The BBEE empowerment commissions says triple BEE transactions are lagging in the area of compliance with fronting being flagged yet again as a key problem. But broadly what is the progress in this area and to what extent are poor economic fundamentals also hampering movement in getting more black people to participate in the economy in a meaningful way. To share some highlights that came out of the Commission’s fourth annual conference I’m joined on the line by Evon Jeewan, Associate Principal at Bravura.
Nompu: What trends have you observed in terms of the B-BBEE transactions in the last number of years?
Jeewan: When you look at the transformation over the last 20 years what you find is that each sector comes with a particular set of challenges that require specific investor profiles. The lag of ownership in the agri sector which is lagging at 4% this is closely linked to the challenge of black agriculture land ownership.
But on the other hand, we look at the financial services sector or the transport and tourism industry, they are actually way ahead in terms of meeting transformation targets. Potentially the reason for this is that these sectors charters have been implemented way before the other sector charters; so over time you will find that they have actually complied.
The transactions that were previously implemented based on the old codes, you’ll find that shareholders are locked in or cannot exit but are currently being assessed on the revised codes. What that means is that they will automatically drop a couple of levels on scorecard.
The JSE listed companies they have an average ownership score that is lower than that of private. The investor profiles for listed companies are mainly made of asset management companies or state-owned entities or they don’t contribute to your ownership score unless there’s a mandated exclusion principle applied. This means that they would form part of your denominator when you are being scored for ownership (although they don’t contribute to your ownership) and that will in a sense drop your BEE score as well.
I think that the big picture here is that ownership figures still remain highly skewed; in particular you’d find black women ownership as key concern at about 9% average. The control of boards of SA listed entities are still concentrated within the hands of white and foreign males of about 58%, with black males accounting for about 20%, black females at 80% and white females lagging at about 4%.
Why do you think these JSE listed companies seem to be faltering in this regard when many of them have a policy of trying to get better gender and race representativity?
Jeewan: It’s based on the investor profiles, the requisite skills that are required. Thus they have not been transformed to the extent the private equity has.
Nompu: In practice when doing a B-BBEE transaction, does it have to be brought to the attention of the B-BBEE commission for them to advise on whether it complies with the legislation?
Jeewan: The way it works is that you don’t get approval from the BEE commission for your transaction. Once you implement a transaction you would, if considered a major transaction, register it with the BEE commission for them to assess it, but you would not get approval for it like the way you would in term of the Competition Commission, or the takeover regulations panel or the JSE. It does cause concern because once you’ve implemented and it has been assessed, you might need to take remedial action if the commission is not satisfied. What they do allow you to do is to request an advisory opinion prior to implementation of your transaction which basically raises some of the red flags in terms of what wouldn’t work from an implementation perspective. This is strongly encouraged by the Commission, prior to implementation.
So would go to a BEE Commissioner, you would provide details of your transaction and they would provide an advisory opinion to confirm if your transaction complies in terms of the BEE codes and if there is any deviation from the spirit of the codes of transformation.
With a firm like Bravura for example, an expert in this field, could a company or dealmaker approach you for this type of advice?
Jeewan: We would be involved with the actual structure of the transaction. We would advise companies on the structuring element of the transaction. We’d advise them on the sustainability and structure around that, and also provide advice in terms of a funding perspective and the types of funding that would be required.
Tell us about the B-BBEE commission 4th annual conference. It seems like fronting continues to rear its ugly head.
Jeewan: That is correct; fronting still remains the biggest challenge and its becoming increasingly sophisticated. Just last year, there were 125 reports of fronting. Last week the dti Minister made a bold statement saying we are going to eradicate any non-compliance, so it’s obvious that this is being taken very seriously.
Illustrate to us the cases that you’ve heard where fronting takes place because we don’t hear anything about it in the public domain about people being punished for this.
Jeewan: There have been about 17 public investigations that were announced last year. Not all of them necessarily involved fronting but involved non-compliance or regulatory non-compliance.
In terms of fronting practices there are three types. One is the window dressing. These include cases in which black people are introduced to the enterprise on the basis of tokenism and are discouraged or inhibited from participating in the core activities of the company. Thus they are not really involved in the operations of the entity.
The second case would be benefit diversion which includes initiatives implemented where economic benefits received as a result of the BEE status of the enterprise, do not flow to black people in the ratio as specified in terms of the legal agreement, so it’s diverted.
The other one is the opportunistic intermediaries. These include enterprises that have concluded agreements with other enterprises with the view to leveraging off opportunistic intermediary’s favourable BEE status.
The other issue that the Commissioner also highlighted the complexity around transaction structures when it becomes difficult to determine and trace the economic benefits that flow to black shareholders.
They have warned against that saying that the more complex the deal is the more likely they will come down hard on deal makers around that. What sort of sanctions would they be able to exercise or put against people who violate or don’t comply with their rules?
Jeewan: In some instances, this could be criminal proceedings against the company if fronting is suspected. The background is that fronting was only introduced into legislations in the BEE Amendment Act in 2013 and implemented in 2014. It was then formally criminalised in the legislation. The consequences of being found guilty of fronting is a fine or imprisonment of up to 10 years. If it’s a company then the fine could be up to 10% in company’s annual turnover and potentially even barring them doing business with any state-owned entities for a period of up to 10 years.
The local economy has not been kind to business and we see confidence levels both at the business and consumer levels still quite low. To what degree do you think the lacklustre economy also has put a spanner in the works in terms of cultivating more empowerment deals in the same way that we’ve seen broader M& A activities slowing?
Jeewan: We need to look at transformation is a business imperative and what you would find is that in order to remain competitive in this environment, especially in the public sector, there is a need to transform. So that being said, each company would need to assess it on that merit.
Listen here: The current state of B-BBEE in SA