1. The South African Communications Forum (“SACF”) is an industry association in
the ICT sector and enjoys a diverse membership in the ICT value chain and
includes licensees, prospective licensees, OEMs, OTT. This diverse membership
permits us to advance views that are balanced and seek to promote an
inclusive, responsive, a competitive sector able to attract investment and
sustain growth.
2. We welcome the opportunity to comment on the Draft Regulations relating to
the Limitations of Control and Equity Ownership by Historically Disadvantaged
Groups (HDGs) and the Application of the ICT Sector Code (Draft Regulations).
The SACF would like to participate in any future processes relating to the Draft
Regulations, including public hearings and workshops.
Introduction
3. The extended submission deadline on the Draft Regulations has been
invaluable as it has given stakeholders the opportunity to submit comments
that considers a world post-COVID 19. It is inevitable that this process, as well
as other regulatory processes consider the changed environment as a result of
the pandemic.
4. Transformation is a critical issue to ensure the inclusion of Black people across
the ICT value chain in a meaningful way that secures economic transformation
and ultimately wealth creation.
5. There have been two phases of economic transformation in South Africa under
a democratic dispensation – the first adopted a narrow-based approach by
focusing on equity only and the second, adopted a broad-based approach
with an expanded scope which now includes management, skills
development, procurement, enterprise development and corporate social
investment.
6. While most economic sectors have transitioned to the use of the balanced
scorecard from the Broad-Based Black Economic Empowerment Act, the ICT
sector maintained the narrow-based approach and added the balanced
scorecard.
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Historically Disadvantaged Groups (HDGs) and the Application of the ICT Sector Code
4 May 2020
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7. The balanced scorecard and B-BBEE approach is encapsulated in sector
Codes which encourages empowerment but does not compel it. Instead,
there is a strong commercial imperative for firms to comply.
8. ICASA is enjoined by the Electronic Communications Act to apply a mandatory
equity target in specific instances and to apply the B-BBEE ICT Code. Equity
remains an important element in economic transformation. The critical
question is whether a primary focus on equity is the best way of achieving
effective transformation in electronic communications licences.
Investment Downgrade
9. The ratings agencies have downgraded South Africa to sub investment grade
twice in March and April 2020. This has made the cost of capital more
expensive.
10. Additionally, the economy has contracted between 5 and 7 percent, while the
rand fell by 23% in 2020.
The Impact of COVID 19
11. The advent of the B-BBEE Act and Codes highlights the need for a more broadbased approach. Moreover, COVID 19 has changed economies and markets.
12. No one truly knows the impact of COVID19. Experts are working with imperfect
information as it evolves and there is no global experience or practice from
which we have been able to learn, as this affected and infected the globe at
almost the same time. Some countries may be a few steps ahead.
13. The result was concurrent national lockdowns. This combined with
globalisation has impacted the manufacturing and supply chains of other
countries even before their lockdowns were implemented which restricted the
movement of people and goods.
14. As a result most governments introduced stimulus packages to help businesses
as a result of national lockdowns and the resultant inability to trade and
continues to have a catastrophic impact on revenues. While, some sectors
were impacted more heavily than others, it is inevitable that smaller businesses
would be more severely impacted, as small businesses are less likely to have
reserves to weather such an unprecedented event.
15. While, the essential role of ICTs have been highlighted during the crisis, the
share prices of electronic communications companies have been volatile, with
significant drops at the beginning of the crisis and some level of recovery since.
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Historically Disadvantaged Groups (HDGs) and the Application of the ICT Sector Code
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16. Electronic communications have proven to be critical to enable working and
learning from home to help social distancing. Its importance cannot be
underestimated, as it enables critical online platforms that have become key
in our new everyday lives.
Equity Acquisition in existing Individual Licences
17. There are several hundred individual licences abound, some are not
operational, others have varied levels of operationality with a limited number
of high-value operations originating from these licences. As a result the value
and process of acquisition of equity will vary significantly and so too will the
acquisition costs.
18. Equity transactions in smaller licences are likely to be a simpler process and
cheaper with a shorter end date.
19. Larger transactions take longer and typically requires funding from bond and
capital markets in an environment where the cost of capital has increased. This
will almost certainly increase the length of the transaction and may even
impact the benefit accruing to the Black shareholder.
20. Finally, equity of any business regardless of the demographic is always held by
a limited number of people. Hence, it is imperative that empowerment must
be inclusive with the adoption of measures that ensure the greater inclusion of
Black people across the value chain.
Application of the B-BBEE ICT Code
21. All sector codes including the B-BBEE ICT Sector Code adopts a balanced
scorecard and promotes a holistic approach to transformation through
increasing the number of Black people at all levels of the ICT sector, including
ownership; management, procurement, corporate social investment, skills and
enterprise development.
22. This approach to empowerment strives to improve the positioning and
economic status of more people and does not negate the importance of
ownership by Black people. It instead balances the importance of equity
among the other critical priorities. The use of the scorecard increases the
number of people impacted and who benefit.
