In September 2011 President Zuma raised his concern about the lack of black industrialists in South Africa and called for the economy to produce “authentic black entrepreneurs” who own factories. A few months later in his 2012 State of the Nation Address, President Zuma introduced government’s plans to make a massive investment in infrastructure. The aim, he said, is to “industrialise the country, generate skills and boost much needed job creation.” A few days later, during his budget speech, Finance Minister Pravin Gordhan announced that R845 billion is to be spent on energy infrastructure, transport, logistics, housing, telecommunications and water, budgeted for the next three years.
The role of B-BBEE
In December 2011 new procurement regulations as well as proposed amendments to the Broad-Based Black Economic Empowerment Act were introduced, in terms of which tenders can no longer be awarded to black intermediaries who then pass on the skilled work to non-compliant companies. Sub-contracting of worth more than 25% of the value of the project now must go to a contractor with an equal or greater B-BBEE status or to an exempt micro enterprise.
This is aimed at encouraging the development of capacity within black-owned companies. Local production is also given more support with the ‘China Clause’ which requires tenders to stipulate a minimum threshold of local production and local content and obliges contractors to honour these terms. Contractors may not change their minds and procure cheaper materials from China.
The B-BBEE amendments also propose a controversial requirement that states that, in order to score BEE points for Enterprise Development, companies will be expected to provide practical support to their beneficiaries, in addition to the funding support that was originally required.
But are any of these measures sufficient to boost the development of black-owned manufacturing companies?
Walking the talk
My colleague, Deon Oberholzer, CEO of Gestalt Fund Managers, believes that it’s all very well to introduce procurement regulations, but government itself must walk the talk. He cites the example of the Gautrain busses which were imported instead of being manufactured locally. South Africa’s manufacturing sector has suffered due to competition from other emerging markets. Manufacturing now only represents 15.6% of the South African GDP.
Some commentators believe that government is the guilty party – it has the greatest buying power in the country but is itself not sufficiently committed to local procurement. The concern is that government will repeat its old ways in its proposed infrastructure projects. “Will they still contract the bulk of the work to larger international companies that only employ temporary construction workers, or will they find a solution to bring the black medium-sized businesses into the projects on a sustainable basis?” asks Deon.
Some local authorities are being proactive in this regard. A notable example is the Rustenburg Local Municipality in the Northwest Province, which has embarked on a R3 billion investment in a rapid bus transport system to serve the entire Rustenburg region, including the surrounding rural settlements and the mining operations in the area.
The municipality has stipulated that 25% of the money paid to contractors has to be spent within the community. The result is that contractors are engaging with local suppliers, transferring skills and building capacity. The system will be run by specially trained professionals selected from within the community and support services (such as bus and infrastructure maintenance and manufacture of materials and uniforms) will be sourced locally, supported by procurement agreements with the local authorities.
But even with a nationwide drive to involve local suppliers and build local manufacturing capacity, we still have the challenges of our critical skills shortage, along with a serious lack of understanding in our emerging sectors of the complexities of entrepreneurship.
The reality of working in SA
In October 2011, Deon conducted a study of a group of Soweto-based entrepreneurs and found a number of constraints; a poor understanding of financial systems (such as the difference between income and cash flow), a misperception of how the tender system works compounded by a belief that all are entitled to a fair share of tenders, an inability to market their products, a limited grasp of paying suppliers, collecting payment, applying for funding or the purpose and content of the business plan, a poor understanding of or compliance with labour legislation, little ability to manage customer relationships, no functional understanding of health and safety requirements, and neither the tools nor the skills to develop strategies for growth or manage a bigger business. Overall, the test group perceived the role of government as a required enabler and yet an unwelcome restraint in terms of regulations and compliance.
According to Deon, other studies have also shown that emerging entrepreneurs are constrained by mindsets of entitlement, self pity, a focus on short-term gains and the inability to move from thinking like an employee to thinking like a business owner. He concludes that, given these challenges, the policy of giving blanket support to all SMEs is not the answer to fostering the rise of black-owned industrial companies. To meet this specific target, we need to identify high potential businesses early and give those selected businesses the right support.
If private businesses are indeed required to be hands-on in supporting black-owned enterprises in terms of the proposed amendments to BEE legislation, this could go a long way in identifying potential industrial stars. But then government has to come to the party as well by committing to procurement from new local suppliers and directing practical resources to specifically help establish such new manufacturing companies.
