI. The NPA must ensure Government objectives are achieved in the procurement arena. These objectives include efficiency in delivery of services, BEE, business development and competitiveness. The procurement system should therefore be rooted in effective supplier development and contract management.

. The Preferential Procurement Framework Act ("PPFA"), must be substantially amended to bring it in line with the Integrated National Black Economic Empowerment Strategy. It is further proposed the PPFA be amended to allow for the establishment of the NPA.

. The NPA must set policy guidelines and targets for all Government departments (national, provincial and local), and SOEs. It should monitor performance against the set targets and build capacity within Government.

•. Government departments could utilise centralised purchasing agencies to reap the benefits of bulk buying and to ensure uniformity in systems. Centralised agencies could be constituted at provincial and local level as is currently being piloted in Gauteng. An example would be the State IT Agency (SITA). The SITA is mandated to integrate all Government IT services and to act as a procurement agent for such services.

Ø. Set-asides for black companies and SMEs for all Government organs and SOEs should be designed. There are various options, which could be pursued, including setting aside a minimum percentage of contracts for black companies to perform. Another route is to set aside certain contracts in their totality only for black groupings.

Ø. Uniform definitions should be adopted and a new system of preferences for qualifying companies should be up to 20%.

Ø. Special attention needs to be paid to local Government structures given the high level of procurement spend.

Ø. Training of procurement officials needs to be addressed.

. Supplier support and funding mechanisms through Tender Advise Centres (TAC's) should be enhanced.

6.2 An Accreditation Unit should be established as a joint venture between the public and private sectors with a mission to stimulate private sector procurement from black suppliers and to broaden ownership structures to include black people. It would be incorporated into the NPA.

Ø. The Unit should establish a national database of black suppliers for the use of the public and private sectors.

Ø. It should encourage the private sector to procure from black companies, through guidelines. The Unit should also provide an appraisal of the capacity of black suppliers. This appraisal could guide Government support to SMEs.

Ø. The unit should also provide an empowerment accreditation for any company who submits an empowerment report to it. Incentives for submitting reports to the Unit could include presidential awards for outstanding performers, recognition of rating in adjudication procedures undertaken by State and SOE tenders and licenses, publication of results in an accreditation register and positive sentiments from clients and consumers.

6.3 Current initiatives to reform public sector procurement need to take into consideration the following:

Ø. The implementation of a central monitoring system which enables evaluation of procurement spend to ensure that it meets national objectives, BEE included, is imperative.

Ø. The ongoing process of decentralising the tender function to departmental levels needs to be appraised in terms of its ability to meet national objectives. Tender Boards should be transformed to include an increasing amount of procurement officials. A comprehensive evaluation should be undertaken to ensure readiness to dissolve tender boards and to determine time frames to do so.

Ø. Uniform adjudication criteria, guidelines and targets should be set at a national level to be applied by all tender boards and offices.

Ø. The review and complaints capability must be enhanced.

Ø. There is an urgent need to overhaul and implement a turnaround strategy for procurement offices/agencies through a comprehensive skills audit, training programme and institutional capacity building strategy. Training for procurement officials needs to be fast tracked to enable them to procure in a manner which furthers all Government objectives.

Ø. Tender advice centres for potential suppliers must be extended and contract funding vehicles designed.

Ø. The private sector should be able to access all these services at a fee in the interest of promoting private sector support for affirmative procurement policies.

6.4 Government and the South African Management Development Institute (Samdi) should investigate the possibility of drafting a skills plan, which will facilitate the upskilling of existing staff and training of new staff as part of an HRD Strategy for Procurement. This can be carried out via the NPA.

•. The programme must consider and adjust existing training programmes in the National Treasury. The training should include the evaluation of funding and ownership structures (for example the difference between ownership and control) to prevent fronting and the development of a comprehensive understanding of empowerment indicators.

•. Government must help design an HRD Strategy for the sector to meet the requirements of a revamped procurement system.

Ø. The HRD Strategy will include estimates of personnel needs after conducting a skills audit of existing capacity... Training could be done in partnership with the private sector (for example an IT company that specialises in supply chain management) and an existing educational institution.

Ø. Training costs could be recouped through developing private sector skills.

6.5 Given the numerous structures and mechanisms used to facilitate black entry into the economy, the BEECom is presenting the following analysis and a definition to assist the creation of uniformity in the tender system.

6.5.1 In this regard, the first question is whether priority should be given to control or ownership.

Ø. Control is not directly related to ownership. Control has strategic importance because it can contribute to the deracialisation of the political economy. However, control in itself cannot be the most important indicator since it is only useful insofar as it can be used to achieve BEE objectives, including the deracialisation of business ownership.

•. There is, therefore, an emerging consensus that ownership (as measured by economic interest), rather than control, is the key indicator to evaluate success in deracialising business ownership. It is an unambiguous indicator and refers to a situation where the BEE company has paid for its full portion of an equity stake.

