TOWARDS TRANSFORMATION IN THE WINE INDUSTRY: THE WINE CHARTER & INDUSTRY SCORECARD Johan van Rooyen CEO, SA Wine & Brandy Company and Chair, WCSC Technical Team

1. The Wine Economy today  Core business activities/Stakeholders  producers : < 100 ton + 50% < 500 ton + 80%  wineries : small private 83%; Co-ops 13%  Trade (?) - 97 : 67 wholesalers; 30 exporters  Civil society and community based organisations (±80)  Labour groupings (±11) Note: Size definitions (DTI-CGP) and stakeholders important

 Economic value of the wine industry  + R22 billion GDP contribution  Turnover + R10 billion  Exports + 3 billion and expanding  4x added value multiplier  + R4 billion wine tourism  Household income + R10 billion  + 250,000 employment opportunities (add 50,000 tourism); Positive employment & income linkages  Skew ownership; social legacies (later)  Highly competitive and fragmented industry, but business consolidations are developing

Trends in the competitiveness of the wine industry in South Africa ( )

Trends in the competitiveness of selected wine producing countries (1990 – 2003)

 Key role of Government – national and local: Policing & regulatory Service: certification Support systems: trade, R&D, DTI support, etc Levers and levies: licensing, water allocations, etc  Industry – Government partnership important: The Wine Industry Strategy Plan (WIP) as framework  Goals :  Competitiveness and profitability (tariffs, taxes, R&D, trade policy, etc)  Economic transformation & Empowerment (BEE Charter)  Sustainable Natural Resources Management (BWI, IPW)  Socially responsible consumption (ARA, “papsak”, BEE Charter)

 Increased competitiveness and world standing of the South African wine industry  A highly skewed ownership, skills and business regime  Racialised political economy  A history of problematic labour relations, social evils and fragmented civil society relations  Substantial positive rural linkages: income, employment, value add  Positive & negative legacies; but positive future prospects: productivity; power of ownership; unlocking resources; social sustainability; Fair trade prospects, etc 2. The context

The reasons for Black Economic Empowerment  Legislation requires and regulates –An economic growth strategy to support the attainment of an equal dispensation for black groups: Focus on business mobilisation and entrepreneurship development –Voluntary, except when doing business with the state or as a strategic industry –Agriculture is a strategic industry and licences are required to produce and distribute wine  Performance assessment and grading of contribution towards BEE required (in terms of definitions and a scorecard)

3. Wine industry Charter Process (since October 2003)  Wine Charter Steering Committee (WCSC) –Representative of all role players (Table of role players) –Regular monthly meetings –Technical support by specialists and industry groupings  Linking with other groups (manage overlaps) –Liquor traders and trade-mark owners –AgriBEE –DTI – Codes of Good Practice (CGP)

WCSC: Role players Agricultural Workers Association of SA (AGRIWASA) Black Alliance for the Wine & Spirits Industry (BAWSI) Cape Winelands District Municipality Cape Women’s Forum Disabled groupsFood and Allied Workers Union (FAWU) Independent Unions Group (ITUF) National African Farmers Union (NAFU) National Union of Food, Beverages, Wine and Allied Workers (NUFBWSAW) Olifants River Black Economic Empowerment Forum (ORBEEF) Rural Development Network (RUDNET) Siyanda District Municipality SA Liquor Brand Owners Association (SALBA) SA Vintners Association (SALVA)

WCSC: Role players VinProWine Cellars SA (WCSA), the South African Wine & Brandy Company (SAWB) The South African Wine Industry Trust (SAWIT) Winelands District Municipality Wine Tourism Wholesale Merchants ForumWomen in Wine Women on Farms Project (WFP) Youth Groups

Wine Industry Charter  7 “Internal” Drafts to date  WCSC meeting of 25 April 2006 took decision to distribute Charter among interest groups first for workshopping  End of July : to the public and the media  August/September : presented to the Minister  Electronic version available from - or

Contents of the Charter 1.Introduction 2.Challenges 3.The mission statement 4.The scorecard Annexures: The context of the wine industry (That which directs the Wine Charter)  Historical context  Globalization  Economic context  Local context  Transformation to date  Wine industry Strategy Plan (WIP)

