File photo: Nadine Hutton.

The Department of Trade and Industry (dti) has scrapped a much maligned plan to improve the implementation of the amended broad-based black economic empowerment (BBBEE) codes of good practice announced on May 1.

The plan to change rules aimed at redressing economic inequality and empowering black business people threatened to put new investment deals on hold for months.

Last Friday, Trade and Industry Minister Rob Davies withdrew an official notice of May 5 that said companies would get fewer black economic empowerment points if their shareholders were community trusts or employees rather than individuals or black-owned businesses.

Opposition

The points are part of an assessment system that gauges whether companies can win government contracts.

The notice reversed past practices in which a company with such black participants as shareholders could attain 25 points for ownership.

Instead it put the maximum at three points that could be earned by such BBBEE deals.

A clarification of May 12 by the dti failed to quell the opposition from BBBEE experts and practitioners. It said the May 5 notice would have no retrospective effect and BBBEE deals concluded before May 1 would not be affected.

On Friday, Davies capitulated to the opposition in a Government Gazette notice to the effect that there was no longer a three-point cap in respect of the broad-based ownership schemes and employee share ownership schemes.

The main criticism against this form of ownership is it is amorphous, with no identifiable participants or beneficiaries.

The Black Business Council, which supported the clampdown on the schemes, said that there needed to be a balance between passive and active shareholding, with broad-based groups needing strong, empowered individuals who could interface between such groups and companies, and to drive transformation.

“This is a very welcome, sensible decision given the original guidelines struck a lot of fear into investors about the state of their BEE settlements,” said Peter Attard Montalto, an economist at Nomura International.

Jenny Lawrence, the managing director at Grant Thornton Verification Services, said yesterday while she wholeheartedly agreed that broad-based and employee ownership schemes needed to be reviewed, the dti erred in not following its own process, when it effectively removed recognition for these schemes, without following due procedure.

Procedure

“Minister Davies has suggested that a committee will be formed in order to investigate the options and alternatives around these schemes, which we hope will follow the proper process, with a commentary period as required,” she added.

Lawrence said employee benefit schemes had been around for many years and could serve to incentivise and motivate staff, but in some cases had been corrupted to meet the needs of BEE.

She said ownership which inferred no real benefit to buy or sell shares, no ability to control business and, in many cases, no benefit ever paid out, did not meet the intention of the codes of good practice.

“We would like to see recognition for appropriate schemes continue, but based on more stringent requirements.”