Land ownership is a critical factor in empowering a new black industrial sector. Government land should be allocated for the development of industrial clusters, with ownership rights built into the deal. Once ownership of the land and its infrastructure is in the hands of the people who are working on it and there is a stable market for their products, along with knowledge transfer coming from established businesses, then much else can fall into place, such as; leveraging of funds, accountability for success and retaining the flow of money within that community.
The R845 billion infrastructure building programme has the potential to create a platform for sustained industrial development and transformation. But government will need to be vigilant about the structure of its tenders and will have to do as much to empower its suppliers as it is asking of the business sector.
4 Vital Differences Between King III And King IV™ On Corporate Governance
April 2018 marks a year since the effective date of the IoDSA’s (Institute of Directors in Southern Africa) latest report, the King IV Report on Corporate Governance ™ (King IV™), on effective and ethical corporate governance.
What is the King Report?
If you’re not familiar with the King Reports: it’s a series of reports that translate international standards and big-time happenings on corporate governance into set of local principles. Each new Report replaces the former.
The aim of the King Report is to set up actionable principles for South African company leadership to act as modern, good corporate citizens.
It also ensures those in leadership positions act in the best interest of the company and all parties influenced by the company. The first Report, King I, published in 1994, and was the first officiated document of its kind in South Africa.
Why is it useful to my business?
The Report also promotes transparency within your company’s leadership to ensure transgressions aren’t hidden that will eventually damage the company.
The Report also ensure blunders can be evaluated, found and corrected ASAP. Today, its mandatory for all JSE listed companies to implement the Report into their company policy. If you’re a smaller business or a non-profit, you can comply with the Report voluntarily; by applying the principles you’re essentially ensuring the long-term sustainability and survival of the business.
It also helps that create a healthy corporate culture and when your business’s foundation is healthy, growth is unthreatened. If you haven’t applied any of the former Reports in your business, you’re in luck; King IV™ is the simplest, and seemingly the most practical, Report in the family of four reports.
Why was King IV™ needed?
Companies, especially smaller businesses, often struggled to apply the King III due to its long-winded structure.
Also, King IV™ was needed because King III, published in 2009, was out-dated in terms of present-day concerns like technological advances, the increased need for online transparency, long-term resource sustainability and information security.
Here’s the rundown of the most significant differences between King IV™ and King III.
1. King IV’s™ structure is much simpler to apply
While King III did a good job of summarising the extensive scope of effective and ethical governance into 75 principles, the Report still lacked clear guidance on real-world application.
Ensuring the effective incorporation of all 75 vague, ethical principles was too exhaustive for most companies to implement, monitor and account for. That’s why King IV™ took a different structural approach.
King IV™ boiled good corporate governance down to 17 simplified principles, each supplemented with various recommended practices to make it easier for smaller companies to implement the principles within their day-to-day running.
2. King IV™ spotlights practical implementation
King III lists multiple ethical principles and then commands companies to explain how their management and actions honour those principles.
Unfortunately this meant companies approached it like a mindless compliance checklist.
King IV™ also states principles, but more importantly, requires organisations to actively report on the implementation of the recommended practices thereof.
Mervyn King, the chair of the King Committee, dubs this the shift from a “apply OR explain” mentality to a “apply AND explain” mentality. The Report also allows organisations to report on alterative-implemented practices – provided they support and advance the principle.
To make the application simpler to grasp, King IV™ clearly differentiates between the long-term Outcomes, the ethical Principles and the recommended Practices.
Essentially the new structure and its requirements mean companies have to engage in thoughtful implementation and reporting of those practices.
3. King IV™ is inclusive to more than just large companies
After King III, there was a significant demand for the inclusivity of smaller businesses, and governmental or non-profit organisations in the King Report.
Consequently, King IV™ dedicates an entire supplement chapter to guiding municipalities; non-profit organisations; retirement funds; small and medium enterprises and state-owned entities in the implementation of the Report.
Also, where King III used terms like “companies” and “boards”, King IV™ very purposefully uses more inclusive terms like “governing bodies” and “organisations” throughout the report.
It’s clear that King IV™ aims to move the principles on good corporate governance into real-world action – for all organisations.
