Forest Sector making progress in meeting transformation targets

Khosi Mavimbela, Executive Director of the Forest Sector Charter Council with Michael Peter, Executive Director of Forestry South Africa.

The good news is that the Forest Sector has improved its overall B-BBEE rating from Level 4 to Level 3, demonstrating progress towards achieving transformation targets. Furthermore, there has been an encouraging improvement in the number of enterprises that submitted their B-BBEE Reports to the Forest Sector Charter Council – from 113 in 2021/22 to 192 during the 2022/23 financial year.

While these trends reflect the progress that the forest sector is making towards achieving transformation targets, it must be said that the number of enterprises submitting their B-BBEE Reports is still fairly low relative to the number of enterprises that are active in the sector.

This is the case despite the fact that annual reporting of transformation performance for all large, medium, small and even micro-enterprises is required in terms of the amended B-BBEE Act.

The Forest Sector Charter Council (FSCC), which is charged with monitoring and reporting on the sector’s progress in achieving the B-BBEE targets, has been one of the most consistent and diligent charter councils in the country when it comes to annual reporting of the state of transformation in the sector. The FSCC team has also engaged with business associations and business owners in an effort to encourage them to submit their B-BBEE reports.

In any event it is pleasing to note that the biggest companies in the sector that are engaged in forestry and processing of wood and/or fibre are reporting regularly. These companies together represent a large chunk of the sector’s turnover, so their participation is crucial to the sector’s contribution to transformation.

It is safe to say that in general, it appears that the most transformed enterprises make up the bulk of enterprises submitting their reports as they are able to demonstrate good progress towards achieving the B-BBEE targets. This observation is borne out by the fact that the majority of Qualifying Small Enterprises (QSEs) and Exempted Micro-Enterprises (EMEs) submitting Reports were ‘Enhanced’, meaning that they have between 50% and 100% black ownership and thus automatically achieve Level 1 or Level 2 B-BBEE rating.

A number of commentators have pointed out that many enterprises in the sector are currently in ‘survival’ mode due to the impacts of Covid-19, load-shedding and a generally depressed economy, and so resources are stretched. As a consequence transformation efforts may be taking a back seat to more pressing issues. This is true of many other sectors in South Africa as well.

A negative attitude towards BEE among some business owners may also be a factor in low reporting levels. The poor performance of government in terms of service delivery and the decline of state owned enterprises adds fuel to this viewpoint.

The number of enterprises that submitted valid B-BBEE reports to the FSCC by forestry sub-sector in the 2022/3 financial year was as follows:-

Contractors 132
Sawmillers 22
Pole producers 12
Growers 8
Fibre processors 10
Charcoal producers 9

Forestry contractors are the most diligent sub-sector when it comes to transformation, with 132 enterprises reporting.

The very low number of growers reporting is disappointing. There are around 1 300 medium size growers active in SA and one would expect more to be reporting their transformation status. In mitigation many of these growers are also involved in agriculture and may be reporting under the Agri Charter.

The 10 fibre processors that submitted their reports probably constitute most of the enterprises active in this sub-sector in SA.

The number of charcoal and pole producers that reported is also disappointing.

Forest Sector Highlights

Here are some highlights from the latest Annual Status of Transformation in the Forest Sector Report worth noting:-

• Medium and Large Enterprises (MLEs) recorded ‘remarkable’ scores in Socio-Economic Development, Enterprise & Supplier Development, Ownership and Skills Development.
• MLEs achieved an average score of 50% of target in the Management Control element for the first time.
• QSE Reports were received from only four of the six sub-sectors: Contractors - 58, Sawmillers – 6, Pole producers – 2, Fibre producers – 1; and zero from Growers and Charcoal producers. Nevertheless QSE’s performed well maintaining a Level 2 B-BBEE rating.
• The state-owned forestry company Safcol recorded a big B-BBEE rating improvement, jumping from Level 4 last year to Level 2.
• EMEs are exempted from compliance with the scorecard (they are only required to submit affidavits and/or their CIPC certificates). EME’s achieve an automatic level 4 if unenhanced (below 50% black ownership), while enhanced EMEs with 50-100% black ownership achieve Level 1 or Level 2. It’s no surprise that most of the EMEs that reported are Enhanced.

