Charter needs clarification

The draft ICT charter, which has finally been gazetted after eight years in the making, needs more clarity, because some exemptions are not clear enough and will be difficult to verify.

Members of the public have until 10 August to comment on the document, which raises the equity ownership bar to a higher level than the generic empowerment codes. The charter will be in effect until 2026, with a “mid-term” review in 2016.

Companies in the ICT sector will have to sell a 30% stake to meet the compliance target, unless they are listed on the JSE or conclude an empowerment deal worth R7.5 billion. The 30% stipulation is likely to draw heated comment as it has already been slammed as being too onerous and is a higher target than the 25.1% in the generic codes.

The charter applies to “all persons, organisations and entities operating in the ICT sector in SA”, which includes public entities such as Broadband Infraco and the State IT Agency. However, the draft makes the point that wholly state-owned entities cannot be measured against the ownership requirement.

JSE-listed entities only have to be 25.1% empowered to comply, and state-owned entities can strip out government's holding to work out ownership, which lowers the required equity level.

Companies that turnover less than R5 million a year qualify as “exempted micro enterprises” and are automatically classed as level four contributors in terms of the Department of Trade and Industry's codes. Start-up companies are also exempted for the first year.

Firms that turnover between R5 million and R35 million a year are classified as “qualifying small enterprises” and must choose four of the seven empowerment elements on the scorecard for measurement purposes.

Adrian Schofield, president of the Computer Society of SA, points out that companies have a year in which to increase their empowerment stakes, or run the risk of not scoring all the ownership points on the scorecard.

“Companies may be relaxed about not meeting the maximum level until they realise they are losing out on business,” notes Schofield. He says this will be a challenge for smaller firms doing business with larger companies that will insist on full compliance.

If the empowerment partner sells out after three years, companies can continue to count the stake as part of their equity ownership, but only if value has been created in the “hands of black people”.

The stake that has been sold cannot account for more than 40% of the total equity score. Companies can only continue claiming the shareholding for the same amount of time as the black partner held the shares in the first place.

According to the draft, company boards must be half black to comply with the targets. Within six to 10 years, 60% of senior staff, 75% of middle management and 80% of junior staff need to be black.

The charter also sets a target of 5% of after-tax profit to be spent on enterprise development initiatives aimed at growing and developing black-owned ICT enterprises. In addition, 1.5% of net profit must be spent on socio-economic development initiatives.

Irnest Kaplan, MD of Kaplan Equity Analysts, points out the target will have less of an impact on companies than if it was a percentage of revenue, which would be a bigger cost. He adds that firms that are not turning a profit will not have to contribute.

Companies are exempt from contributing to socio-economic development if their net margin is less than a quarter of the “norm in the industry”. Schofield says this needs clarity because there is no indicator of what the “norm” is and net margins vary from sub-sector to sub-sector.

In terms of procurement, 70% must be spent with empowered companies, but firms can exclude imports from the calculation if they cannot source the item locally, or need a specific brand that is not made in SA.

Schofield says this requirement could be open to interesting interpretations. “Who will decide whether we have local equivalents?”

The charter also does not indicate exactly which stakeholders put the document together, which means some entities could have been left out of the decision-making process, notes Schofield.

The charter aims to “bridge the digital divide” by promoting access to ICT, as well as stimulate growth in the sector. It also wants to trim unemployment and reduce poverty, according to the draft document.