4. Difference 3: King IV™ pushes for more accountability, transparency and reporting
What King IV™ does quite differently from King III, is recommending the application of its principles within set timelines, reports and committees within it’s recommended practices.
King IV™ strongly propagates transparency, the delegation of responsibility and the implementation of accountability by putting pen to paper in term of officiated aims, bodies responsible for those aims and the provisions of consistent reports.
Take leadership as an example, where King III would just stipulate what being a good leader means, King IV™ advises you to set goals, delegate responsibility and evaluate progress through reports and accountability.
An example would be to set up a committee, consisting of lower management levels, with clearly identifiable responsibilities and then to measure their progress via reports.
It comes down to the ignorance no longer being a valid excuse. Directors should be aware of all issues within your company.
Directors should take responsibility for everything that happens within their organisation – you can’t plead innocence on the grounds of not knowing. There should rather be reports in place to identify and uncover any discrepancies early on.
Essentially, where King III lacks in the aim of ensuring the actualisation of good corporate citizenship, King IV™ steps up the game.
How Economic Crime Is Impacting Business In South Africa
77% of SA organisations have experienced economic crime and CEO’s and boards are increasingly being held accountable for economic crime.
South African organisations continue to report the highest instances of economic crime in the world with economic crime reaching its highest level over the past decade, according to PwC’s biennial Global Economic Crime Survey.
South African organisations that have experienced economic crime is now at a staggering 77%, followed in second place by Kenya (75%), and thirdly France (71%). With half of the top ten countries who reported economic crime coming from Africa, the situation at home is more than dire.
The Global Economic Crime and Fraud Survey examines over 7200 respondents from 123 countries, of which 282 were from South Africa.
The rise of economic crime
Trevor White PwC Partner, Forensic Services and South Africa Survey Leader, says: “ Economic crime continues to disrupt business, with this year’s results showing a steep incline in reported instances of economic crime. At 77% South Africa’s rate of reported economic crime remains significantly higher than the global average rate of 49%. However, this year saw an unprecedented growth in the global trend, with a 36% period-on-period increase since 2016.”
Related: PwC Focus On Sugar Tax
Economic crime in South Africa is now at the highest level over the past decade. It is also alarming to note that 6% of executives in South Africa (Africa 5% and Global 7%) simply did not know whether their respective organisations were being affected by economic crime or not.
While the overall rate of economic crime reported was indeed the highest for South Africa, the period-on-period rate of increase for South Africa and Africa as a whole was below that of our American, Asian and European counterparts.
Global indicators of a rise in economic crime
From a regional perspective, the biggest increase in experiences of economic crime occurred in Latin America, where there was a 25% increase since 2016 to 53% in respondents who indicated they had experienced economic crime. The US was a close second with a 17% increase over 2016 to 54% of respondents, while Asia Pacific and Eastern Europe experienced increases of 16% and 14%, respectively.
Asset misappropriation continues to remain the most prevalent form of economic crime reported by 45% of respondents globally and 49% of South African respondents. While the instances of reported cybercrime showed a small decrease in the South African context (29% in 2018 versus 32% in 2016), it retained its second place in the global rankings (31%) albeit at a lower rate of occurrence than 2016.
One of the new categories of economic crimes was that of “fraud committed by the consumer”.
It is the second most reported crime in South Africa at 42% and takes third place globally at 29%. This was followed closely by procurement fraud (39% in South Africa versus 22% globally). This indicates that the entire supply chain in SouthAfrica is fraught with criminality.
Related: PwC: Pria Chetty
When combined with the high instances of bribery and corruption reported (affecting more than a third of organisations at 34%), the resultant erosion in value from the country’s gross domestic product (GDP) is startling. Accounting fraud, which is usually perpetrated by senior management and results in the largest losses, increased from 20% to 22%.
Accountability of the board
Accountability for fraud and economic crime has moved into the executive suite, with the C-Suite increasingly taking responsibility, and the fall, when economic crime and fraud occur.”
The survey shows that almost every serious incident of fraud has been brought to the attention of senior management (95%).
85% of South African respondents indicated their organization had a formal business ethics and compliance programme in place.
In addition, 20% of local respondents indicated that the CEO (who is part of the first line of defence) has primary responsibility for the organisation’s ethics and compliance programmes, and is therefore more instrumental to the detection of fraud and the response to it.
