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OPINIONSTA: Genuine black empowerment entities could be collateral damage as commission cracks down

BUSINESS MAVERICK / 16 APRIL 2020 - 15.55 / JO SEOKA

The BBBEE Commission wants assurances that beneficiaries of black economic empowerment are, indeed, black and identifiable, but there are some technical and technical concerns that could impact on some trust entities - who are doing good work and who comply with best practice in corporate governance.

Cynicism about broad-based black economic empowerment (BBBEE) and particularly over how an elite few have abused the law to enrich themselves at the expense of the poor has become the dominant narrative about legislation which originally had the best of intentions.

Many success stories – and there are some riveting ones – remain untold. Even government, as the architect of BBBEE, seems unable to tell the good stories and provide a more balanced picture amid all the negative criticism. What’s more, some of the best of the success stories are now in danger of being snuffed out completely.

Government can take great credit for one of the best success stories. These have been made possible by two enactments:

  • BBBEE legislation has enabled the establishment of a number of investment vehicles that use BBBEE credentials to acquire shares in public and private companies. They then use dividends to directly support social development projects or pay them to not-for-profit organisations (NPOs) that provide essential specialised services. Several million South Africans in poor communities have benefited from the projects and services. Dividends from these commercial investments have helped to sustain NPOs, enabling them to deliver services that government would be hard-pressed to provide and that would need to be funded by taxpayers. Now some NPOs have a completely new source of income that provides valuable additional funding to meet the almost unlimited demands on their modest resources. Out with the begging bowl; in with BBBEE investing!

  • Because NPOs play a significant role in society by sharing responsibility with government for the social and development needs of the country, they now receive tax exemption as Public Benefit Organisations if they comply with the Income Tax Act. This frees up more money for social investment.

These two measures – participation in the BBBEE programme and tax exemption – have dramatically improved the financial position of many NPOs, underscoring the importance that government attaches to their work.

The crucial role played by NPOs was recently emphasised by President Cyril Ramaphosa who announced in his State of the Nation Address in February that government will convene a Social Sector Summit this year. He said NPOs and community-based organisations play a “critical role in tackling poverty, inequality and related social problems” and explained that the summit would “seek to improve the interface between the state and civil society and also address the challenges that NGOs and CBOs face”.

The organisation that I represent, Ditikeni Investment Company, and the 16 NPOs which are its shareholders, would certainly welcome the opportunity to participate in the president’s summit. We believe that we – and indeed government itself – have a great story to tell. However, there are some major challenges that need to be resolved.

First, the good news. Ditikeni, which means “something to lean on” in tshiVenda, was established 20 years ago following a bold but speculative decision by NPOs to reduce their dependence on foreign donor funding. This had sustained many of them during the apartheid years but began to dwindle after South Africa’s transition from apartheid to democracy in 1994.

The organisations scraped together R2.8-million as seed capital to establish Ditikeni as a BBBEE investment holding company that aimed to acquire shares in listed and private companies which required BBBEE credentials. Dividends would be used by the NPOs to partly fund their activities.

While numerous other NPOs declined to participate in the venture on the grounds that investment in unlisted companies was too risky, Ditikeni today has net assets of more than R200-million with investments in listed and unlisted companies, according to the company’s 2019 annual report. Its NPO shareholders have over the past 20 years provided social development services to about two million marginalised South Africans, the report adds.

During this time, Ditikeni has distributed R44.5-million in dividends to its NPO shareholders, which have used the revenue to bolster their income from sources such as donors, according to Ditikeni’s latest financial results. Ditikeni’s internal rate of return of 28.5% on investment over 20 years is impressive, particularly in recent times when economic growth has all but evaporated. Not many asset managers achieve that kind of return.

Ditikeni is not alone. Intellidex has found that a sample of 25 BBBEE trusts established by large companies for charitable purposes have so far committed R4.5-billion to fund projects, mainly in the education, health and community development sectors. Almost R1-billion was committed in 2018 alone. By 2017, the capital value of BBBEE endowments had reached R51.6-billion: a policy triumph of which to be proud. More detail can be found here.