Wine Industry Charter: Consultative Process  Invitation to interest groups to give: –Comments on the proposed scorecard, its expected contribution to transformation, and problems likely to be encountered during implementation –Advice regarding the completion of the Charter. These include: Strategies to support projects and programmes across all elements of the scorecard; and The institutional structure of the ‘Wine Charter Council’: institutions to implement the support strategies, and institutions to monitor progress during implementation Appropriate linkages with other charters (AgriBEE, Liquor Industry, etc) Scenarion planning / what-if analysis to set realistic and effective targets (GP&A facilitation)

4.Link to Government’s Code of Good Practice (CGP)  Important guideline to all in the wine industry  Qualifying enterprises are expected to complete a scorecard to determine their contribution to BEE (qualifications still outstanding)  Industries may propose their own scorecards, but there is a limit to deviations from the code of good practice of the Department of Trade and Industry (DTI)  For the wine industry, it is necessary that the scorecard be fully aligned to the AgriBEE and Liquor Trade scorecards i.e. complete overlaps

Scorecard for large enterprises (GP) Ownership20 Control10 Employment Equity10 Skills Development20 Preferential Procurement20 Enterprise Development10 Residual Note: GP + R2m turnover; AgriBEE proposal + R50m turnover wine industry?

Scorecard for smaller enterprises (GP) (QSEs) Ownership20 Control20 Employment Equity20 Skills Development20 Preferential Procurement20 Enterprise Development20 Residual Note: GP + R R2m turnover; AgriBEE proposal + R5m-R50m turnover wine industry?

Small enterprises (GP)  Exempt (receive level 4 basis points), but could still have an opportunity to accumulate a high score and position themselves as “preferential partners”  GP below R turnover – to be revised?  AgriBEE below R5m turnover  Wine industry?

Contribution levels (GP) BEE StatusQualification Recognition level for Preferential Procurement Level 1 contributor 100 points on scorecard135 Level 2 contributor >85 but < 100 points on scorecard 125 Level 3 contributor >75 but < 85 points on scorecard 110 Level 4 contributor >65 but < 75 points on scorecard 100 Level 5 contributor >55 but < 65 points on scorecard 80 Level 6 contributor >45 but < 55 points on scorecard 60 Level 7 contributor >40 but < 45 points on scorecard 50 Level 8 contributor >30 but < 40 points on scorecard 10 Non-contributor<300 Wine Charter proposal for “small enterprises” = level 1 score GP&A proposal for “small enterprises’ = level 4 score

Who completes the scorecard?  From a wine industry perspective, participants are defined as enterprises whose core business focuses on any aspect of the value chain for wine and who over three financial years have earned on average more than 50% of their turn over from these activities before being rated.  Producers, cellars, trade, services, service providers  Overlap with other Charters?

5. Details of the Wine Charter: The Scorecard - Ownership IndicatorWeightTarget Voting rights Executable voting rights by black persons325% + 1 vote Executable voting rights by black women210% Economic interest Economic interest in the enterprise that black people are entitled to425% Economic interest in the enterprise that black women are entitled to210% Economic interest in the enterprise that black designated groups, participants in distribution or employee schemes, or participants in corporations are entitled to 13% Realization points Execution of ownership1No limitations Net shareholders’ interest7 10% of target (yr 1) 20% of target (yr 2) 40% of target (yr 3-4) 60% of target (yr 5-6) 80% of target (yr 7-8) 100% of target (yr 9-10) Bonus points Involvement of black new entrepreneurs, black respected participants in broad-based ownership schemes, or black participants in corporations 3 Bonus per each level of five percent “Effective black land ownership”. This is the value of the land component as a percentage of the value of the total transaction multiplied by the percentage of black ownership 512.5%

How does this promote land reform? Assumption: Land as % of transaction (1) Assumption: % Ownership (2) Calculation: %: Land accessed (by value) (3 ) = (1 ) x (2) Target (4) Weight (5) Bonus points (6)= (3 )/ (4 )* (5) 30%25%7.5%12.5%53 50%25%12.5% 55 80%25%20%12.5%55 30%15%4.5%12.5% %15%7.5%12.5%53 80%15%12%12.5%54.8

