Submission on Broad-Based Black Economic Empowerment Act: BEE should be scrapped, not reformed - 4th December 2012.

Black economic empowerment (BEE) is currently governed, in the main, by the Broad-Based Black Economic Empowerment Act of 2003 (the Act) along with the generic codes of good practice (the codes), which were gazetted by the Department of Trade and Industry (DTI) in February 2007 and entered into force in August 2008.
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Submission on Broad-Based Black Economic Empowerment Act: BEE should be scrapped, not reformed - 4th December 2012.

Black economic empowerment (BEE) is currently governed, in the main, by the Broad-Based Black Economic Empowerment Act of 2003 (the Act) along with the generic codes of good practice (the codes), which were gazetted by the Department of Trade and Industry (DTI) in February 2007 and entered into force in August 2008.


BEE SHOULD BE SCRAPPED, NOT REFORMED

South African Institute of Race Relations

Submission to the

Department of Trade and Industry

Regarding

the Revised Broad-Based Black Economic Empowerment

Codes of Good Practice

Johannesburg, 4th December 2012

 

Structure:

Introduction: the current generic codes (page 1)

Criticisms of BEE and calls for reform (page 3)

            from the ANC (page 3)

            from Cosatu and the SACP (page 3)

            from small black business and other commentators (page 4)

            calls for reform (page 4)

Key differences between the current and revised codes (page 5)

            The current codes (page 5)

            Revised codes (page 5)

            Implications of the revised codes (page 8)

Economic costs and consequences of BEE (page 9)

            Direct costs (page 9)

            Indirect costs (page 10)

The need for a new approach (page 11)

           

Introduction: the current generic codes

Black economic empowerment (BEE) is currently governed, in the main, by the Broad-Based Black Economic Empowerment Act of 2003 (the Act) along with the generic codes of good practice (the codes), which were gazetted by the Department of Trade and Industry (DTI) in February 2007 and entered into force in August 2008.

 The generic codes potentially apply to firms in all sectors of the economy, unlike the various sectoral charters which have been negotiated by stakeholders within specific sectors and apply solely within those spheres. (Examples of sectoral charters include the liquid fuels charter of 2000, the mining charter which entered into force in 2004 as an adjunct to the Mineral and Petroleum Resources Development Act of 2002, and the finance charter of 2003.) The generic codes currently do not apply within parts of the economy where recognised sectoral charters are in force.

 The current generic codes put pressure on businesses with annual turnover exceeding R35m to comply with seven components or ‘elements’ of BEE. Firms with annual turnover between R5m and R35m are expected to comply with four out of the seven elements but may choose for themselves which these four should be and ignore the other three. Firms with annual turnover of less than R5m are exempt from BEE obligations. [Department of Trade and Industry, Codes of Good Practice on Black Economic Empowerment, Government Gazette, 9 February 2007]

 The codes lay down different compliance targets for each of the seven elements. For example, under the ownership element, firms must seek, by 2017, to transfer 25% (plus one vote) of their equity to ‘black’ South Africans, these being Africans, Indians, or so-called ‘coloured’ people. Under the preferential procurement element, by way of further illustration, firms must seek to buy 70% by value of the goods and services they need each year from ‘empowered’ firms with good BEE status levels (see below). Procurement from a firm with the highest possible BEE rating is regarded as equivalent to R135 for every R100 spent.

 Companies are measured each year on the extent of their compliance with the targets laid down for each element in the generic codes. The process of measuring compliance and assigning points for performance is carried out by accredited BEE verification agencies. These agencies are supposed to apply uniform methods laid down by the DTI in a verification manual, but this is a lengthy and complex document which is not easy to understand or apply in a consistent manner.

 Verification agencies are expected to check on how well firms have met their BEE targets and then accord them BEE points according to scorecards laid down in the codes for each of the different elements of BEE. For example, a maximum of 20 points can be earned for meeting the target of 25% on the ownership element, while another 20 points can be earned by firms that succeed in bringing their procurement from black-empowered firms up to 70% of the value of their total annual procurement.

 Based on the points earned on each element and the overall score thus attained, verification agencies must assign firms a BEE status level identifying the ‘level’ of their ‘contribution’ to BEE. There are eight levels of BEE contribution. These range from level one, the highest, for firms with 100 points, to level eight, the lowest, for those with 30 points. Firms which earn less than 30 points in a year are seen as making no contribution to BEE, while procurement from such firms counts nothing in the earning of BEE points.