•. The evaluation of a funding mechanism should focus on how long it will take to achieve this objective and the manner in which this will be attained. This is because most black companies do not meet this stringent (economic interest) criterion because they do not have the funding required. There are numerous funding structures that achieve this (economic interest) objective to varying degrees. They do not require third party (e.g. bank or financial institution) funding. The BEE company does not have to give away the bulk of the financial benefits to a third party funder. The full economic interest will eventually accrue to the BEE company. These models can, ideally, be combined with voting pool arrangements to ensure that the BEE company has a meaningful influence, which is at least commensurate with the equity stake.

. For these reasons, in such cases the BEE company should be regarded as having an economic interest. Where an option model has to be combined with third party funding - for example, in licensing and concessions where new projects have to be financed - the same could apply and the criterion should, again, be how fast the equity (and voting interest) will translate into economic interest.

Ø. Other models – for example, N-shares, pyramids and special purpose vehicles (SPVs) – do not have built-in mechanisms to match the voting interest with full economic interest. Such arrangements can, however, enhance black influence and control in strategic sectors of the economy and do not deserve outright condemnation.

Ø. Black influence in the form of board positions and minority equity stakes remain an important instrument in achieving the objectives of BEE. This suggests that SPVs should continue to play a role in the BEE funding arena because, as stated before, board positions and minority stakes can contribute towards the deracialisation of the political economy.

Ø. Furthermore, the financing instruments used should reflect attempts to achieve the kind of optimal capital structure that is commensurate with empowerment objectives, i.e. reasonable term structure of the loans at affordable interest rates. This is important not only as a way of lowering uncompetitive and historically generated barriers to entry but more significantly to ensure sustainability of the black business projects.

6.5.2 Given the imperative of attaining economic interest, the BEECom is proposing the following definition to be applied by the public and private sector in initiatives aimed at deracialisation of ownership. The BEECom submits the following proposal - to be used when awarding price preferences.

Ø. A "black company" is one that is 50,1% owned and managed by black people. Ownership refers to economic interest. Management refers to executive directors. A black company should receive an "A" rating for accreditation purposes, allowing it to qualify for set-asides and a 15% price preference.

Ø. A "black empowered company" is one that is at least 25,1% owned and managed by black people. Ownership refers to economic interest. Management refers to executive directors. This is whether the black company has control or not. Such a company should receive a "B" rating for accreditation purposes, allowing it to qualify for set-asides and a 10% price preference.

Ø. A "black influenced company" is one 5-25% owned and managed by black people. Such a company should receive a "C" rating for accreditation purposes and a 5% price preference. Such a company would not qualify for set-asides.

Ø. An "engendered company" is one with at least 30% representation of black women within the black equity and management portion. Companies in any of the above three categories, with at least 30% representation, will receive another 5% price preference. Therefore an "engendered black company" will get a 20% price preference. An "engendered empowered company" will get 15% etc.

Ø. To qualify for any of the above preferences and ratings, companies must submit a number of regulatory documents and policies such as SARS returns, Employment Equity Plans and proof of adherence to bargaining Council Agreements.

7. The Enabling Framework

7.1 The BEECom recommends that the Integrated National BEE Strategy (INBS) is adopted as a cabinet approved policy position, which provides a framework and guidelines to be followed by the private and public sector.

The Constitution has sought it fit to specifically address the evident economic imbalances in our society. Section 9(2) of the Constitution of the Republic of South Africa Act 108 of 1996, states as follows in as far as Equality is concerned: "equality includes the full and equal enjoyment of all rights and freedoms. To promote the achievement of equality, legislative and other measures designed to protect or advance persons, or categories of persons, disadvantaged by unfair discrimination may be taken".

7.2 It is proposed that some of the fundamental principles of INBS be encapsulated in a single legislation: "Black Economic Empowerment Act" ("BEE Act").

The BEE Act should define BEE and establish the necessary institutional support and authority to ensure the implementation of the INBS. This legislation will have application on the public and private sector.

7.3 BEE Act should provide for the following:

7.3.1 The Act should provide for a definition of BEE. The BEE Commission is proposing the following definition of BEE:

•. It is an integrated and coherent socio-economic process.

•. It is located in the context of the country's national transformation programme, the RDP.

•. It is aimed at redressing the imbalances of the past by seeking to substantially and equitably transfer and confer the ownership, management and control of South Africa's financial and economic resources to the majority of its citizens.

•. It seeks to ensure broader and meaningful participation in the economy by black people in order to achieve sustainable development and prosperity.

7.3.2 The Act should allow for the establishment of implementation agencies and set broad policy framework for these agencies; and

7.3.3 Provide for the establishment of National Economic Commission ("NEC")

7.3.4 The Act should provide for the promulgation of regulations from time to time dealing with inter alia: indicators; time-frames and targets to be reached by the private sector & public sector. These targets should aim at enhancing the level of black and women participation in state-related tenders; licenses and even incentives.

7.3.5 The Act should require all Government departments, all provincial and local government structures, all SOE's and all statutory bodies to submit an annual BEE report to the NEC. The report will give details on success and failures in implementation of BEE targets and plans to reach the targets.