23. Compliance with the Codes is voluntary however, the ICT Sector Code
encourages compliance in three priority elements of the scorecard viz.
ownership, skills and procurement. While, compliance is discretionary, noncompliance is punished commercially. In addition, the codes include a
negative incentive for firms that fail to achieve the sub-minimum targets for the
SACF Comments – Draft Regulations on the Limitations of Control and Equity Ownership by
Historically Disadvantaged Groups (HDGs) and the Application of the ICT Sector Code
4 May 2020
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priority elements. The firm is penalized and achieves a recognition level one
below the actual achievement. For example, should a licensee be verified at
Level 4, but fails to meet the applicable sub-minimum targets of priority
elements, its compliance level will be dropped one down to Level 5.
24. In our comments on the Information Memorandum in January 2020, the SACF
argued for the use of the ICT Sector Code. We had proposed the following:
a) The Authority has set a minimum target of a B-BBEE Level 4 for licensees.
b) Compliance should rather be viewed on an evolving and iterative basis
which progressively encourages higher levels of compliance with the
inclusion of increased targets for procurement.
c) The Authority through its annual compliance reports will be able to
assess the success of implementation of the ICT Sector Code and as
such should consider the periodic increase in the minimum compliance
level applicable.
25. This in our view, will ensure sustained meaningful transformation of the sector.
26. Increased targets for procurement from Black owned and Black empowered
companies in all licences, we believe will have the following impact:
a) Procurement is immediate and will increase the number of Black people
included in the value chain;
b) It will improve the level of empowerment to Black people while reducing
the cost of capital required to participate as licensees may be able to
provide advance funding or contracts will increase the company’s
ability to access credit facilities.
c) Small, Medium and Micro Enterprises (SMMEs) would be included in the
value chain.
Challenge between the Legislative Framework in the current environment
27. The ECA enjoins ICASA to impose a minimum of 30% HDP equity targets on
licensees once they trigger one of the following regulatory or compliance
processes:
a) New Applications for Individual Licences (Section 9 of the ECA);
b) Amendment of a licence (Section 10 of the ECA);
c) Renewal of a licence (Section 11); and
d) Transfer of Control (Section 13 of the ECA).
The ECA enjoins the Authority, to start with a Section 4B Inquiry when making
regulations on transformation to determine the need and scope of potential
regulations.
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Historically Disadvantaged Groups (HDGs) and the Application of the ICT Sector Code
4 May 2020
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While the Authority has followed the legislated process, the changed
environment, demands a review and revision to the process and perhaps even
the end result.
Terminology
28. The ECA uses the term Historically Disadvantaged People whereas the national
overarching legislative framework for transformation, the Broad-Based
Economic Empowerment Act (B-BBEE Act) focuses on the empowerment of
Black people. Most firms across the economy, including licensees already
comply with relevant sector Codes and creates a framework for the
empowerment and measurement thereto. Accordingly, the term Black people
should be used instead of Historically Disadvantaged People.
Application of the Draft Regulations
29. The Draft Regulations indicate the HDP targets apply to all manner of licences.
We understand this obligation to be limited to I-ECNS and I-ECS licences only.
The I-ECNS and I-ECS licences are the ticket to give a licensee access to
spectrum or numbering. We would appreciate clarity on the following:
a) Which licences will attract an HDP equity target?
b) We understand that licensees should be able to continue to apply for
spectrum and numbering, for example. We would appreciate clarity in this
regard.
Applicable Verification Level
30. The draft regulations propose a minimum of level 4. Transformation must be
viewed as an evolving target with the progressive escalation of targets.
Accordingly, while Level 4 may have been applicable when it was originally
introduced in regulations, it may no longer be applicable. The Authority ought
to continually review the compliance levels of licensees and adjust the
minimum level applicable as is required.
31. The use of the Codes offers an obligation that is proportionate to licensee
revenue.
32. The verification resulting from the Codes also has commercial application,
which is largely a standard requirement for the acquisition of new business.
33. We suggest that the Authority conduct an audit on the current levels of
compliance among class licensees to inform the appropriate level.
Caution when applying the B-BBEE ICT Sector Code
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Historically Disadvantaged Groups (HDGs) and the Application of the ICT Sector Code
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34. The B-BBEE Act enjoins ICASA when granting or issuing a licence or a
concession to determine the applicable B-BBEE qualifying criteria. While, ICASA
is required to set the minimum levels of B-BBBEE compliance, it must be
cognisant of the fact that it has limited control over the targets included in the
ICT Sector Code or amendments thereto.
35. The ICT Sector Council determines and amends the targets of the ICT Sector
Code. These are aligned to the generic B-BBEE framework and is amended
periodically. In 2016 the ICT Sector Code was amended and radically
increased targets. As a result most licensees and measured entities in general
dropped several levels as they had no opportunity to mitigate the changes
introduced in the ICT Sector Code as the amendments applied immediately.
The amendments also applied to verifications that were already in progress.
36. All of our members were able to get back to previous levels of compliance and
some even exceeded previous levels. The progression from one level to the
next is dependent on the funding available towards empowering Black people
through skills development, the procurement of goods and services from Black
companies, as well as developing Black enterprises and communities.