PwC Focus On Sugar Tax
The proposed sugar levy is unlikely to make sizeable dent in fiscal deficit, but the Sugar Beverage Industry is offering a helping hand to reduce obesity.
In 2016, the National Treasury announced a Sugar Beverage Levy (SBL) on sugar-sweetened beverages (SSBs) scheduled to take effect April 2018. The aim of the levy was to prevent and control obesity in South Africa, but key industry players also viewed it as a potentially significant new source of revenue that could help plug the growing fiscal deficit.
The fiscal deficit has been widening as National Treasury faces slow economic growth and a shrinking tax base. Initially estimated at 3.1% of GDP, fiscal deficit projections increased to 4.3% of GDP in October last year.[i]
However, official data suggests the deficit already reached R195 billion in the first 8 months of the 2018/19 fiscal year, so it could amount to approximately R250 billion, thereby exceeding Finance Minister Gigaba’s October projections by 25%.
The levy has undergone various changes since it was first announced.
When the levy takes effect in April this year, it will amount to 2.1 cents per gram of sugar per 100ml, above 4 grams per 100ml.
This is down from an initial 2.29 cents per gram of sugar with no exempted amount.[ii]
Our estimations suggest the tax burden is approximately 10% given current levels of sugar content, down from approximately 20% previously. In addition, industry has recently reacted to the news of the SBL, reducing the sugar content of popular beverages by including non-nutritive sweeteners.
In addition to efforts to reformulate, the industry introduced smaller bottle sizes to curb excessive sugar consumption and limit the excise tax burden.
SBL excise revenue estimations
We estimated that in a scenario in which the beverages industry makes no change to the sugar content of SSBs, the levy would result in an estimated R1.5 billion loss in sales revenue and a R 1.4 billion excise revenue gain for government.
However, a reformulation by industry would result in a lower loss in sales revenues of only R1.07bn and lower than expected excise revenue gain for government of R990mn.
Given the estimated fiscal budget deficit of up to R250bn, additional revenues of between R990mn and R1.4bn are unlikely to make a significant dent in plugging the deficit and could support the assertion that the levy will focus on curbing sugar consumption rather than providing significant additional revenue inflows.
In our quantitative analysis of the proposed tax on SSBs, we use the PwC Economic Impact Assessment Model to derive the potential impacts, based on a 10% sales reduction calculation due to potential excise driven price changes.
Although excise revenues are expected to increase, other tax revenue streams are likely to experience a decline. Not considering excise impacts, the prospective tax revenue loss stemming from reduced sales revenues and showing in lower VAT, corporate income tax (CIT) and personal income tax (PIT) could range between R363 million and R518 million in the reformulation and non-reformulation scenarios, respectively.
Therefore, the net impact on estimated tax revenue combining the implications for excise tax, VAT, CIT and PIT revenue would only range between R631 million and R856 million, subject to which scenario is implemented.
It is unclear whether the SBL levy will assist in reducing consumers’ sugar consumption. However, industry facilitates lower sugar consumption by reducing bottle sizes and through reformulation.
Smaller sizes nudge consumers to lower sugar consumption
In addition to reformulating popular SSBs, the beverages industry has altered the size of the 500ml buddy bottle to 440ml, potentially nudging consumers to reducing their sugar consumption.
The move to the 440ml bottle represents a 12%[iii] reduction in size and means that sugar content fell from 53 grams in the 500ml bottle to 46.6 grams in the 440ml bottle.
The implementation of the new levy could still result in an approximately 61 cent increase in the price of the 440ml bottle.
It remains to be seen how South Africans will react to the current and impending price change of SSBs and if the SBL can indeed assist in reducing obesity. It is clear that monitoring and evaluation are key tools to help government and industry understand the effectiveness of this initiative to prevent and control obesity in South Africa.
- [i] Treasury, 2017. Medium Term Budget Policy Statement. [Online] Available: http://www.treasury.gov.za/documents/mtbps/2017/speech/speech.pdf [Accessed 08 February 2018]
- [ii] SARS, 2017. SARS to collect for sugar tax (SBL) from 1 April 2018. [Online] Available: http://www.sars.gov.za/Media/MediaReleases/Pages/15-December-2017—SARS-to-collect-for-sugar-tax-from-1-April-2018-.aspx [Accessed on 06 February 2018]
- [iii] PwC calculations
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