TOWARDS TRANSFORMATION IN THE WINE INDUSTRY THE WINE

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 Ø Core business activities/Stakeholders § § § producers - 4435 : < 100 ton + 50% < 500 ton + 80% wineries - 505 : small private 83%; Co-ops 13% Trade (? ) 30 exporters 97 : 67 wholesalers; § Civil society and community based organisations (± 80) § Labour groupings (± 11) Note: Size definitions (DTI-CGP) and stakeholders important

Ø Economic value of the wine industry § § § § § + R 22 billion GDP contribution Turnover + R 10 billion Exports + 3 billion and expanding 4 x added value multiplier + R 4 billion wine tourism Household income + R 10 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 (1961 -2003)

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

Ø 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 Ø Industry – Government partnership important: The Wine Industry Strategy Plan (WIP) as framework Ø Goals: v Competitiveness and profitability (tariffs, taxes, R&D, trade policy, etc) v Economic transformation & Empowerment (BEE Charter) v Sustainable Natural Resources Management (BWI, IPW) v Socially responsible consumption (ARA, “papsak”, BEE Charter)

2. The context § 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 Ø Positive & negative legacies; but positive future prospects: productivity; power of ownership; unlocking resources; social sustainability; Fair trade prospects, etc

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 – Agri. BEE – 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 groups Food 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 Vin. Pro Wine Cellars SA (WCSA), the South African Wine & Brandy Company (SAWB) The South African Wine Industry Trust (SAWIT) Winelands District Municipality Wine Tourism Wholesale Merchants Forum Women 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 nv@sun. ac. za or gerhard@sawit. co. za

Contents of the Charter 1. 2. 3. 4. Introduction Challenges The mission statement 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 (Agri. BEE, 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 Agri. BEE and Liquor Trade scorecards i. e. complete overlaps

Scorecard for large enterprises (GP) Ownership 20 Control 10 Employment Equity 10 Skills Development 20 Preferential Procurement 20 Enterprise Development 10 Residual 10 100 Note: GP + R 2 m turnover; Agri. BEE proposal + R 50 m turnover wine industry?

Scorecard for smaller enterprises (GP) (QSEs) Ownership 20 Control 20 Employment Equity 20 Skills Development 20 Preferential Procurement 20 Enterprise Development 20 Residual 20 140 Note: GP + R 300 000 -R 2 m turnover; Agri. BEE proposal + R 5 m-R 50 m 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 300 000 turnover – to be revised? § Agri. BEE below R 5 m turnover § Wine industry?

Contribution levels (GP) BEE Status Level 1 contributor Level 2 contributor Level 3 contributor Level 4 contributor Level 5 contributor Level 6 contributor Level 7 contributor Level 8 contributor Non-contributor Qualification Recognition level for Preferential Procurement 100 points on scorecard 135 >85 but < scorecard >75 but < scorecard >65 but < scorecard >55 but < scorecard >40 but < scorecard >30 but < scorecard <30 100 points on 125 85 points on 110 75 points on 100 65 points on 80 55 points on 60 45 points on 50 40 points on 10 0 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 Indicator Weight Target Voting Executable voting rights by black persons 3 25% + 1 vote rights Executable voting rights by black women 2 10% Economic interest in the enterprise that black people are entitled to 4 25% Economic interest in the enterprise that black women are entitled to 2 10% Economic interest in the enterprise that black designated groups, participants in distribution or employee schemes, or participants in corporations are entitled to 1 3% Execution of ownership 1 No limitations Net shareholders’ interest 7 10% of target (yr 1) Economic interest Realization points 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 5 12. 5%

How does this promote land reform? Assumption: Land as % of transaction Assumption: % Ownership Calculation: %: Land accessed (by value) Target Weight Bonus points (1) (2) (3 ) = (1 ) x (2) (4) (5) (6)= (3 )/ (4 )* (5) 30% 25% 7. 5% 12. 5% 5 3 50% 25% 12. 5% 5 5 80% 25% 20% 12. 5% 5 5 30% 15% 4. 5% 12. 5% 5 1. 8 50% 15% 7. 5% 12. 5% 5 3 80% 15% 12. 5% 5 4. 8