37. Therefore, while we support the application of the B-BBEE ICT Sector Code, it is
important to recognise that verification levels could fall drastically without
warning and mitigation is not always possible. As such the Authority would
need to develop a sensitivity to mitigate for this.
Application of the Principles included in the draft regulations
38. Although it is not clear in the draft regulations, we note the exclusion of the
modified flow-through principle in the Findings Document and request that this
be reconsidered for the final regulations. The inclusion of the modified-flow
through principle will better align with the B-BBEEE codes and since the
Department of Trade and Industry (DTI) has limited the use of the modified-flow
through principle, its potential abuse is significantly mitigated.
Application of 30% HDG Equity Requirements (Section 9(2)(b) of the EC Act)
39. In terms of the ECA, existing Individual licensees are not required to have 30%
HDG equity ownership unless they trigger one of the following regulatory or
compliance processes:
a) New Applications for Individual Licences (Section 9 of the ECA);
b) Amendment of a licence (Section 10 of the ECA);
c) Renewal of a licence (Section 11); and
d) Transfer of Control (Section 13 of the ECA).
SACF Comments – Draft Regulations on the Limitations of Control and Equity Ownership by
Historically Disadvantaged Groups (HDGs) and the Application of the ICT Sector Code
4 May 2020
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40. The Draft regulations seek to bring this obligation forward upon promulgation
of a final HDP regulation. We have set out the current context which we believe
necessitates a reconsideration of this position.
41. Notwithstanding our comments in this regard, we would urge the Authority to
consider our current context and measures that would best achieve the
meaningful inclusion of Black people across the entire value chain.
42. We note the inclusion of a minimum level of compliance of Level 4 that will be
applicable to licences. The levels of compliance must seek to achieve at least
two key objectives:
– include rather than exclude licensees; and
– encourage increased levels of compliance.
43. Accordingly, we propose that the Authority review the level of compliance
currently held by licensees and then determine the appropriate level of
compliance coupled with a medium term target for licensees moving up at
least one level.
44. The SACF argued for this in our submission on the Information Memorandum.
45. While, the SACF has consistently advocated for a greater reliance on the
application of the ICT Sector Code in the licensing framework, the Authority
must build the tolerance to provide for amendments to the ICT Sector Code
which may result in a drop in the level of compliance.
46. Amendments to the Code have resulted in a drop in the level of compliance
and has taken a few years for licensees to claw their way back to former levels
of compliance. This needs targeted funding.
47. The DTI has to date not permitted a compliance period. A transitionary period
is essential. A reasonable transition period for compliance with amendments to
the ICT Code is at least 12 months.
48. Even with a transitionary period, a drop in B-BBEE levels is possible. in such an
instance the condonation must be linked to materiality of the changes and the
resultant drop. Condonations would be supported by evidence.
49. The objective is to promote meaningful transformation without being too
onerous and prejudicial to licensees.
Treatment of State Owned Entities
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Historically Disadvantaged Groups (HDGs) and the Application of the ICT Sector Code
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50. The SACF notes the exemption of wholly state-owned entities to this 30% HDG
Equity Requirement and urges the Authority to align the HDG Regulations to
the B-BBEE Codes of Good practice with regards to the treatment of entities
with B-BBEE facilitator status.
Use of ICT Sector Codes as the measure for Class Licensees
51. The SACF welcomes the Authority’s decision not to impose equity targets on
Class Licences. This in our view aligns to the empowering legislation and
provides for flexibility in the application of transformation for class licensees.
52. We do recognize that the revenue of class licences varies considerably and is
likely to provide a conundrum for the Authority. However, the approach
included in the draft regulations ensures transformation proportionate to the
scale of the operations and revenue of the licensee.
53. The application of the ICT Sector Code is directly linked to the revenue
generated by the licensee. Accordingly, licensees with a larger turnover will
have a bigger yet proportionate compliance requirement than smaller
operators.
54. Compliance with the Codes is voluntary nonetheless, the ICT Sector Code
encourages compliance in three priority elements, of the scorecard viz.
ownership, skills and procurement. While, compliance is discretionary, a
penalty applies to firms that fail to achieve the sub-minimum targets for the
priority elements. The penalty is a drop in the compliance level achieved. For
example, should a licensee achieve Level 4 compliance, but fail to achieve
the applicable sub-minimum targets the compliance level will be dropped to
Level 3.
Transformation Targets for Individual licensees
55. In our previous submission to the Authority on the Discussion Document, the
SACF argued for the standardisation of terminology from HDI to B-BBEE. We
reiterate this position and our arguments are set out in that submission.
56. We understand the societal and legislative imperatives for the inclusion of
equity targets in individual licences. It is important for Black people to have a
greater level of ownership and economic participation in the economy.
However, the current economic environment is fundamentally different from
when this process began and it is important for the Authority to recognise and
reflect this.
57. The South African economy and currency is weaker and the cost of capital has
increased. Markets have reacted differently from accepted standard
practice, for example, gold has always been the safe haven for investments
e