Commented Makhosazana Mavimbela, Executive Director of the Forest Sector Charter Council: "We are extremely thrilled to have achieved a level 3 B-BBEE rating with improvement also in the number of reporting entities. This performance should no doubt be an escalator for continuous improvements, reliable reporting and impactful B-BBEE implementation in the Forest Sector.

“As a sector, our new approach - besides celebrating this milestone - should be to have all reporting entities in the forest sector reporting annually and gradually elevating our reporting to a point where we are able to fully demonstrate the sector's performance and commitment to the principles and objectives of B-BBEE.”

Commented Forestry South Africa’s Ronald Heath: “We are delighted that the industry has achieved Level 3 status for the first time since the B-BBEE Act was introduced. This demonstrates objectively the progress that has been made in the transformation of the Sector. The achievement is all the more encouraging given the very challenging years which the Sector and the country have endured. It is positive to note the number of reporting entities has grown more than five times over the last three years.”

SA Inc. transformation scorecard

How does the Forest Sector stack up against the rest of South Africa when it comes to transformation?

According to Sanlam’s Transformation Gauge Report released in July this year, South Africa Inc. achieved a combined B-BBEE score of Level 3, showing an improvement in all the scorecard elements over previous years. This matches the Forest Sector’s overall Level 3.

“But there is still a long way to go,” cautions the Gauge Report.

It cites the Ownership element by way of example: SA has achieved 80.8% of the target, which is 25% voting rights in a company for black people. “Is this a good achievement after 30 years of democracy?”

The Gauge Report notes that the worst performing scorecard element in all sectors remains Management Control, achieving 69% of target, up from 56% last year.

The Report notes further that government is pushing through a raft of legislation aimed at forcing compliance with its transformation objectives, particularly from companies that want to do business with government entities. Examples of this are the Employment Equity Amendment Act of 2020 and the Draft Public Procurement Bill. While closer to home the Department of Water Affairs & Sanitation has gazetted draft regulations stipulating that water use licences will only be granted to companies with at least 75% black equity ownership.

The Report notes that government appears to be busy “re-calibrating the balance between incentives and penalties to drive compliance with B-BBEE.”

Unlocking economic development

The rationale behind government’s transformation objectives is to accelerate the entry and development of previously disadvantaged people into the mainstream economy (women and people with disabilities are included in these empowerment imperatives.). This is necessary due to the fact that under previous regimes people of colour were denied opportunities and deliberately excluded from participation in the mainstream economy. Since the advent of democracy in South Africa in 1994, government has moved to reverse the negative impacts of apartheid through its B-BBEE policies.

The thrust is broad-based black empowerment – it is not just about ownership, but includes skills development, supplier development, socio-economic development and management control. This approach is designed to broaden the impacts of empowerment, to reward empowerment efforts of enterprises across a broad front, and to accommodate a diversity of business ownership structures in the transformation journey.

If implemented effectively, it will serve as a boost for the whole South African economy by unlocking the skills and talents of all of its people, and is also critical to the creation of a stable, productive and harmonious society that has been historically skewed by apartheid.

The Forest Sector also stands to gain much from effective transformation, and all enterprises engaged in forest sector business are encouraged to participate. Submitting B-BBEE reports to the Forest Sector Charter Council is not only a legal imperative, it is also a good place to start on the transformation journey.

Reporting is not difficult. It does require a bit of admin, but any business owner who has a good handle on his or her own business should have little trouble reporting against the five scorecard elements. Exempted micro-enterprises with a turnover less than R10 million a year only need to submit affidavits and/or their CIPC certificates to the FSCC to comply.

Effective transformation is therefore central to the South African Forest Sector’s sustainability, and it needs to make a positive impact in the boardroom and on the ground!

For more detailed info on the Forest Sector’s transformation journey, see the following reports:

• Annual Status of Transformation in the Forest Sector Report 2022/23 -
• Sanlam’s Transformation Gauge Report -

Forest Sector transformation making progress

Khosi Mavimbela, Executive Director of the Forest Sector Charter Council.

The Forest Sector Charter Council, which is charged with supporting, promoting, guiding, facilitating, reporting and monitoring transformation of the Forest Sector by securing stakeholder compliance with the Amended Forest Sector Code, has noted encouraging trends in its latest ‘Status of Transformation’ report.