Control Indicators Weight Target 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 black 1 50% Executive members of the board who are black women 1 25% Bonus points 1 40% Percentage of independent black non-executive board members that form part of the total number of non-executive board members

Control (QSEs) Indicators Weight Target Black representation on level of owner/manager 20 25. 1% Bonus points Representation of black women on level of owner/manager 2 10%

Employment Equity Indicators Weight Target Black people with disabilities as % of full-time employees 2 4% Black people employed as Senior and Top managers as % of all Senior and Top managers 2 60% Black women employed as Senior and Top managers as % of all Senior and Top managers 2 30% Black people employed on professional, experienced specialist, professional and middle management levels as % of total employment on experienced specialist, and middle management levels 2 75% Black women employed on professional, experienced specialist and middle management levels as % of total employment on professional, experienced specialist, and middle management levels 1 40% 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 1 80%

Employment Equity (QSEs) Indicators Weight Target Black representation on management/control level 6 40% Black women on management/control level 6 20% Black employees as % of all employees 4 70% Black women as % of all employees 4 35%

Skills development Indicators Skills Development Learnerships and/or Skills programmes Weight Target 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) 6 2% Expenditure on skills development among black women employees 2 1. 4% Expenditure on skills development among black disabled employees 1 0. 3% Number of black employees on SETA approved learnerships and/or skills programmes as % of total number of employees 2 10% Number of black women on SETA approved learnerships and/or skills programmes as % of total number of employees 2 2. 5% Number of black unemployed and/or rural black youth on SETA approved learnerships and/or skills programmes as % of toal number of employees 1 1%

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

Skills development (QSEs) Indicators Weight Target Application submitted to National Skills Fund 6 40% 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 15 2% Support back people in launching sustainable enterprises through skills transfer within approved qualifying mentorship programmes accredited by the relevant SETA 5 Yes

Preferential procurement Indicators Expenditure on procurement from providers Weight Target 15 70% 4 15% 1 5% based on their BEE contribution levels as % of the total number of purchases Expenditure on procurement from QSE providers based on their BEE contribution levels as % of the total number of purchases Expenditure on procurement from EME providers based on their BEE contribution levels as % of total number of purchases

Preferential procurement (QSEs) Indicators Expenditure on procurement from providers based on their BEE contribution levels as % of total procurement Weight Target 20 50%

Enterprise development Indicators Weight Target Cumulative non-recoverable contributions made as % of cumulative net profit after tax, measured from the starting date till the date calculated 6 2% Cumulative non-recoverable contributions made as % of cumulative net profit after tax, measured from the starting date till the date calculated 4 3% 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 funds 1. 25 Support to land reform 1. 5 Should an enterprise choose to make nonrecoverable contributions only, then the weight changes to 10 and the target to 3. 3%

Enterprise development (QSEs) Indicators Qualifying enterprise development contributions by the QSE as % of the net profit after tax Weight Target 20 29%

Rural development and poverty eradication: farming community Indicator Weight 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 3 Availability 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. 3 0. 5 5 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. 1 Yes 7 Care for the environment: Implementation of programmes aimed at Biodiversity & Wine Initiative and the Integrated Production of Wine guidelines. 2 0. 5

Rural development and poverty eradication: No farming community Indicators Weight Target 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. 7. 5 1. 5% 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. 7. 5 1. 5%

Rural development and poverty eradication: No farming community (QSEs) Indicators Qualifying contributions to rural development and poverty eradication, as % of cumulative net profit after tax, measured from the starting date till date calculated. Weight Target 20 2%

Summary: Wine Charter & Industry Scorecard Items Large QSE’s 25(+9%) 40 (+8%) 10 20 20 (+5) Preferential procurement 20 20 Enterprise development 10 (+1) 20 15 20 50* 100 (+15) 140 (+13) 100* Ownership & control Employment Equity skills Skills Rural development, Poverty eradication, CSR Points (max) * Voluntary in order to move to a level 2 contributor (level 1 if black owned) Small 50*

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 300 000 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 Agri. BEE 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