 Since BEE is supposedly voluntary, no formal penalties apply for failure to meet the compliance targets laid out in the codes. However, firms with poor BEE scores under the codes are likely to be barred from government contracts, and may also find it difficult to obtain necessary licences from the State. In addition, since businesses can earn additional BEE points by procuring goods and services from companies with good BEE scores, all firms are under pressure to seek high BEE status levels so as to give other companies incentives to buy from them. Conversely, firms with low BEE status levels may find themselves left out of procurement chains and battling to do business at all.

 The rules governing BEE are thus complex and multifaceted. They are often also vague and difficult to interpret or apply, but their scope has nevertheless expanded over the years. As BEE obligations have grown, so too have criticisms of the policy. BEE is supposed to help empower the poor, but instead it has brought most benefit to a small politically-connected elite while fuelling corruption, discouraging investment, squandering skills, and diverting scarce capital from more productive use.

 In recent times, many of the criticisms of BEE have come from within the ruling African National Congress (ANC) and its allies in the Congress of South African Trade Unions (Cosatu), and the South African Communist Party (SACP). Even black small business, which was supposed to draw particular benefit from BEE, has been critical of it.

 

Criticisms of BEE and calls for reform

From the ANC: ‘South Africa’s BEE policies…have not worked,’ said the minister of finance, Pravin Gordhan, in November 2010. ‘BEE policies did not make South Africa a fairer and more prosperous country. They led to a small elite group benefiting, and that was not good enough in terms of benefiting 45m people.’ [Business Report 29 November 2010]

 In September 2011 President Jacob Zuma echoed this concern, telling the Confederation of Black Business Organisations: ‘We are concerned that BEE has not yet benefited a wide enough segment of our society.’ Mr Zuma also lamented the lack of ‘visible black industrialists’ after a decade or more of BEE interventions, adding: ‘We do not see large factories or mines that are owned by black people… The economy must produce authentic black entrepreneurs, who own factories and manufacture textiles, metal products, or whatever the market requires.’ [President Jacob Zuma, address to the Confederation of Black Business Organisations, Sandton, 6 September 2011]

 From Cosatu and the SACP: Cosatu has often criticised BEE for enriching the few and giving impetus to corruption. In October 2012 Zwelinzima Vavi, general secretary of Cosatu, criticised the policy again, castigating ‘the oasis of opulence’ to which a narrow ‘black elite’ had managed to gain entry via ‘dirty’ BEE ownership deals. [Business Day 18 October 2012]

 According to the SACP, BEE needs a drastic overhaul as it is ‘a failed project “at the heart of the corruption”…rampant in South Africa’. Adds the party: ‘We must honestly and urgently review BEE as it has not addressed the huge economic inequalities and has led to the empowerment of only a small elite instead of the majority.’ [The Citizen 28 April 2011]

 From small black business and other commentators: In November 2010 the president of the National African Federated Chamber of Commerce and Industry (Nafcoc), Lawrence Mavundla, said that BEE and preferential procurement had marginalised small businesses rather than helping it. It had also promoted ‘tenderpreneurs who were tender thieves because they got their tenders through [political] connections’. [Business Report 30 November 2010]

 Repeated criticism has also come from Moeletsi Mbeki (brother of former president Thabo Mbeki). In his book Architects of Poverty: Why African Capitalism Needs Changing, published in 2009, Mr Mbeki wrote that BEE ‘strikes a fatal blow against black entrepreneurship by creating a small class of unproductive but wealthy black crony capitalists made up of ANC politicians’. It thus robs South Africa of the key to economic and industrial development: an entrepreneurial bourgeoisie. ‘These are the businessmen, industrialists, risk-takers and private investors who alone can create a developed, modern state.’ [Business Day 17 July, 14 December 2009, The Citizen 21 September 2009]

 Since then, Mr Mbeki has continued to question the value to the country of creating what he terms ‘a class of idle rich ANC politicos’. What South Africa needs is an entrepreneurial middle class capable of creating wealth and expanding the economy, he says. Instead, BEE is generating an entitlement culture, ‘whereby black people who want to go into business think they should acquire assets free, and that somebody else is there to make them rich, rather than that they should build enterprises from the ground’. [Business Day 10 February 2011]