7.3.6 The Act should provide for a framework within which the private sector can implement strategies aimed at BEE.

•. The consensus view of black business during the BEECom's research and consultation process was that the requirements of the Act should be mandatory on all private sector companies with more than 50 employees. This reflects extreme frustration stemming from a sense of continuing disempowerment and limited opportunities for black people to realise their economic potential. The negative market sentiment over Corporate BEE transactions has dampened the confidence of black entrepreneurs, hence the demand for a powerful legislative instrument to give further impetus to the process. The perceived failure of Corporate BEE has spilled over into civil society and continues to undermine all efforts to increase black participation in the economy.

. This situation must be reversed and demands decisive action. This report proposes a legislative instrument that requires and challenges the private sector to agree on targets and mechanisms aimed at deracialisation of business ownership. The Act should be rooted in a spirit, which encourages the private sector to arrive at competitive and creative solutions to black participation in the economy. The private sector will then be able to benchmark themselves against these solutions and thereby promote vibrant support for BEE.

. The BEECom recommends the government review the voluntary nature of the requirements if there has been no success in reaching industry targets after a specified period.

7.3.7 The Act should require the private sector to embark on a process which enables them to agree on industry-specific targets for a number of BEE indicators within the guidelines and targets provided for by the Act. These would be incorporated as Industry Empowerment Charters.

•. These Industry Empowerment Charters could define targets for black participation and the mechanisms for achieving that participation. They could also specify monitoring and evaluation (M&E) mechanisms.

•. This could require an expanded role for Sector Education and Training Authorities (SETAs); Export Councils and sectoral summits (between labour and business) to agree on and incorporate BEE targets within Industry Empowerment Charters. (There have been similar initiatives in the energy, defence and advertising industries.)

7.3.8 The Act will require companies bidding for Government contracts to submit BEE reports (to the relevant tender office - who will evaluate the report against uniform guidelines issued by the NPA) supplying details of successes in implementing BEE objectives - for example, procurement to black suppliers, employment equity and black ownership.

7.3.9 The Act should Provide for incentives to encourage private sector to implement BEE objectives and disincentives for non- implementation of BEE objectives. The feasibility of making the private sector empowerment reporting requirement applicable in the following instances needs to be explored:

* Competition Commission evaluation of mergers and acquisitions * License applications

* Application for any DTI incentives

* JSE listing

* Banking license application

* SETA benefits

* Application for a mining and exploration license

* Government contracts

7.3.10 A final incentive to submit an Empowerment Report will be to win a presidential award for outstanding performance in the various categories of empowerment. Furthermore, the NEC could publicise a register of good performance, which will benefit companies and inform consumers.

7.4 The BEE Act should with regard to the NEC, deal with the following:

•. the powers and duties of NEC;

Ø. the appointment of NEC Chairperson and other Commissioners;

Ø. the term of office of the Commissioners, their disqualification and removal thereof;

•. the establishment of relevant committees;

. remuneration of the Commissioners; and

. the financing of NEC.

. the reporting lines of NEC

NEC should assume the regulatory role of monitoring, analyzing and reporting on the development and progress regarding the unfolding INBS on the private and public sector. The NEC should champion and oversee the implementation of the Integrated National BEE strategy. THE NEC should report to the Office of the President and to the relevant the cabinet cluster

The NEC will be entitled from time to time to promulgate and publish rules and regulations dealing with i.e. the setting up guidelines for adjudication and accreditation and promulgation of timeframes and targets aimed at enabling black people to be involved substantively in the mainstream economy of the country.

In terms of the BEE Act, the NEC will be entitled and authorized from time to time to establish other Statutory Agencies or bodies in order to fulfill the aims and objectives of BEE Act and further to ensure that the Integrated National BEE Strategy is maximized to the fullest.

8. An Empowerment Framework for Public Sector Restructuring (PSR)

8.1 The BEECom recommends the adoption of an Empowerment Framework for Restructuring that outlines empowerment guidelines to be applied in the event of restructuring. The key principle of the framework is that it should have at its core the facilitation of meaningful and sustainable empowerment at all levels. The components of the framework could be as follows:

8.1.1 The PSR programme must aim to improve delivery of services and enhance the rollout of infrastructure to underdeveloped and rural areas.

8.1.2 BEECom believes that the following process should be followed when considering potential job losses – that may be the outcome of restructuring excercises.

. Retrenchments should be avoided at all costs

. Aggressive training and skills development programmes must be introduced

•. Management should have the responsibility to seek alternative employment for workers in the event that redeployment and retention options fail

•. Management should have the responsibility to facilitate financial and non-financial support for employees starting their own businesses.

8.1.3 The PSR programme should be a key pillar of the BEECom's proposed Investment for Growth Strategy. The BEECom believes the PSR programme should be used to:

•. Finance an agency that focuses on rural development. A portion of the proceeds from the sale of State assets should be used to stimulate the economies in rural areas by building social and economic infrastructure. The BEECom suggests a cap on restructuring proceeds that are aimed at debt reduction.

•. Stimulate further infrastructure expansion by attracting new foreign and domestic investment into the country.

8.1.4 The BEECom believes black equity and management participation in the restructuring process must not be relegated to second-tier opportunities. We therefore recommend that black involvement must occur at all levels, including large divestitures, SEPs, concessions and strategic management partnerships.