Control IndicatorsWeightTarget Participation in board of directors Percentage of executable voting rights executable by board members that are black to the total number of voting rights executable by board members 3 50% Executive members of the board who are black1 50% Executive members of the board who are black women 1 25% Bonus points Percentage of independent black non-executive board members that form part of the total number of non-executive board members 1 40%

Control (QSEs) IndicatorsWeightTarget Black representation on level of owner/manager % Bonus points Representation of black women on level of owner/manager 210%

Employment Equity IndicatorsWeightTarget Black people with disabilities as % of full-time employees24% Black people employed as Senior and Top managers as % of all Senior and Top managers 260% Black women employed as Senior and Top managers as % of all Senior and Top managers 230% Black people employed on professional, experienced specialist, professional and middle management levels as % of total employment on experienced specialist, and middle management levels 275% Black women employed on professional, experienced specialist and middle management levels as % of total employment on professional, experienced specialist, and middle management levels 140% Black people employed as skilled technical and academically trained workers, junior managers supervisors, foremen, and superintendents as % of total employment on level of skilled technical and academically trained workers, junior managers, supervisors, foreman and superintendents 180%

Employment Equity (QSEs) IndicatorsWeightTarget Black representation on management/control level 640% Black women on management/control level 620% Black employees as % of all employees 470% Black women as % of all employees 435%

Skills development IndicatorsWeightTarget Skills Development Expenditure on skills development (the score will be adapted in direct relation to the intended literacy and numeracy levels until a level of 80% [ABET level 3 or Grade 7] has been reached) 62% Expenditure on skills development among black women employees 21.4% Expenditure on skills development among black disabled employees 10.3% Learnerships and/or Skills programmes Number of black employees on SETA approved learnerships and/or skills programmes as % of total number of employees 210% Number of black women on SETA approved learnerships and/or skills programmes as % of total number of employees 22.5% Number of black unemployed and/or rural black youth on SETA approved learnerships and/or skills programmes as % of toal number of employees 11%

Skills development Organisation Transformation Index Existence of a comprehensive and fully established BEE strategy that is being implemented 1Yes Appointment of a skills development facilitator with the authority to carry out transformation initiatives 1Yes Existence of a policy of non-discrimination, widely publicized by the enterprise, as well as external training in diversity management 1Yes Alignment with existing labour legislation1Yes Implementation of an effective human resource management plan 1Yes Existence of a programme which gives practical effect to the intended programmes 1Yes Bonus points Support black people in launching sustainable enterprises through skills transfer without approved qualifying mentorship programmes accredited by the relevant SETA 5Yes

Skills development (QSEs) IndicatorsWeightTarget Application submitted to National Skills Fund 640% Quantifiable expenditure on skills development for black employees over and above the Skills Development Levy as % of the relevant expenditure (the score will be adapted in direct relation to the level of literacy and numeracy in the enterprise until a level of 80% (ABET level 3 or Grade 7) has been reached 152% Support back people in launching sustainable enterprises through skills transfer within approved qualifying mentorship programmes accredited by the relevant SETA 5Yes

Preferential procurement IndicatorsWeightTarget Expenditure on procurement from providers based on their BEE contribution levels as % of the total number of purchases 1570% Expenditure on procurement from QSE providers based on their BEE contribution levels as % of the total number of purchases 415% Expenditure on procurement from EME providers based on their BEE contribution levels as % of total number of purchases 15%

Preferential procurement (QSEs) IndicatorsWeightTarget Expenditure on procurement from providers based on their BEE contribution levels as % of total procurement 2050%

Enterprise development IndicatorsWeightTarget Cumulative non-recoverable contributions made as % of cumulative net profit after tax, measured from the starting date till the date calculated 62% Cumulative non-recoverable contributions made as % of cumulative net profit after tax, measured from the starting date till the date calculated 43% Bonus points: Qualifying contributions directly resulting in a rise in employment in the previous year 1

Enterprise development  The following multipliers apply: Employment in rural areas or areas indicated by the state 1.5 Contribution to exempt micro enterprises (EME’s)1.25 Support the production of goods/services not yet made in South Africa 1.5 Contributions to warehousing funds1.25 Support to land reform1.5 Should an enterprise choose to make non- recoverable contributions only, then the weight changes to 10 and the target to 3.3%

Enterprise development (QSEs) IndicatorsWeightTarget Qualifying enterprise development contributions by the QSE as % of the net profit after tax 2029%