The Amended Forest Sector Code (FSC) applies to all entities operating in commercial forestry and first-level processing of wood products, and operating as Medium & Large Enterprises (MLEs), Qualifying and Small Enterprises (QSEs) and Exempted Micro Enterprises (EMEs). These include wood fibre processors, growers, sawmillers, pole treaters, charcoal manufacturers and forestry contractors. All entities are required to report annually to the Forest Sector Charter Council (FSCC) on their Broad-Based Black Economic Empowerment credentials as per the B-BBEE Act as Amended.

Big increase in submissions
A total of 113 businesses active in the South African forestry industry submitted valid B-BBEE certificates and affidavits to the FSCC during the 2021/2022 period – a significant increase over the 37 certificates submitted in the previous year. These statistics reveal a growing level of engagement with B-BBEE at all levels of the industry, despite a challenging business environment on many fronts.

A noteworthy achievement that was highlighted in the recently released 2021/22 Annual Report on the Status of Transformation in the Forest Sector, published by the FSCC, was that a growing number of medium and large forestry businesses submitted their B-BBEE certificates with underlying reports. These underlying reports provide valuable insights into each measured entity’s B-BBEE performance against the scorecard targets, and may also be an indicator of greater engagement with transformation initiatives.
B-BBEE performance, however, was pretty much on a par with previous years. This is reflected in the B-BBEE level achieved by forestry businesses. MLEs, with an annual turnover in excess of R50 million, maintained an average B-BBEE Level 4; QSEs (annual turnover between R10 million and R50 million) averaged Level 2; and EMEs (annual turnover up to R10 million) also achieved a Level 2 average.
“The forestry industry continues to make great strides in transforming the socio-economic landscape of the sector,” states the FSCC Annual Report. It also notes that the inclusion of Forestry in the Public Private Growth Initiative (PPGI) and the commitments reflected in the Forestry Sector Masterplan further demonstrates the sector’s commitment to investment, growth and transformation. The Forest Sector’s contribution to the PPGI initiative was an investment commitment of R11.7 billion. The initiative has so far created 4 644 jobs and has resulted in improved collaboration between the private and public sectors, notes the FSCC Report.

Figure 1 below compares the number of valid B-BBEE certificates and affidavits submitted to the FSCC by MLEs, QSEs and EMEs over the past three years. The total number of 113 certificate and affidavits in 2021/22 shows the highest number of submissions received since the gazetting of the Amended FSC and is a significant increase when compared to the 2020/21 reporting period. The FSCC Report also notes that the increase in the number of submissions received may be the result of the good working relationships that the FSCC has established with the various Forest Sector Associations “that assisted greatly in the collection of the information”. It is also an indicator of the Forest Sector’s overall commitment to transformation.

MLEs, including SAFCOL (the only state-owned Forestry enterprise) submitted 24 certificates and underlying reports - six more than in the previous year. For the first time since reporting on the Amended FSC, all MLEs that submitted valid B-BBEE certificates also submitted underlying reports. QSEs submitted a total of 46 B-BBEE certificates and affidavits, with eight certificates received from so-called ‘Unenhanced’ entities i.e., those with black ownership below 50%. All the eight Unenhanced QSEs also submitted underlying reports. Forty-three affidavits were received from EMEs, a significant increase from the previous year as well. Notably, significant increases were recorded from QSEs and EMEs which may be as a result of the bigger companies demanding B-BBEE credentials from their suppliers for the recognition of points on the Enterprise and Supplier Development element in particular. This is a crucial element as QSEs and EMEs are the chief beneficiaries of B-BBEE.

Figure 1: Certificates Received by Company Size over three reporting years

Figure 2 below shows the total number of submissions (B-BBEE certificate or affidavit) received for the 2021/22 reporting period, broken down into the Sub-Sectors. A high number of submissions were received from Contractors and these were mostly from QSEs and EMEs. Once again zero submissions were received from the Charcoal manufacturers.

Figure 2: Certificates Submission by Sub-sector, 2022

The Forest Sector’ transformation status is measured in terms of five key elements which contribute to Broad-Based Black Economic Empowerment, namely: Ownership, Management Control, Skills Development, Enterprise & Supplier Development and Socio-Economic Development.