•. Every form of black equity participation can be an effective instrument to drive empowerment. The negative sentiment around black investment holding companies creates the misconception that this vehicle is always ineffective. Such approaches de-emphasise the importance of ownership. In fact, black investment companies, given the right support in a conducive environment, can be an effective instrument to ensure deracialisation of ownership and control.

•. To realise the objective of effective black equity and management participation, the State will have to play a facilitative role through the provision of favourable and preferential funding mechanisms and information, support and independent advisory capacity. To increase the equity and management participation of black entrepreneurs in the restructuring process, the following measures should always be considered: Discounts, deferred payment terms where possible, new BEE funding mechanisms including claw-back, earn-in and vendor funding.

. The trend in BEE transactions is to clearly define up front the nature of the black equity partner's participation, including expected value-add, with clearly defined performance indicators. There is a need to ensure that the Black Equity Partner is supported by the State (through its DFIs) and the SEP in performing its obligations.

8.1.5 The BEECom recommends that Government should use the restructuring process to help develop black corporate advisory companies - across a wide spectrum of disciplines - with the potential to compete against established firms.

•. Where possible, black advisors should be appointed as lead advisors and project managers with the ability to include SEPs within their consortia in the event that they have insufficient capacity to execute an entire contract. (Black advisors include lawyers, merchant banks, investment banks, management consultants, accounting firms and stock brokers)

•. Government should encourage black professionals to pool their skills and bid for advisory contracts. This could give them the springboard from which to launch successful firms.

•. Where a contract is awarded to an established firm, Government should stipulate conditions demanding targets for ownership changes, skills transfer and the inclusion of black sub-contractors during the execution of a contract. The same should apply to black advisors appointed as lead advisors or project managers.

•. Other options would be to set aside a portion of each contract exclusively for black suppliers, or a total percentage of all contracts awarded to be awarded to black suppliers.

8.1.6 All PSR exercises should investigate the feasibility of incorporating ESOPS and where possible other schemes aimed at enhancing worker participation, for example worker buy-outs and co-operatives.

•. The existing ESOP schemes in privatised companies struggled to get off the ground. There was no agreed framework between labour and management, to ensure worker involvement and financial empowerment. (See section on National Empowerment Funding Agency.)

•. PSR must promote the development of worker and community-owned businesses through the increased use of a mix of outsourcing and other Alternative Source Delivery models.

•. Government must utilise the Social Planning process to agree with unions on clear guidelines within which worker and community-owned enterprises will occur. As far as possible, outsourcing initiatives must involve assisting workers and communities to establish companies and to support their ongoing development.

•. Agreement must be reached on the nature of financial and non-financial support to be provided for business and co-operative development.

8.1.7 Procurement and outsourcing targets should be set for all SOEs and uniform procurement guidelines must be applied across all SOEs.

. The BEECom recommends that within ten years at least 50% of SOE procurement should go to black-owned companies as defined in this document.

•. The BEECom further recommends that at least 30% of this procurement should go to black-owned SMEs.

•. The Office for Public Enterprises procurement policy proccess should be intergrated into initiatives being undertaken on National procurement reform to ensure uniform guidelines and monitoring a procurement across government.

8.1.8 The BEECom believes that every IPO of an SOE must have a significant retail scheme with a discount to encourage black participation.

•. Internationally, various schemes have been utilised to encourage broader ownership via Government-owned equity, retail schemes and unit trusts.

•. NEFA 4 could manage the retail schemes and on-sell shares to black individuals, companies and consortia. It could set up the infrastructure to administer the schemes and help boost the distribution networks of organisations such as Cosatu, The Post Office Network's nation-wide banks and/or sales outlets and The National Lottery Network.

•. The schemes could use Ikageng-type option models, perhaps adjusted to allow for tradeability. The NEF could undertake to pay Government on a deferred basis (as and when it receives the proceeds). Participants could be encouraged to retain shares via "bonus shares" and other innovative incentives.

8.1.9 In the area of an empowerment framework for PSR, business can deliver in the following ways:

•. Business can provide appropriate channels for the distribution of shares, warrants or certificates, which give the ownership of privatised Government assets to a large portion of black South Africa. Banks can fund the purchase made by individuals, using the assets themselves as a guarantee.

•. Stockbrokers can provide flexible trading mechanisms that will allow individuals to choose how long they invest for and when they wish to receive any proceeds.

•. Business can provide market-making abilities in the listed certificates or warrants, in the same way that certain banks make markets in Government bonds, or in existing listed warrants.

. Business can provide for the retraining and upskilling of workers in the public sector through their participation as new shareholders in restructured SOEs and local utilities.

•. Business can provide for training through partnerships with government in new sector-based training institutes.

8.1.10 There is a need to design and implement an effective communication and support strategy that facilitates real participation of communities, workers and entrepreneurs in the restructuring.

8.1.11 Training and skills transfer programmes must form a substantive component of the Empowerment Framework for each SOE and in the public sector.

•. Comprehensive skills audits must be conducted to determine skills levels and to design reskilling and upskilling programmes. New investors should perform extensive training of current and new workers.

Ø. Shareholder contracts must incorporate key performance indicators relating to training, skills development and affirmative action strategies.

