COMPETITION COMMISSION SUBMISSION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY

1. Introduction
Black economic empowerment (BEE) remains a major challenge in the South African post apartheid era. Although the concept of BEE gained prominence in the early 1990s it wasn't until 2001 that government came up with a coherent definition and vision on the subject. The BEE Commission (BEECOm), which was tasked to investigate and report on a clear vision and strategy for BEE, released its findings in 2001 in a document entitled 'An Integrated National Black Economic Empowerment Strategy'. Lack of a general consensus around the BEECOm's recommendations necessitated a revisit of the policy framework. The result has been the release by the Department of Trade and Industry (DTI) of a new policy document entitled "A Strategy for Broad-Based Black Economic Empowerment". The purpose of this commentary is to highlight the main features of the new policy document as compared to the previous one, and to assess the new policy document and Bill.

2. Introductory remarks
The 'Strategy for Broad-Based Black Economic Empowerment' document released by the National Department of Trade and Industry (dti) outlines Government's approach with regard to the definition of BEE, the objectives of BEE, its measurement and the policy instruments that can be used to achieve those objectives.

The document kicks off with an introduction giving background information on the legacy of apartheid and the transformation imperative in sections 1.1 to 2.3. Section 2.4 discusses the building blocks that have been put in place in preparation for BEE. It is interesting to note in section 2.4 that Government passed various pieces of legislation as a way of laying a firm foundation for BEE. The Competition Act No.89 of 1998 is one such piece of legislation that was passed to provide a basis for achieving BEE, among other things. This makes the South African Competition Act different from those of other countries due to its public interest provisions emanating from the history of the country. For instance, an anticompetitive merger could be given a thumbs-up by the competition authorities if it promotes black economic empowerment. Conversely, a pro-competitive merger could be denied if it would lead to the exit or failure of a BEE firm. Although the Competition Act was not formulated specifically for BEE purposes nor are competition authorities the right bodies to decide on BEE policy, they can nevertheless play a crucial role in facilitating BEE.

The Preferential Procurement Policy Framework Act of 2000 and the Employment Equity Act of 1998 are two other pieces of legislation that provide a firm foundation for the achievement of BEE.

2.2 Defining BEE
Section 3.2.1 of the document defines BEE as:
- an integrated and coherent socio-economic process
- that directly contributes to the economic transformation of South
Africa
- and brings about significant increases in the numbers of black people that manage, own and control the country's economy,
- as well as significant decreases in income inequalities.

This definition views BEE as a broader framework encompassing issues such as human resource development, employment equity, enterprise development, preferential procurement, investment, ownership and control of enterprises and economic assets. The new definition departs from the previous BEECom one which defined BEE as
= An integrated and coherent socio-economic process
= Being located in the context of the country's national transformation programme, namely the RDP
= 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
= Seeking to ensure broader and meaningful participation in the economy by black people to achieve sustainable development and prosperity.

The previous definition focused on '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. The emphasis lay on equity ownership and company management and control, to the exclusion of other empowerment strategies such as human resources training and development, rural infrastructural development and preferential procurement. As a result, a lot of companies produced 'fronts' by creating top management positions for the historically disadvantaged individuals (HDIs) without decision-making or control powers. Thus the new definition takes a much broader view, going beyond equity ownership to viewing BEE as a socio-economic process that forms part of the wider economic transformation of the country.

The new document also shies away from setting specific targets and deadlines for industries. Instead, it provides guidelines and incentives for private companies to work together with government voluntarily in attaining BEE. Although the new policy distinguishes between direct empowerment initiatives such as equity ownership, human resource development and employment equity in the intermediate range, and indirect measures such as procurement, it actually gives equal weight to these three categories. What this means is that a company that awards substantial preferential procurement could score equally or even better than one that is black owned, in terms of equity ownership or one that invests in human resource development or promotes employment equity. The main problem with the previous policy is that it emphasized company ownership and thus gave rise to a black middle class by advantaging a small clique of the population of black people. The majority of HDIs who do not have the ability to buy company shares can now benefit from BEE through other means.

3 Policy objectives and principles of BEE
According to section 3.3 of the strategy document, the policy objectives of BEE include:
- A substantial increase in the number of black people who have ownership and control of existing and new enterprises
- A substantial increase in the number of black people who have ownership and control of existing and new enterprises in the priority sectors of the economy as identified in the microeconomic reform strategy.
- A significant increase in the number of new black enterprises, black-empowered enterprises and black-engendered enterprises.
- A significant increase in number of black people in executive and senior management of enterprises.
- An increasing proportion of the ownership and management of economic activities vested in
community and broad-based enterprises and cooperatives.
- Increased improved acquisition productive areas.
- Accelerated and shared economic growth.
- Increased income levels of black persons and a reduction of income inequalities.
ownership of land and other assets, access to infrastructure, increased of skills and increased participation in economic activities in under-developed

Section 3.4 of the document discusses the key principles underpinning the BEE strategy. Accordingly, BEE is seen as a i) broad-based and ii)inclusive process, iii)associated with good governance and iv)forming part of the national growth strategy.