 In 2011 Jenny Cargill, a BEE consultant who for many years was a proponent of the strategy, warned that BEE ownership deals had cost between R550bn and R600bn between 1998 and 2008, yet were largely ‘non-productive’. By contrast, adds Ms Cargill, the amount spent by the State on housing and land reform in the same period was much less, at R87bn. Moreover, she notes, the more scarce capital is put into empowerment financing, ‘the less there is for housing, infrastructure, and so on’. [Business Day 11 March 2011; Jenny Cargill, Trick or Treat: Rethinking Black Economic Empowerment, Johannesburg, Jacana Media, 2010]

 

Calls for reform

Calls for reform have grown in tandem with such criticisms of BEE.  However, instead of recognising the high costs and inherent unworkability of BEE, the DTI’s response has been to tighten up the BEE codes still further via the proposed revisions gazetted by the minister of trade and industry, Rob Davies, in October 2012.


Key differences between the current and revised codes

The aim of the revised codes is to strengthen BEE rules regarded by many BEE proponents as too lenient, ‘like an exam which is easy to pass’, as a BEE analyst, Duma Gqubule, said in February 2012. [The New Age 23 February 2012] According to Dr Davies, the revised codes will help ‘plug the gaps businesses have taken advantage of’, including a ‘tick-box’ mentality. [Business Day 3 October 2012]

 

The current codes

The current codes contain seven elements. These elements, and the points that can currently be earned for each of them, are: [The Citizen 3 October 2012; Department of Trade and Industry, Revised Broad-Based Black Economic Empowerment Codes of Good Practice, Government Gazette, 5 October 2012, pp9-10]

            Element                                                                                   Points available

·      ownership                                                                                                20

·      management control                                                                                10

·      employment equity                                                                                  15       

·      skills development                                                                                   15

·      preferential procurement                                                                         20

·      enterprise development                                                                           15

·      socio-economic development (or corporate social responsibility)             5

Total points available:                                                                                    100     

 

Revised codes

The new codes propose reducing these seven elements to five, to be achieved by combining some of the current elements. Management control will thus be combined with employment equity to generate a single new element called management control. Similarly, preferential procurement and enterprise development will be combined into one element called ‘enterprise and supplier development’.

 The five ‘new’ elements and the points available for each will be as follows: [The Citizen 3 October 2012; DTI, Revised codes, pp9-10]

            Element                                                                                   Points available

·      ownership                                                                                                 25

·      management control                                                                                 15

·      skills development                                                                                    20

·      enterprise and supplier development                                                        40

·      socio-economic development                                                                   5

Total points available:                                                                                      105

 All companies (except exempted micro enterprises with annual turnover of R10m, rather than R5m, as at present) with have to comply with all five elements. [Finweek 18 October 2012] Smaller firms will no longer be able to choose four out of seven, as is currently the case.

 In addition, three of these five elements are identified as ‘priority’ elements, where a minimum ‘threshold’ level of compliance, amounting to 40% of the specified targets, must be attained.  These three elements are ownership, skills development, and enterprise and supplier development. 

 All enterprises with annual turnover exceeding R50m (up from R35m) must achieve the 40% minimum on all three of these priority elements, failing which they will have their overall BEE status level reduced by two levels. [Business Day, The Citizen 3 October 2012] (Under the current codes, as noted and further explained below, there are eight levels of BEE ‘contribution’ ranging from ‘level one’, the highest – for firms with 100 points – to ‘level eight’, the lowest, for those with 30 points.)

 Qualifying small enterprises (those with annual turnover of between R10m and R50m, up from the present R5m to R35m) must achieve the 40% minimum on the ownership element and on one of the other two priority elements: either skills development, or enterprise and supplier development. If they fail to achieve the 40% minimum on ownership and on the other priority element they have selected, their BEE status level will be reduced by one level. [The Citizen 3 October, Business Day 4 October 2012]

 All companies – including the South African subsidiaries of foreign multinational corporations – which were previously able to gain good BEE rankings without changing their ownership by focusing on the six other elements in the 2007 codes, will now have to attain the 40% minimum level of compliance. Since 40% of the ownership target of 25% is 10%, they will have to ensure that black ownership of their assets or equity rises to at least the 10% mark. [Business Day 4 October 2012] In addition, companies whose existing ownership deals do not meet the new minimum requirement, will ‘have to restructure or refinance their existing deals’, says Ajay Lalu, another BEE analyst. [Finweek 18 October 2012]