But there is some disconcerting news. While BBBEE has enabled many NPOs and other organisations to serve the poor, legislation governing it has also been abused. So-called fronting is one of the main culprits, and the BBBEE Commission, which monitors compliance with legislation, seems determined to tackle this head-on, and rightly so.

A key commission concern is with entities constituted as trusts. The BBBEE commissioner is on record as stating that the “vast majority” of trusts involved in BBBEE transactions are not compliant with the law and do not constitute effective black ownership.

In an analysis of a recent statement by the commissioner, Werksmans Attorneys’ director, Pieter Steyn, writing in Business Day, concludes that the commission believes that the beneficiaries of a broad-based trust must be clearly identifiable and able to exercise voting rights; must receive the same economic benefits as other shareholders; and ultimately become the unencumbered owners of the shares in which they are invested. The key word here is “beneficiaries”.

The commission’s approach presents a major challenge for Ditikeni and, I am sure, for similar entities.

Ditikeni consists of a trust and a public limited company. They are mirror images of each other, with the same directors as trustees, same beneficiaries as shareholders, and are managed together. The trust is a public benefit organisation. Ditikeni is a certified 98% black-owned and 60% black women-owned investment company.

Ditikeni’s 16 NPO shareholders consist of seven voluntary associations, four trusts, and five not-for-profit entities, and most of them are public benefit organisations. They work with children and youth, in crime prevention and reintegration, community development, education and training, HIV and AIDS, land and agricultural rights, people with disabilities, women and gender-based violence, and poverty alleviation. The many thousands of beneficiaries of Ditikeni’s current 16 NPO shareholders live mainly in remote rural areas across the length of breadth of our country.

We fully understand that the commission wants assurances that beneficiaries of BBBEE are black and identifiable. However, it would be impossible for us and many other similar organisations to prove this by, for example, producing many tens of thousands of IDs, bearing in mind that many of our beneficiaries are children. There are in any case privacy issues in some cases where we work with the victims of violence, for example.

It would also be impossible for us to enable our tens of thousands of beneficiaries to exercise voting rights, receive the same economic benefits as other shareholders and ultimately become the unencumbered owners of shares. In any BBBEE deal, there may be one or more layers between us and the ultimate investment, such as a Special Purpose Vehicle for funding purposes. It is completely impractical to require that our beneficiaries are able to have the same rights as individual shareholders. In any case, beneficiaries change from year to year. Trusts are not like companies, where there must always be a vested individual at the end of the chain.

In short, entities like Ditikeni can never have private, individual shareholders who are clearly identifiable and able to exercise the rights of ownership. That is our first concern: that we might not be able to operate as a BBBEE entity and therefore lose our ability to raise our own funds.

Our second concern is to avoid onerous compliance burdens. The costs and red tape involved in reconstituting Ditikeni and its shareholders to satisfy the BBBEE Commission – or at least of attempting to do so – would be prohibitive for our NPOs, which are relatively small organisations with limited resources.

We comply with best practice in corporate governance; we are transparent; we have made the most innovative use of BBBEE; and we have supported government to realise the original purpose of BBBEE: black empowerment that is truly broad-based. And our record of disbursements to worthy NPOs alone is sufficient to dispel any fears that the BBBEE Codes have been abused.

The issues at stake here are technical and complex and we hope a way will be found to enable us to carry on the good work that we do.

Meanwhile, we hope we get an opportunity to tell the president’s Social Sector Summit how we have used BBBEE to benefit two million South Africans. Or, maybe the president himself would like to tell what is a really good news story – at least at this stage.

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LINK : https://www.dailymaverick.co.za/opinionista/2020-04-16-genuine-black-empowerment-entities-could-be-collateral-damage-as-commission-cracks-down-on-fronting/

Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER

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