8.1.12 BEE should be an important component of the country's new system of local Government. All tiers of local Government must design and implement BEE plans that incorporate guidelines, targets and reporting systems to monitor progress in achieving goals such as affirmative procurement. Those BEE plans should form part of the new councils integrated development plans.

8.2 Regulators should direct far greater resources towards ensuring that licensing becomes an even more powerful instrument to advance the BEE agenda.

There is an urgent need to boost the capacity of regulators to monitor and evaluate BEE during the licensing process.

•. Regulators need to evaluate financial structures and contractual arrangements related specifically to black consortia, to determine how they may be improved to achieve BEE objectives. This evaluation should be flexible enough to ensure the sustainability of black consortia.

. Regulators should have effective systems with clear outlines of objectives and criteria to monitor and evaluate BEE during the licensing process.

. Regulators should introduce stiffer penalties for companies that do not meet BEE criteria.

•. Uniform BEE evaluation guidelines need to be developed for each sector. They should be developed within the context of a sector strategy for BEE - for example, the BEECom's Industry Empowerment Charters.

•. Broader empowerment should always be an objective during the licensing process. Government should always consider allocating a stake to the National Empowerment Fund, as has been done in the National Lottery.

9. Rural Development and Access to Land

9.1 The BEECom believes there is an urgent need for Government to implement the Integrated Sustainable Rural Development Strategy.

The BEECom has made suggestions in respect of four areas:

•. Acceleration of land reform

•. Promotion of community and collective ownership

•. Improved access to finance

. Investment in rural infrastructure

9.2 The BEECom recommends that Government should speed up the design and implementation of a comprehensive social security system, including a basic income grant to alleviate poverty, especially in rural areas. A comprehensive social security system would help stimulate rural economies.

9.3 The BEECom recommends that Government should use a portion of privatisation proceeds to stimulate rural economies by investing in labour intensive infrastructure development projects. The commission recommends that there should be a cap on privatisation proceeds going towards debt reduction reflected in the medium term expenditure framework.

9.4 The BEECom recommends the identification of a dedicated "Agency", which will ensure co-ordination and appropriate focus on rural development.

•. The Agency would work closely with the Office of the President of South Africa, NEFA and other DFIs and Government departments. Activities would be funded from a portion of the proceeds from the sale of State assets. It will also mobilise funding and other support from NEFA, private sector CSI budgets and the donor community.

Implementation of projects could be done with joint public-private sector participation. The Agency's mandate will be to:

* Assist in advocacy of rural development initiatives

* Promote infrastructure projects in rural areas

* Co-ordinate and streamline existing DF initiatives in rural areas

* Source funding for land acquisitions

* Increase rural access to affordable finance through vehicles such as the Post Office network and the PostBank.

9.5 Government should streamline the mandates and devise guidelines and targets for the Land Bank and other institutions involved in rural development. There should be a concerted effort to scale up the activities of these institutions.

Government must set transformation targets for the Land Bank to achieve, including:

. The value of micro-loans to emerging farmers, small and medium-sized black farmers and large black farmers.

•. The value of loans advanced to finance land acquisitions. The Land Bank and the Agency should consider establishing a dedicated mechanism to finance land acquisitions under the land reform programme. This vehicle could consolidate the efforts of other organisations involved in funding land acquisitions and leverage their resources.

•. In addition, the Land Bank should impose conditions on all recipients of new loan funding. This will ensure that white farmers have progressive labour relations policies and participate in BEE initiatives such as farm equity schemes.

9.6 The BEECom recommends that Government develop a framework for the transfer of public and private land to black people with clear guidelines and time frames.

•. Government has implemented numerous policies and initiatives to support land reform. However, during the first five years, Government's efforts have resulted in the redistribution of only 1% of the country's farmland - a long way from the 30% target that was initially set by the RDP. The SLAG funds have also been subject to misuse.

•. Since the 1999 elections there has been new energy and a shift in policy to accelerate sustainable land reform. The policy is aimed at promoting access to land for productive use, specifically for agricultural purposes.

•. A more flexible grant system allows people to leverage their resources with a grant to enable productive use of land. The new approach is tied to the productive value of land, minus past state subsidies. Beneficiaries can now make a contribution in kind or in cash and define type and size of farming projects they wish to pursue.

9.6.1 State assets available for land reform must be transferred to workers, communities and black companies.

Innovative funding mechanisms enabling broad-based ownership, are critical. Financial and non-financial support are imperative. For transfer of State land, substantial discounts, innovative vendor-financing schemes (such as deferred payment and options), mechanisms ensuring majority worker and community ownership and the conditions for debt write-offs should be considered.

9.6.2 The BEECom believes that where blockages to land reform exist Government should utilise the property clause in the constitution, which allows for expropriation to transform land ownership patterns.

•. The constitution requires the payment of "equitable", not "market value" compensation. So far Government has not used this and continues to rely on a "market-based willing-buyer-willing-seller" approach.

•. The State should consider foreclosing the land of white farmers who have accumulated unsustainable levels of debts and use this land for redistribution.