4 Policy instruments
To help achieve the objects of BEE the strategy proposes the use of policy instruments including Legislation, Regulation, Restructuring of state-owned enterprises (SOEs), Preferential procurement by government, Institutional support, Partnerships and Charters. These are discussed in section 3.5 of the document. A few of these instruments are worth commenting on here.

Restructuring of SOEs
The policy instruments mentioned above provide a platform for the achievement of BEE, provided they are utilized correctly. For instance, the restructuring of state-owned enterprises provides an opportunity for the participation of HDIs in the mainstream economy, provided privatization and competition form an integral part of restructuring. According to government's blueprint on restructuring (DPE. 2000. An accelerated agenda towards the restructuring of state-owned enterprises: Policy framework) one of the objectives of restructuring SOEs is to create a wider ownership in the South Afncan economy. To that end, restructuring should redistribute wealth, boost SMEs, promote sustainable affirmative action and facilitate genuine black economic empowerment. Most SOEs are in those industries traditionally viewed as natural monopolies. However, due to technological advancement competition is now possible in some of these industries including telecommunications, electricity and transport. Where competition in the market is not possible, government can still facilitate competition for the market through the bid or tender processes. In cases where the state owned company has to compete with private companies, the playing field must be level to ensure that the new companies, including BEE firms might benefit from the restructuring exercise.

Government has made it mandatory in certain instances that private companies entering these industries should have a BEE component, partner with BEE companies or commit to a skills transfer to BEE companies. In some cases government has set aside substantial parts of these markets for BEE purposes to ensure that there is meaningful participation by HDIs in the economy. In using restructuring as a policy instrument, there is one factor that cannot be overemphasized; that is 'getting the structure of these markets right'. Market structure is crucial for the entry of new companies, notably BEE companies. In certain sectors of the economy, it is clear that participation by BEE companies (or private investors for that matter) is still insignificant despite restructuring, due to institutional barriers to entry. Government remains a major player in these industries and entry by new firms is either restricted or insufficient. Government should compete on an equal footing with private firms. Where government has been both regulator and player, with the introduction of competition, the regulatory function should reside with a neutral independent body. Another factor restricting the participation of BEE companies in SOEs is lack of funding. Government can set aside substantial shares of the market for BEE purposes, but without finance, these companies will not be able to take up the offer. Access to finance is discussed in section 5 below.

Preferential procurement
In terms of the new strategy, BEE can be achieved not only through company ownership but also through other means such as preferential procurement. SOEs provide a good example to the business community. During the financial year 2002/2003, Transnet committed 54,6 percent of its procurement spending to BEE, Eskom committed 21,2 percent, and Denel 15 percent. Together, Eskom, Transnet and Denel had a combined discretionary procurement budget of just under R34-billion in 2002/03, with more than R9-billion being empowerment-centred. (Radebe J Budget Speech on Public Enterprises. SAPA Cape Town 11 April 2003) One of the objectives of the Competition Act is to ensure that small medium and micro enterprises (SMMEs) have an equitable opportunity to participate in the economy. Preferential procurement is complementary to this objective. It can be an effective instrument insofar as the promotion of SMMEs is concerned. However, it is important to note that a transparent, competitive tendering process is still essential even in BEE cases. This will ensure that firms are chosen on merit and not necessarily on their BEE position. Moreover, an important aspect with regard to preferential procurement is that established companies must involve SMMEs and BEE firms in core businesses and not simply in peripheral activities that will not benefit the small firms in terms of skills development and competitiveness.

Regulation
Government will use a scorecard approach to measure progress in achieving its BEE objectives. According to section 3.5.3.3, the scorecard will be used as a Code of Good Practice that allows for a measure of flexibility in order that it can be adapted to the particular circumstances of specific sectors or enterprises, while at the same time bringing a measure of standardization to the definition and measurement of BEE. It would appear that government wants to lay the onus of BEE with companies, with government providing guidelines and incentives. This is a welcome move from an investment perspective. Private investors are not keen to invest in economic jurisdictions characterised by heavy-handed government regulation of their activities. Closely related to this policy instrument is the use of partnerships and industry charters. Again, government's approach is that of self-initiative by industries. Industry charters are seen as a good gesture by the private sector to engage in BEE. The negative stock market reaction that followed the leak of the mining charter provided government with an opportunity to rethink its approach. It is important to realise that BEE will only be achieved when enterprises voluntarily take the initiative to achieve BEE. Investors are at home in a hands-off environment.

Institutional support
The document proposes the establishment of a BEE Advisory Council whose role would include reviewing progress on BEE, giving advice to government, promoting partnerships between government and the private sector and advising on sector and industry charters. The previous document proposed a National Economic Empowerment Commission with more powers than just playing an advisory role. This would have created another regulatory institution in the economy that is already contending with a lot of regulatory mechanisms. The present policy shies away from that by proposing an advisory Council and one that makes recommendations to government. Whether those recommendations will be acted on is another question. However, the mere fact that there is some institution over-seeing BEE should provide a stimulus for firms to do something about it, without a knock on the head. The issue is not regulation but providing incentives for firms to achieve BEE.