Rural development and poverty eradication: farming community IndicatorWeight 1 Provision of good quality housing at a level higher than specified in Sector Determination 13, provided ALL specifications of SD 13 are met. This includes access to safe drinking water and toilet facilities. 4 2 Contribution to or provision of sport and recreational facilities as well as transport to participate in these as % of cumulative net profit after tax, measured from the starting date till date calculated 1 3Availability and access to health and welfare services, including payment for or provision of health services, raising awareness of and treatment of HIV/Aids, care for the aged and disabled, programmes to combat malnutrition, drug abuse, ph syndrome, amp, as well as provision for retirement and funeral costs measured s % of cumulative net profit after tax, measured from the starting date till the date calculated 3

Rural development and poverty eradication: farming community 4 Investment in education: Support to ABET; education for children including support to farm schools, help with school fees, pre-school education, aftercare, encouragement for post-matric education and transport measured as % cumulative net profit after tax, measured from the starting date till the date calculated Remuneration: Specifically remuneration above the minimum wage as specified in Sector Determination 13, on condition that ALL specifications of SD 13 are met. (0.5) 10% above 20% above 6 Providing a safe and healthy living environment: Criteria and above legal stipulations such as measures against drowning, exposure to danger, access to means of communications. 1Yes 7 Care for the environment: Implementation of programmes aimed at Biodiversity & Wine Initiative and the Integrated Production of Wine guidelines. 20.5

Rural development and poverty eradication: No farming community IndicatorsWeightTarget Cumulative rand value of non-recoverable qualifying Corporate Social Investment contributions as % of cumulative net profit after tax, measured from the starting date till the date calculated. Contributions must focus on the broader community, and include social development, responsible alcohol use, support for education in the interest of the wine industry, and bursaries to study agricultural sciences, viticulture and oenology % Cumulative rand value of qualifying industry-specific contributions measured as % of cumulative net profit after tax, measured from the starting date to the date calculated. Contributions must focus on broader community, and include social development, responsible use of alcohol, and support for education which is in the interest of the wine industry, and bursaries to study agricultural sciences, viticulture and oenology %

Rural development and poverty eradication: No farming community (QSEs) IndicatorsWeightTarget Qualifying contributions to rural development and poverty eradication, as % of cumulative net profit after tax, measured from the starting date till date calculated. 202%

Summary: Wine Charter & Industry Scorecard ItemsLargeQSE’sSmall Ownership & control25(+9%)40 (+8%) Employment Equity skills1020 Skills20 (+5) 50* Preferential procurement20 Enterprise development10 (+1)20 Rural development, Poverty eradication, CSR * Points (max)100 (+15)140 (+13)100* * Voluntary in order to move to a level 2 contributor (level 1 if black owned)

6. Strategic Focus on Growth with Equity: Deviations based towards: - Contributions by all (incentives) - Growth with equity focus - Contribution to Land Reform if so chosen - Focus of social capital and skills 1 In terms of the Codes an enterprise is exempt if its turnover is <R per year. This means :  They need not complete a scorecard  When another enterprise buys from the, they are regarded as “Level 4 participants”, irrespective of the ownership. If black-owned, Level 4 contributor. 2 The wine industry wants everybody to participate. It is therefore proposed that :  A small enterprise, if it so wishes, may voluntarily complete the Skills Development and Residual sections of the scorecard (each with a weight of 50), and if their score is high enough, they will be rated as a Level 2 contributor. If black-owned, a Level 1 contributor.

 Wine industry accepts cut-off level of Codes of Good Practice but must align with AgriBEE and “Liquor Industry” Charter. Deviations from the Code of Good Practice 3. Includes land reform as an option in the Ownership and Enterprise Development elements; 4. Change the name of the Management Control element to the Control element, reduce its weight to 5 points and include only those indicators dealing with representation on the Board; 5. Group the Senior and other Top Management indicators with the Employment Equity element of the scorecard

6. Increase the weight of the Rural Development and Poverty Eradication element to 15 points (Large enterprises) 7. Distinguish between enterprises with and those without people living on the farm 8. Change the indicators, weights and targets where there are people living on the farm

Concluding thoughts : Management tool (complicated) Size critical Perceptions critical Provide comments