 The new category of enterprise and supplier development carries the most weight in the scorecard, counting for 40 of a possible 105 points. [Business Day 3 October 2012] Firms will be expected both to develop new black enterprises and also to ensure their ‘sustainability’. This suggests that they will have to turn their BEE start-ups into profitable businesses, irrespective of how difficult this may be.  In addition, targets for preferential procurement will be raised from 70% at present to 80% of total annual purchases. Moreover, companies will be required to source this procurement from ‘value-adding suppliers’, defined as entities whose net profits before tax, together with their total labour costs, exceed a quarter of their revenue. This provision is aimed at barring companies from sourcing from agencies which do not add value or create jobs. [Finweek 18 October 2012] The aim, says the minister of trade and industry, Rob Davies, is to help ‘deliver real empowerment which will ensure increased participation of black people in the economy as industrialists and manufacturers’. [The New Age 3 October 2012]

 The points available for the new merged element of ‘management control’ (previously both management control and employment equity) will effectively be reduced from 25 to 15. These points will also be obtainable solely via the appointment of black people to senior and middle management positions. [Business Day 3 October 2012; DTI, Revised codes, pp21-23]  Appointing black people as junior managers will no longer earn any points at all. Yet the junior management targets are the easiest to fulfil in a country where relatively few black South Africans have tertiary qualifications or fall within the 40-64 age cohort normally considered eligible for more middle and upper management jobs.

 Though Indian and coloured people, for historical reasons, often have better education and skills than Africans, no points will be available for appointing Indian or coloured people to management posts in excess of their share of the economically active population. Whether this share is to be determined according to national or regional demographics – which will make an important difference to Indians in KwaZulu-Natal and coloured people in the Western Cape, where the regional representation of these minorities substantially exceeds the national average – will be decided under the Employment Equity Act (the EE Act) of 1998. Under a bill tabled in 2012 to amend the EE Act, the labour minister is to be given the power to determine this key question by means of regulation.

 The number of points required to gain good BEE scores will be increased significantly. For example a company which attains 65 points on the current scorecard ranks as a ‘level four’ contributor to BEE, but will drop to become a ‘level seven’ contributor under the revised codes. To regain ‘level four’ status, it will need to score 80 points. [Finweek 18 October 2012; DTI, Revised codes, page 10]

 

Level of BEE contribution                   Qualifying points                     Level of BEE recognition

Level one contributor                          ≥ 100 points                           135% (R100 ≡ R135)

Level two contributor                         ≥ 95 but < 100 points             125% (R100 ≡ R125)

Level three contributor                       ≥ 90 but < 95 points               R110% (R100 ≡ R110)

Level four contributor                         ≥80 but < 90 points                R100% (R100 ≡ R100)

Level five contributor                         ≥ 75 but < 80 points               80% (R100 ≡ R80)

Level six contributor                           ≥ 70 but < 75 points               60% (R100 ≡ R60)

Level seven contributor                      ≥ 55 but <70 points                50% (R100 ≡ R50)

Level eight contributor                        ≥ 40 but < 55 points               10% (R100 ≡ R10)

Non-compliant contributor                 < 40 points                             0% (R100 ≡ R0)        


Implications of the revised codes

Speaking at the launch of the revised codes, the chief executive of the Black Business Council, Xolani Qhubeka, said the codes were ‘a step in the right direction’. [The New Age 3 October 2012] But other BEE practitioners are concerned that that ‘the more stringent regulations will cause public despondency’. Said Chris van Wyk, chief executive of the verification agency AQRate, in July 2012: ‘The [BEE] system is a voluntary one. If this thing is going to be forced down their throats, corporate South Africa is going to walk away.’ [Mail & Guardian 15 June 2012]

 Keith Levenstein, head of the BEE verification agency EconoBEE, adds that the targets now envisaged are ‘unrealistic’, particularly in requiring procurement from suppliers that are ‘value-adding’. [Moneyweb Business 16 October 2012] In general, the only businesses that meet the definition of value-adding are those ‘with high profit margins and high labour costs compared to their turnover’. Accounting, consulting, and legal firms may qualify, for ‘their stock-in-trade is their staff and intellectual property’. But large engineering and manufacturing firms are rarely ‘value-adding’, according to the code’s definition. Nor are companies in the wholesale and retail trade, or those in the oil trade. ‘A company that needs to be highly mechanised, like an oil refinery, simply does not spend anywhere near 25% of its turnover on its labour force’. Moreover, even if a business immediately took on thousands more people, in an attempt to qualify as value-adding, ‘this would have an almost reciprocal effect of decreasing profits by the same amount, and it would still not be able to become a value-adding supplier’.