9.7 An Integrated Sustainable Rural Development Strategy must provide instruments to:

•. Improve access to affordable financial services for the rural poor. This will require co-ordinated efforts to extend the reach of DFls, the banking sector, developmental micro-finance institutions (MFIs) and organisations such as the Post Office and the PostBank to rural areas.

•. Increase the rollout of ICT infrastructure in rural areas, thereby improving the delivery of services and creating opportunities for business development. This could be brought about by means of targets; for example, all schools should have electricity, telephone lines and computers which local communities could use.

10. The role of Business Organisations

10.1 The BEECom believes that the following process should be followed in moving towards a unified business voice, which delivers services to members:

•. There needs to be an agreement that the unified BSA/BBC would be more than just a business caucus, but the voice of business mandated by the constituent business organisations. The new entity would need to operate under a CEO who articulates business' positions.

•. The new entity itself would have two levels – a "Co-ordinating Council" and a full-time Secretariat. The Council would comprise 50:50 representation between BSA and BBC. The Secretariat, which would remain small, would also be constituted on a 50:50 basis initially and gradually progress towards a generally agreed structure.

The Co-ordinating Council would focus the following issues:

* Advancement of BEE;

* Working towards greater unity within business; * Support for transformation.

* Consultation with various business bodies represented by BSA and BBC "to test the feasibility of a single organisation taking the character of BSA but not the name." A component of testing this feasibility would be to assess how BSA and BBC member organisations could be rationalised and restructured to avoid unnecessary duplication of operations and services.

* Design programmes aimed at building capacity in business organisations to enable them to deliver services to their members.

* Develop criteria to accredit member organisations for State-funding purposes.

• The Secretariat would focus on "pursuing common purpose," that is, acting on issues that are generally agreed via the Co-ordinating Council. It would be responsible for day-to-day administrative operations. In addition it would, over time, develop capacity to undertake research and compile policy papers that would inform the deliberations and ultimate policy positions of business.

Key Recommendations

Point of departure: Working definition of BEE

The Commission believes that BEE is a strategy aimed at substantially increasing black participation at all levels in the economy. We have therefore defined BEE in a broad manner.

•. It is aimed at redressing the imbalances of the past by seeking to substantially and equitably transfers ownership, management and proportionate control of South Africa's financial and economic resources to the majority of its citizens.

•. It aims to ensure broader and meaningful participation in the economy by black people.

BEE must therefore be viewed within the broad net of empowerment processes that include, amongst others; job creation, rural development, poverty alleviation, specific measures to empower black women, skills transfer and management development, education, meaningful ownership and access to finance to conduct business.

In order to evaluate the discussion document as a precursor to the final report, it might be useful to highlight the original mandate of the commission as articulated in the terms of reference;

•. To gain insight into the BEE process through empirical research and to make observations on the pace and results of BEE initiatives of the 1990s.

•. To reach conclusions on the obstacles to meaningful participation of black people in the economy

•. To develop a coherent case for an accelerated National BEE Strategy and to make recommendations on policies and instruments required to guide a sustainable strategy.

•. To develop benchmarks and guidelines to monitor the effective implementation of the National BEE Strategy.

The Rationale

The BEE Corn will present a case for South Africa to break the cycle of underdevelopment and continued marginalisation of the majority of its people from the mainstream economy and launch the country onto a course of sustained economic growth.

In making this case, the BEE Corn believes that the legacies of colonial and apartheid oppression and deliberate disempowerment provide a sufficient moral and political basis to justify a National BEE Strategy.

Furthermore, the economic consequences of apartheid are such that the economy's decline over the past 25 years can only be reversed through a National BEE strategy.

South Africa's democratic government inherited a mismanaged economy designed and structured to serve the needs of a minority of the population and confining to the periphery and trapping the black majority in a vicious cycle of extreme poverty, unemployment and underdevelopment.

Since the early 1990s, the private sector has embarked on a number of BEE initiatives. These gave impetus to a flurry of activities during 1996/98, in particular. However, these activities did not translate into a meaningful transfer of ownership to the black majority.

Our democratic government has also introduced hundreds of new laws that have fundamentally transformed South African society, restructured inherited institutions and started new ones

Despite the adoption of transformative policies implemented within a framework of sound fiscal and monetary management, South Africa's economic growth performance remains disappointing. Continued levels of unemployment and increasing poverty threaten to undermine the stability of our new democracy.

The country still has one of the most unequal distributions of income in the world. This is a direct result of the extremely low levels of black participation in the economy.

Furthermore, racism remains fundamentally ingrained across all sectors of SA society. It is a structural impediment that continues to distort the efficient functioning of markets in SA and re-enforce the marginalisation of the black majority from viable economic participation

The BEE Corn believes that the country cannot break out of the cycle of underdevelopment and attain sustained high levels of economic growth in the absence of deliberate measures by the state to facilitate the meaningful participation of black people in the economy.

Key Recommendations

The BEE Com believes that a coherent and integrated National BEE Strategy must be adopted as a national imperative. The key components of the National Strategy include:

•. An Investment for Growth Accord between business, labour and government aimed at reaching agreement on a concrete strategy to lift the country's levels of fixed investment and economic growth.

