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.