Presented during Tshikululu's first Serious Social Investing workshop, which took place on 25 and 26 February 2010. Terence Beney (partner, Feedbank Research and Analytics) discusses the findings of unique and comprehensive research into community trusts set up in BBBEE transactions.

1. Analysis of PDI Beneficiary Trusts as a Vehicle for BBBEE Formidable Risks, Substantial Opportunities

2. Community Trusts as BBBEE Vehicles Trust Vehicles are emerging as a popular response to the increasing emphasis on BBBEE There is very little documented research on the role of Trust Vehicles in BEE The anecdotal evidence suggests that the challenges associated with implementing a community trust are significant Some companies are sitting on a reputational time bomb as their Trust Vehicles poise to fail

3. Purpose of Research Explore the occurrence and role of Trust Vehicles in BBBEE deals Trust Vehicles included in study must: Approximate the criteria used to define “community trusts” in the BEE codes of good practice Be constituted or included in a deal for the purpose of improving the BEE profile of a private enterprise Document the successes, challenges and risks of Trust Vehicles in the context of BBBEE Distil lessons and make recommendations

4. Data Collection Two components: Quantitative desktop study of BEE deals and the role of Trust Vehicles Qualitative field study involving interviews with panel of key informants Literature Review Analysis of BEE Codes of Good Practice Quantitative study: Initial review of comprehensive BEE deals database (Empowerdex database from 2000 to end 2009; approximately 1400 deals) Further investigation into structure of deals in order to identify Trust Vehicles and further details Exploratory study: In-depth interviews with panel of key informants Key informants identified as individuals with substantial experience in the establishment and management of community trusts Findings from interview analysis validated with key informants

5. Contribution of Trusts to BBBEE Performance BBBEE codes of good practice continue to favour narrow over broad-based BEE Contribution of Trust Vehicle to BBBEE score A community trust contributes to Direct Empowerment on the BBBEE scorecard, which covers Ownership Direct Empowerment (Ownership and Management) accounts for 30% of the total score Ownership, to which a Trust contributes, accounts for 20% of the total score Ownership criteria emphasise voting rights and access to economic benefits While a Trust can broaden the base of Ownership, it has inherent complications. Initially it inevitably involves a restriction of voting rights and economic interest. Reputational risk: Does the Trust include a mechanism for voting rights to be exercised by appropriate natural persons when relevant? This is not about the management of the Trust BUT of the enterprise. Does the beneficiary community have unrestricted access to the economic benefit which the Trust entitles them to? Bottom line: to what extent is the enterprise exercising control over the Ownership vested in the Trust on behalf of a beneficiary community?

6. Persistent Challenges of PDI Beneficiary Trusts Defining beneficiary parameters Beneficiaryrepresentivity The fragility of community institutions Operating NOT constituting PDI BeneficiaryTrusts Managing the complexity of impact and relationships

7. Defining Beneficiary Parameters How do you define the parameters of “beneficiary community”? Geographic: how broad should you make it? Shared identity: by whose criteria? Shared traditional authority: what about migratory labour? The best case scenario Identity mobilised around an asset Using assets to leverage equity in business Represented by “communal property” association Traditional authority as an overlay The common scenario Increasingly Trust Vehicles do not benefit from a best case scenario The shared asset is created by sale of equity in a company The “beneficiary community” is then created or imposed by the benefactor The accompanying problems are legion

8. BeneficiaryRepresentivity Include beneficiary representatives on the board of trustees Are they true representatives? What special interests are they advocating? Are they managers of expectations or must their expectations be managed? Exclude beneficiary representatives from the board of trustees Will you be accused of gaming the scorecard system? Can you manage the reputational fallout? Will you maximise the goodwill return? Will you have the community intelligence to optimise your development spend? “You will elicit politics; you cannot spread patronage wide enough to avoid it.”

9. The Fragility of Community Institutions However you manage the governance, you will have to engage with formal community structures at some point You will have to find them or facilitate their establishment Fragility of community institutions: Tend to be voluntary: commitment involves a personal cost Tend to have low levels of capacity Community institutions tend to have an inconvenient turnover rate Community institutions are subject to persistent and often inscrutable patterns of local politics Introducing a new institution or a set of new obligations into existing institutions also introduces costs

10. Operating a PDI Beneficiary Trust The emphasis tends to be on the legal constituting of the vehicle in the context of the BEE deal At least equal attention needs to be devoted to how the entity will operate for beneficiaries to realise benefit Operational issues to consider: Governance Administration Implementing development projects, including: Informed project design Project implementation Project management Contractor management Monitoring, evaluation and reporting Stakeholder consultation and transparent, constant communication

11. Impact and Relationships The possibility of resources impacts social arrangements: you are likely introducing matters for contention and conflict across existing institutions The possibility of resources impacts expectations: beneficiaries will always expect results long before the income generating asset can produce them The management of resources necessitates the management of relationships between at least the following stakeholders: Benefactor Beneficiary community Trustees Administrators Implementing contractors Local authorities Traditional authorities Community leadership

12. Implementation Model The legal constitution of the entity The planning and engagement phase during which informed planning will occur, culminating in the introduction of the Trust to beneficiary communities and their early participation The pre-operational phase during which the operational systems are formalised, beneficiary representatives are appropriately capacitated and an initial portfolio of projects planned with beneficiary input The operational phase during which pilot projects are launched using a revenue stream supplemented by CSI funding. CSI funding is phased out as the dividend stream from the beneficiary asset comes online

13. Recommendations:Operational Arrangements Focus on planning operations more than legally constituting the Trust Time the inclusion of beneficiary representatives on the board of trustees appropriately Include legitimate community based entities in a formal consultative mechanism Appoint and pay administrators Formalise processes and procedures (applying for funds, awarding funds, planning projects, appointing contractors, M&E and reporting) M&E should mediated by an independent third party

14. Recommendations: Critical Planning Outcomes Facilitate access to resources for the beneficiary community and their representative structures: have a revenue stream in place to tie the Trust Vehicle over while the asset is being paid for (use CSI funding) Have a clear, agreed and documented plan for how the money will be spent before it gets into the bank account: this applies to all stages of the establishment of the Trust Vehicle – legal constitution; planning and engagement; operations

15. Recommendations: Capacitating Beneficiaries Support but avoid conflicts of interest: Don’t make them beholden unto you Facilitate a relationship with non-profit independent advisors Conduct a thorough work study to: Identify skills needed for beneficiary representatives to participate consequentially Identify the consequent skills gaps Make funds available for training

16. Recommendations: Stakeholder Relationship Management Time the launch of the Trust wisely Apply the art of stakeholder consultation: engage more than you think is necessary but not enough to fall into stakeholder paralysis Institute formal reporting mechanism between beneficiary representatives and beneficiary community Have an accessible community based presence (open an office) Be clear and transparent about the kind and quality of representation Be clear and transparent about what you are trying to achieve, and the timeline for achieving it