4.1The land question?
One of the objectives listed in section 3.3 is an increase in the ownership of land and other productive assets. Whilst it is clear how some of the policy instruments will be used to achieve the BEE objectives, it is not apparent from the document how increased land ownership will be achieved. Nowhere in the document is the issue of land reform addressed and this might be a serious oversight. The previous document dedicated a whole chapter to addressing the land question and rural development. Land ownership is tied to the other empowerment imperatives like access to finance. Shared economic growth as one of the listed BEE objectives can only be possible when large sections of the population have had access to land and other productive assets. Perhaps land reform should be included as one of the policy instruments.

5 Finance for BEE
The question of financing BEE is discussed in section 3.6. The biggest stumbling block to the attainment of BEE still remains the access to finance by HDIs and SMMEs. Section 3.6 of the strategy document points to the importance of a credible financing component for BEE. Whilst the document identifies financing mechanisms and institutions, it does not make mention of the role of commercial banks in this regard. That commercial banks have a crucial role to play in BEE cannot be denied. However, that up to now, large sections of the population and SMMEs are excluded from the formal banking system is a fact. A BEE strategy that excludes the role of commercial banks is incomplete. This is not to suggest setting targets for the financial sector, but to give general guidelines on how commercial banks could assist in achieving the broader objectives of government. Obviously this should be done with as little interruption to the industry as possible. The setting up of public institutions to promote lending for business start-up and development purposes clearly shows the urgency of access to finance to boost BEE. These institutions need to be complemented by the formal banking system.

6 Concluding remarks
The document concludes with proposals for the way forward in section 4. The main recommendation in section 4 is that the document should be translated into legislation on BEE. Given the history of the country, it is necessary that BEE be legislated. However, the onus should lie with individual firms and industries to adopt measures suitable for them to achieve BEE, with government providing guidelines, incentives, advice and a general policy framework on the issue. The new document is an improvement from the previous one in that it is general in nature and does not prescribe stringent targets to industries. Business should therefore show its faith by fulfilling its side of the bargain. All in all, the document provides a business-friendly framework within which to achieve BEE.

On the Broad-Based Black Economic Empowerment Bill itself, the Commission wishes to point out that it supports the bill and its objectives in. However, the Commission wishes to highlight the following concerns:

1) That Section 3 of the Bill states that 'Any person applying this Act must interpret its provisions so as
a) to give effect to its objectives; and
b) to comply with the Constitution."

It is not clear whether the constitution referred to in Section 3(b) is the Constitution of the Republic or the Constitution of the Council which is contemplated in Section 5 of the Bill.

Furthermore, whilst Section 3(a) states that any person applying the Act "must" interpret its provisions so as to give effect to its objectives, Section 8 provides that every organ of state must take into account any relevant code of practice issued in terms of this Act. "Take into account" in this instance does not mean that the relevant organ will follow the provisions of the contemplated code. The discrepancy in this regard is that whilst Section 3 is peremptory in so far as interpreting the Act is concerned, Section 8, to the extent that it directs an organ of state responsible, merely provides that the relevant organ must "1ake into account" and does not provide that the relevant organ "must apply" the provisions of the contemplated code. It is recommended that Section 8 must provide for compulsory use of the code of practice contemplated in that section by any relevant organ of state.

2) Section 4 of the Bill establishes the Council and Section 4(2) states the Council will advise the President on BEE issues. However, Section 5(2) states that the President is the Chairperson of the Council. This may lead to perceptions that the Council may not be as independent as it should regarding the advice it gives to the President, as he in any case will be the Chairperson thereof. It is therefore recommended that the President not be the Chairperson, but rather an independent eminent person be appointed by the President to be the Chairperson of the Council. This, the Commission believes, will be consistent with the approach the government of the Republic has taken with regard to any other statutory bodies established for regulatory purposes. Furthermore, it is not clear what the Council will do except advising the President. Will it also advise the President and the Minister on recommendations to the codes of practice? How about the having an unlimited number of advisors(??).

3) The third point of the Preamble of the Bill states that the South African economy still excludes the vast majority of its people from ownership of fixed assets and the possession of advanced skills. This creates the impression that these exclusions are done legislatively, as they have been in the past. The Commission proposes that the preamble be revised to indicate that 'Whereas the vast majority of the people of the Republic require access to ownership of fixed assets and the possession of advanced skills".

4) As for the Objectives of Act, section 2(c) perhaps comes across as too socialist: "increase the extent to which communities, workers, collective enterprises and cooperatives own and manage existing and new enterprises". Perhaps this objective might be rephrased to reflect that collective ownership would be a means to raising funds to acquire business interests?

Section 5 of the Bill provides for the Constitution of the Council, which provide for the operational affairs of the Council. It is not clear whether members, the dti or the Presidency has the responsibility to draft contemplated constitution, and whether it will have legal force and effect regulations passed in terms of an Act are.

Competition Commission
Pretoria