Mr Levenstein says that some two thirds of firms are unlikely to qualify as ‘value-adding suppliers’. Procurement from these companies will thus not count for BEE purposes, reducing their incentive to improve their BEE scores. Many could decide that attempts to boost their BEE rankings are no longer worthwhile in these circumstances. [Moneyweb Business 16 October, Finweek 18 October, Business Report 30 November 2012]

 The revised codes also hold implications for current sectoral BEE charters, such as the mining charter and the finance one. In April 2012 Sidwell Medupe, spokesman for the DTI, said: ‘All the charters that have been gazetted will have to be aligned to the new codes to ensure consistency in principles and management.’ [The New Age 23 April 2012] Dr Davies, speaking at the launch of the revised codes, was less categorical, saying only that his department ‘would encourage sector charters to be aligned to the codes’. [The New Age 3 October 2012] Some BEE consultants are pushing for the abolition of all sectoral charters, saying they provide a way (as Mr Gqubule puts it) for ‘industry to dodge transformation’. [The New Age 23 April 2012] But the sectoral charters generally reflect prolonged negotiation within the relevant sectors, have mostly been endorsed by the DTI, and have guided BEE initiatives, in some instances, for many years. If they are now to be jettisoned, this will create yet more uncertainty. It will also breach previous government undertakings that BEE goalposts in the mining sector and elsewhere will not be changed.

 In addition, though the raising of thresholds for compliance (from R35m to R50m, for example) might suggest liberalisation, under the revised codes, all firms with turnover exceeding R10m (many of which are small and family-owned businesses) will come under increased pressure to meet BEE ownership targets. They will also find it significantly more onerous to gain and retain good BEE scores under the revised rules.

 Says Nomonde Mesatya, director of the empowerment unit within the DTI: ‘We are picking up concerns from a number of stakeholders that the proposed new BEE codes will have a negative impact on their scores. Yes, the proposals we have put on the table have been designed to be more stringent, which means people will have to do much more than before to earn good BEE scores.’  But she dismisses concerns of this kind, on the basis that ‘companies that run with a positive attitude towards BEE have no reason to worry… BEE implementation must be pillared (sic) by a positive attitude. They must focus on doing the right thing and points will follow.’ [The New Age 29 October 2012] However, the matter is unlikely to be so simple. In addition, the practical costs and consequences of BEE are already daunting and are likely to increase substantially if the draft codes are brought into effect.

 

Economic costs and consequences of BEE

Direct costs

The value of BEE deals done to date is difficult to quantify since many of these transactions have involved private companies and have not been disclosed. However, the deals which have been publicised have involved a huge allocation of scarce capital, amounting (according to Ms Cargill) to between R550bn and R600bn in the ten years from 1998 to 2008. Since then, the value of BEE deals has doubtless risen further.

 In 2005, well before the value of BEE deals had risen to R550bn, an ANC discussion document raised concerns about the utility of BEE spending, saying: ‘The financing of BEE deals that do not necessarily raise productive investment levels in the domestic economy is a drain on scarce capital assets and will impact on the medium-term investment level in the country’. The document expressed concern that this was making it more difficult to raise the growth rate, create jobs, and reduce poverty. [South African Institute of Race Relations, 2004/05 Annual Report, p21]

 Such concerns are still more salient today, for the Government is now finding it difficult to raise the R850bn it currently plans to spend on expanding essential infrastructure over the next three years. In addition, South Africa’s growth rate seems likely to drop below 2.5% in 2012, reducing  tax revenues. Moreover, two international ratings agencies (Standard & Poor’s and Moody’s Investor Service) have downgraded the country’s sovereign debt ratings to two (or three) notches above ‘junk’ status and put the country on negative watch. Especially in circumstances such as these, South Africa cannot afford to squander scarce capital on the racial reshuffling of share ownership. [Growth-Focused Policies, Fast Facts, November 2012, pp19-22]

 Apart from the financing of BEE deals, other direct compliance costs are considerable, though difficult to quantify. They include the proportions of after-tax profit that firms are currently expected to allocate to skills development (3%), enterprise development (3%), and socio-economic development (1%). Also relevant are the costs of the bureaucracy required to monitor BEE, the costs of the burgeoning verification industry, and the costs of internal ‘transformation’ managers and external transformation consultants. Increasingly, given the salience of BEE to company operations, chief executives are also having to spend time overseeing compliance with empowerment obligations. This, particularly for multinational corporations, is a major irritant, for it adds significantly to the costs of managing South African operations that contribute very little (often no more than 1%) to global profits.