•. A National Black Economic Empowerment Act that aims to define BEE and set uniform guidelines against which the public and private sectors can implement BEE.

•. The establishment of institutions aimed at addressing market failures and transforming existing government structures:

o. A National Empowerment Commission (NEC) reporting to the President's Office.

o. A National Empowerment Funding Agency (NEFA) within the Department of Trade & Industry

o. A National Procurement Agency located within the Department of Finance or DTI

The BEECom is also proposing an approach to the following areas, to ensure integration with a National BEE strategy:

. An Integrated Rural Development Strategy and the establishment of A Rural Development Agency reporting to the Department of Agriculture and Land Affairs.

. An integrated Human Resources Development (HRD) Strategy

. A framework for Public Sector Restructuring for Empowerment

The BEE Corn is therefore recommending the drafting of a Black Economic Empowerment Act.

The Act must aim to achieve the following:

1. The Act should provide an unambiguous definition of BEE.

2. Set uniform guidelines and indicators against which the private and pubic sector (including parastatals, regulatory authorities and other agencies) can measure their performance in achieving the objectives of BEE

3. Set procurement targets for the public sector departments - national, provincial and local - and SOEs.

4. It should require all government departments to submit an annual black economic empowerment report.

The Act should cater for the establishment of three implementation agencies:

. The National Empowerment Commission (NEC), which will report to the office of the President, will oversee the implementation of the Integrated National BEE strategy. The NEC will be an oversight body with a limited staff complement.

. The National Procurement Agency (NPA) with an Accreditation Unit.

. The BEE Corn recommends that there should be an overhaul of the entire public sector procurement system with the view towards ensuring Procurement meets the objectives of the RDP. The commission is therefore recommending the establishment of a National Procurement Agency (NPA):

. The NPA's primary function would be to revamp the national tendering and licensing system to ensure that empowerment is central.

. The NPA will be a streamlined structure focusing its efforts on setting guidelines and standards, monitoring the procurement and licensing system, training and building capacity. It will not be involved in actual adjudication of tenders; however, it could provide a review mechanism.

. It should set up an Accreditation Unit to rate companies tendering for government contracts and licenses and other private sector companies. The Unit will also set up a national database of black companies for the use of the public and private sectors.

. The BEE Act will require that all companies bidding for government contracts and licenses to be accredited by an Accreditation Unit within the proposed National Procurement Agency.

The National Empowerment Funding Agency (NEFA)

NEFA will address the chronic shortage of affordable finance for black entrepreneurs and streamline existing government initiatives in this area. It will also be designed to support national savings and new forms of ownership, such as retail schemes, community ownership, broad-based share schemes and worker-owned cooperatives.

The BEE Com therefore recommends the establishment of the National Empowerment Funding Agency (NEFA) with a mandate to:

. Improve policy and co-ordination between NDFI s that fund empowerment.

. Consolidate and rationalise existing funding initiatives with the aim of creating an efficient pipeline of products and services that systematically meet the needs of entrepreneurs at various stages of development.

. Set policy to guide the private sector's participation in the BEE funding arena

. It will ensure that entrepreneurs are able to source a mix of grant based funding, micro-loans, venture capital and debt funding.

This will be done through four agencies within NEFA:

NEFA ONE: This agency will target black businesses that require debt and equity funding (private equity and venture capital) of more than R5m, including big ticket mergers and acquisitions, management buy-outs and leveraged buyouts. It will also provide non-financial support services. It will include the Isibaya Fund and parts of the IDC.

NEFA TWO: This agency will target small and medium businesses requiring debt and equity funding (private equity and venture capital) in the R50 000 to R5m range. It will incorporate the following: Khula Regional Equity Funds, the Umsobomvu Trust, NEF Ventures and the PDCs. In addition, it could receive funding from: the Isibaya Fund and the NEF. It will source funding from the private sector and the donor community. It will also provide non-financial support services.

NEFA THREE: This agency will incorporate Khula and Ntsika with the objective of strengthening their services to the micro-enterprise sector. The Post Office network could be utilized to enhance savings and to provide affordable financial services.

NEFA FOUR: This agency, which could include the bulk of the National Empowerment Fund's operations. It will provide support to facilitate broad-based BEE schemes, including retail offers, large employee share ownership vehicles, worker-owned and community enterprises and co-operatives. It will primarily focus on administrative support, evaluation and advice. It will have a fund to assist, workers and communities to acquire stakes in restructured SOE's, listed and unlisted companies.

Each of the above agencies should ensure that appropriate support packages are available for different types of entrepreneurs. The support can be provided in-house or through professional companies that provide business advisory and/or strategic management services for small and medium business, including black investment companies. The costs could be priced into the loans or cross-subsidised through selling the services at market-related prices to market players.

An Integrated HRD Strategy

Colonial and apartheid policies had a devastating impact on the development of black human capital. The scars caused by this criminal neglect of the country's most important economic resource - its people - will haunt us for many years to come and put a ceiling on the potential growth rate.

The BEECom believes that government, the private sector and civil society must reach agreement on an Integrated National Human Resource Development Strategy.

