THE FINAL WORKING DRAFT OF THE INFORMATION AND COMMUNICATION TECHNOLOGY SECTOR CHARTER AND THE CHALLENGE OF FOREIGN BASED ICT ENTERPRISES – BY RUDOLPH DU PLESSIS AND BELINDA MAPONGWANA

Monday, March 14, 2005
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Background to the ICT Sector Charter
 
The draft Information and Communication Technology Sector Charter (“the Charter”) provides a framework for the promotion of transformation in the Information Communications Technology (“ICT”) sector. It also establishes guidelines for Broad-based Black Economic Empowerment (“BBEE”) and provides a scorecard on empowerment for the ICT sector as well as establishing an ICT Black Economic Empowerment (“BEE”) Council (“the Council”) which is a body tasked with implementing, monitoring and enforcing the objectives of the Charter.  
 
In its Preamble, the Charter provides that the parties to the Charter recognise that growth and prosperity in South Africa’s economy is not being realised to its full potential due to the lack of meaningful participation by the vast majority of black South Africans, including black women in the national economy, and particularly in the ICT sector.  Accordingly, the parties to the Charter believe that in order to advance economic transformation in the ICT sector, to provide an enabling environment for transparency, fairness and consistency when adjudicating on matters related to BEE in the ICT sector and to bridge the “digital divide”, the parties to the Charter commit themselves to actively promoting the objectives of BEE in the ICT sector and to ensure effective implementation of the Charter in the industries they represent.
 
Key Principles of the Charter
 
The Charter is based on the following underlying principles:
 
·                      it is a voluntary and inclusive industry initiative;
 
·                     it is a transformation charter as contemplated in the Broad-based Black Economic Empowerment Act, 53 of 2003;
 
·                     it outlines processes and mechanisms used to implement economic transformation in the ICT sector; and
 
·                     it is conceived to be “a living document” meaning that it is dynamic and for the duration of its life will be subjected to periodic reviews which must be sensitive to inevitable evolution in the technological, economic, political and other arenas.  Any amendments will be effected on the supreme principles of consultation, inclusivity, transparency and non-racialism as enshrined in and symbolized by the Constitution of the Republic of South Africa.
 
The Challenge of Foreign-based ICT Enterprises
 
One of the key challenges in attaining the objectives of the Charter is the question of Foreign-based ICT Enterprises and the sale of equity ownership.  The reason is that the parties to the Charter recognise that some foreign-owned and controlled ICT enterprises (mainly American multinationals), submit that due to the stringent ownership restrictions from their parent companies and the need to preserve intellectual property, amongst other things, it is difficult to dilute their ownership, instead, they propose the use of “equity equivalents” in place of equity participation.
 
According to the ICT Sector Charter Working Group (“the Working Group”), there were different views on how to approach this issue.  Some sections were opposed to any specialized treatment of multinationals.  Due to the differences of opinion it became necessary for the Working Group to mediate a negotiated solution.  The current position is that there will be no blanket exemptions for any organization from the requirement to comply with the equity provisions and targets contained in the Charter.  The Council will upon application release any company, including a multinational company, in terms of the specifically defined terms of release, from complying with the equity requirements of the Charter.
 
The Charter provides that any company which can demonstrate that compliance with the equity requirements of the Charter will cause inherent commercial harm to its business due to legal, technological or policy barriers which are incompatible with the sale of equity in the ordinary course of events and any other such impediments, shall be permitted to propose ‘alternative equity models’, provided that such models are proposed in a genuine effort to overcome the barriers in question; and fulfill the transformational purpose of equity ownership (i.e. voting rights etc.).  In the event that the barriers are found to exist and no alternative model(s) are proposed, or found to be capable of overcoming such barriers, then the Council may issue the company involved with a Certificate of Permitted Non-Compliance.
 
The Certificate of Permitted Non-Compliance shall only be granted if the enterprise shows that the barrier in question was not put in place mainly for the purpose of avoiding compliance with the Charter, or similar transformational instrument and in the case of parent company policy, if such policy is shown to have existed prior to 25 June 2003 and be globally and uniformly applied by such parent company.  Barriers only related to the ordinary costs of entering into an empowerment deal shall not be taken into account.  There is no definition of an alternative equity model in the Charter and it is not clear at this stage whether the alternative ‘equity’ models should give equity ownership to BEE investors.
 
The Charter, however, is not clear as to what the specifically defined terms of release would be from complying with the equity requirements of the Charter.  Presumably, in light of the use of the word "alternative", it would not have to be actual equity ownership but an alternative that would have some or all of the key elements of ownership as set out in the Charter.  It is also not clear from the Charter what the effect of the issue of a Certificate of Permitted Non-Compliance would be.  Does it mean that an enterprise to whom such a certificate is issued will be exempt from complying with the equity requirements and would be deemed to have attained a full score in that regard?  Or, would it mean that such an enterprise should make up its score through the other components of the Charter (i.e. "over-scoring" in respect of enterprise development, employment equity etc).
 
The ICT BEE Scorecard (“the Scorecard”)
 
The Scorecard presents the core components and major BEE indicators including their respective targets and weightings.  The BEE core components are the broad-based aspects of transformation like equity ownership, management, employment equity, skills development and preferential procurement, the indicators outlined in the Scorecard and the respective targets are used to measure transformational requirements and achievements by enterprises in each of the indicated areas.
 
The Charter measures ownership at 30% by 2010 and at 35% by 2015 and management and control at 40% by 2010 and 60% by 2015.  If however, a company is issued with a Certificate of Permitted Non-Compliance, then it will be allocated a score of zero in relation to the equity/shareholding indicator of the Scorecard and will accordingly be permitted to attain its bronze, silver or gold rating by adding up its total score on the remaining indicators.  An enterprise can gain bonus points capped at 20% of the total score by including Small Medium and Micro Enterprises (SMME’s), rural communities, disabled persons or black recipients of the ICT skills development in its broad based collective ownership programmes.  
 
The Charter was due to commence on 1 March 2005, but the final working document is currently being reviewed by the National Economic Development and Labour Council (NEDLAC) and in addition will need to be aligned with the Department of Trade and Industry’s draft Codes of Good Practice.  According to newspaper reports, it is envisaged that the Working Group will publish the final Charter in April and thereafter the public will be given a chance to comment on it once the public comments have been reviewed, the final Charter will be gazetted in June 2005.