Medium and Large Enterprises (MLEs)
The Medium and Large Enterprises are the biggest contributors to the B-BBEE programme by virtue of the size of their businesses (annual turnover above R50 million). This grouping includes the highest number of consistent B-BBEE reporting entities and is mostly represented by the larger Corporates. MLEs achieved an average of 80 points and maintained a level 4 B-BBEE rating on average.
In the reporting year under review, slight declines were observed in four of the five scorecard elements, namely Ownership, Skills Development (SD), Enterprise and Supplier Development (ESD) and Socio-Economic Development (SED). The biggest decline observed under the Skills Development element was anticipated.

“This could be as a result of a combination of factors such as a decline in revenue, the reprioritisation of the spend or that some of the skills development initiatives could not be recognised as per the learning matrix,” remarked Khosi Mavimbela, FSCC Executive Director.

The decline in the ESD score could also be a consequence of reduced profit margins due to COVID-19 impacts.

The Management Control element showed slight improvement. This is encouraging, given that most sectors across the South African economy score particularly poorly on this element. Only four MLEs had women executives on their boards, which indicates that the sector is still dominated by male executives. The decline in the participation of women on the boards of companies is a concern, as there were positive trends in this indicator in previous years.

The performance of MLEs on the Socio-Economic Development element over the past three years has been outstanding. This is still one of the best performing B-BBEE elements in the Forest Sector. These activities have a big impact in the rural areas where opportunities are otherwise limited.

Notably, the report reflected on the transformation performance of forestry companies listed on the Johannesburg Stock Exchange. All four (Mondi, Sappi, York and Merensky) are not only consistent reporters, but have also achieved good scorecard scores.

SAFCOL also continued to perform well though was disadvantaged by the low representation of women on their board as well.

It is interesting to note that most government departments require at least a Level 4 rated entity when awarding tenders, licences, grants etc., which means that most MLEs fall within this procurement frame.

Figure 3: MLE Overall Performance per Element as a Percentage of the Compliance Target

Qualifying Small Entities (QSEs)
QSEs are measured entities with an annual total turnover between R10 million and R50 million. QSEs are either Enhanced (majority black owned) or Unenhanced, (minority black owned).

Eight B-BBEE certificates were submitted by Unenhanced QSEs with the balance of 38 submitted by Enhanced QSEs. Sixteen Enhanced QSEs achieved a Level 1 with the remaining 22 achieving a Level 2. Five of the Unenhanced QSEs achieved a Level 1 score with the remaining three each receiving a level 2, 3 and 8 rating respectively.

Unenhanced QSEs performed exceptionally well in all the scorecard elements, achieving about 80% and above in all the elements and even achieving the full score on the Socio-Economic Development element.

The overall performance of QSEs is displayed in Figure 4 below.

Figure 4: QSE Overall Performance per Element as a Percentage of the Compliance Target

Exempted Micro Enterprises (EMEs)
EMEs (annual turnover below R10 million) are the main beneficiaries of B-BBEE. In most cases, such entities provide contracting services to the bigger entities. The Forestry Sector Masterplan acknowledges the need to develop EMEs engaged in forestry work as they have the potential to create more local jobs. The average black ownership profile within this group is 54% while the average black women ownership is 8% showing a decline from the previous year.

Figure 5 below shows the level achieved by the reporting EMEs in the year 2021/22.

Figure 5: EME B-BBEE levels achieved, 2022

“Commendable and very encouraging” is how the FSCC Annual Report described the Forest Sector’s overall B-BBEE performance, especially since it was achieved at a time when the entire world was recovering from the negative economic effects of the COVID-19 pandemic.

The Report noted that inconsistent reporting is still prevalent amongst the QSEs and EMEs, the majority of whom did not report in the previous two years.

“This is a call for concern considering that these are the main beneficiaries of the B-BBEE Policy and hence their participation in the forest economy is of chief importance,” commented Khosi.

“To those companies who continue to embrace meaningful B-BBEE, we thank you. My wish is for all if not more forest companies to continue to implement impactful B-BBEE, not only as a legal imperative, but more so as a strategic objective. We want to see the development of new sustainable businesses in all categories so as to efficiently grow the forest economy and broadly include as many potential role players and B-BBEE beneficiaries as possible,” concluded Khosi.