The key elements of a national human resources development strategy should include:

. Finding ways of substantially increasing the number of black high-level skills produced by the country's institutes of higher learning, especially in ICT

. Long term planning guided by a sophisticated Management Information Service.

. There is a need for targeted programmes to significantly enhance black participation in the professions. Black participation in the professions remains dramatically low

. Identify the skills needs of the country over the next five years and agree on priority areas in which to fast-track black participation.

Rural Development and Access to Land

The millions of blacks living in rural areas have been denied opportunities to develop their human potential. As a result, there are high levels of illiteracy and low levels of formal education. The majority of rural people are either unemployed or engaged in marginal activities that add little to the economy. Human migration has resulted in these areas being populated by women, the young, elderly, sickly and unemployed.

This gives way to a vicious cycle of crushing poverty, under-developed markets, dismal rates of public and private sector investment and a lack of infrastructure that re-enforces the cycle by impacting on the ability of rural communities to engage in economic activities. The country's rural areas, where just over half of the country's population lives, are devoid of basic infrastructure and economic activity.

The governments Integrated National Rural Development Strategy aims to address the current fragmented approach to alleviating the plight of the rural poor.

The BEECom supports this initiative and believes that many aspects of this strategy are integral to a National BEE strategy.

. There is an urgent need for the institutional and structured reform of those institutions currently involved with the implementation of rural development programmes. The creation of a dedicated Rural Development Agency (RDA), from reform of the current NDFI's, would be an important mechanism to gear up activities aimed at ensuring the availability of funds for land acquisitions and land-use and infrastructural development. The RDA should be located within the Department of Land and Agricultural Affairs. It would work closely with NEFA

. Support for broad ownership initiatives through vehicles such as NEFA 4 and the Post Office Network. (Retail schemes; consortium purchases and co-operative - worker or community schemes)

. Community reinvestment requirements aimed at enhancing the availability of affordable funding to rural areas and access to finance for households will be a critical component of a BEE strategy.

An Empowerment Framework for Public Sector Restructuring (PSR)

The democratic government inherited massive, inefficient and costly state machinery, including National, Provincial and local government and State Owned Enterprises. The challenge for the state is to restructure the public sector in a manner, which improves delivery of service, protects the rights of workers and achieves BEE.

The key principle of the recommended empowerment framework is that PSR should have at its core the facilitation of meaningful and sustainable empowerment at all levels.

The components of the framework are:

1. The PSR programme can help finance a proposed Rural Development Agency (RDA). A portion of the proceeds from the sale of state assets should be used to stimulate the economies in rural areas by building social and economic infrastructure. The BEE Corn suggests a cap on Restructuring proceeds that are directed towards debt reduction.

2. The PSR programme is also fundamental to Investment for Growth Accord because of its ability to attract foreign and local investment.

3. The BEE Corn believes that black equity and management participation in the restructuring process must not be relegated to second-tier opportunities. We therefore recommend that black involvement must occur at all levels, including large divestitures, SEP's, concessions and strategic management partnerships. New trends in funding are enhancing participation and focus of black investment companies. The potential opportunity to fast track empowerment and promote skills transfer through a SEP- BEP shareholding relationship must not be lost.

4. The NEF must be operationalised as soon as possible focusing its activities on unlocking value in the fund. The administrative structure for its retail component will form part of NEFA 4, this will involve retail schemes and the sale of shares to black companies and consortiums, which would have otherwise acquired smaller stakes directly in privatized assets or IPO's.

5. The BEE Corn recommends that government should use the restructuring process to proactively develop black corporate advisory companies - across a wide spectrum of disciplines - with the potential to compete against established firms.

6. All PSR exercises must incorporate ESOPS and where possible other schemes aimed at enhancing workers participation, for example worker buy-outs and co-operatives.

7. Every IPO of an SOE must have a retail scheme with a discount to encourage black participation. A minimum of percentage for black people and or the NEF must be agreed to.

8. PSR must promote the development of SMME's and worker and community-owned businesses through the increased use of a mix of outsourcing and other ASD models and the required contractual and performance regulations.

Community Re-investment

Financial institutions have traditionally been geared to serve the needs of the minority white section of the population, including monopoly capital, resulting in a biased allocation of resources to the disadvantage of the black majority, particularly women.

There has been limited transformation in the banking, financial services and other advisory industries, with management and ownership structures still reflecting apartheid era management compositions.

This has contributed towards the continued inability of these institutions to effectively support meaningful black participation in the economy.

The BEE Com believes that it is an imperative that the continued transformation of the sector to meet the needs of the RDP. In this regard we are making two suggestions:

1. The use of Equality legislation when discrimination occurs.

2. The BEE Corn calls upon the government to investigate the feasibility of introducing community reinvestment requirements, which are aimed at ensuring, continued transformation through disclosure requirements and agreed guidelines to direct support for underdeveloped areas. The legislation should also aim to encourage the established banking sector to help set up the infrastructure and capacity for a second and third tier banking sector.

These are some of the key recommendation highlights, which will be the subject of debate and feasibility tests at the consultative conference.

http://www.bmfonline.co.za/bee_comm.htm. 01/09/23

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Black Economic Empowerment