 

Indirect costs

Indirect costs are even more difficult to quantify but are likely far to outstrip direct costs. For one thing, BEE reduces the economic freedom which experience around the world has shown to be essential to rapid growth and increasing economic prosperity. How much this has cost the country is impossible to quantify.

 In addition, BEE has clearly deterred direct investment in the crucial mining sector, and has played a major part in South Africa’s failure to benefit from the earlier global commodities boom. In addition, it has encouraged South Africa’s major mining companies to focus on expanding operations in other countries, rather than at home. Some, like Anglo American and Billiton, have also moved their primary listings abroad. [Anthea Jeffery, Chasing the Rainbow: South Africa’s Move from Mandela to Zuma, Johannesburg, South African Institute of Race Relations, 2010, p277]

 BEE has also deterred the foreign direct investment (FDI) the country might otherwise have attracted in the post-apartheid period. Since businesses which decided to bypass South Africa do not advertise such decisions, neither the government nor its citizens are ever likely to know the full extent of the FDI that has been jeopardised. [Business Day 29 June 2004]

 Most foreign diplomats and businessmen have been careful not to express concerns about BEE in public. However, in October 2005 the Dutch foreign minister, Bernard Bot, who was on a two-day visit to South Africa to deepen his country’s ties with Pretoria, said that ‘BEE requirements were a worry to foreign companies in South Africa and to those considering coming to the country’. Added Mr Bot:  ‘The way in which empowerment is being implemented is scaring away potential investors who do not wish to give up stakes in their companies. It is a bad thing when a foreign company has to sell a certain percentage of its equity…[and] at a price that is not the one [it] had in mind…because then you close the door to a number of companies that otherwise would be interested in investing in South Africa.’ [Business Day 12 October 2005]

 The current codes cater for this concern by allowing the South African subsidiaries of foreign multinationals to focus on the six other elements in the current BEE scorecard or to find ways of earning ‘equity equivalent’ points, through the provision of additional training, for instance. But the revised codes close off these options by demanding that all firms, whether foreign-owned or not, attain at least 40% compliance with the ownership target. Changing the goal posts in this way – particularly at a time of faltering growth, rising labour unrest, and declining competitiveness – could encourage firms already in South Africa to disinvest and those eyeing the country as the gateway to Africa to choose a different portal.

 

The need for a new approach

The Government assumes that tightening up the BEE codes will help solve deep-rooted problems of poverty, inequality, and unemployment. In fact, no such quick fix is feasible. After more than a decade of BEE policies covering the seven elements identified above and referred to below, it is more than ever apparent that:

  • preferential ownership transfers do not build entrepreneurship or the ‘visible black industrialists’ that Mr Zuma seeks;
  • promoting people into board and management positions without the necessary skills and experience undermines efficiency and,        depending on how far it is taken, can jeopardise the efficient functioning of institutions;
  • preferential procurement frequently inflates costs while eroding the quality of performance;
  • enterprise development is unlikely to succeed without adequate experience, infrastructure, and markets;
  • skills development is of course crucial to South Africa’s success but would be far better achieved via tax incentives for on-the-job training of a kind decided by business, not bureaucrats; while
  • socio-economic development (essentially in the form of state-directed corporate social responsibility) can do little to meet the country’s social needs or counter the negative effects of persistent and widespread unemployment.

 Already, far too much capital, skill, entrepreneurial effort, and bureaucratic oversight have been ploughed into trying to make BEE work. It is time to call a halt.

 Instead, the Government needs to identify the real barriers to the advancement of the poor and set about removing them. Among other things, it needs to embrace the hard tasks of fixing education, freeing the labour market from excessive regulation, ending damaging dirigiste intervention, building up international competitiveness, and making South Africa much more attractive to direct investors, both local and foreign

 The Government also needs to shift its ‘big idea’. For 18 years, the ANC has put its emphasis on redistribution, rather than on promoting economic growth. But a different way of dividing up the existing economic pie – without expanding it as well – will never be enough to meet the needs of a growing population. By contrast, as Gill Marcus, governor of the South African Reserve Bank, noted at a recent conference: ‘Growth matters. With growth of 7%, you double your income every ten years. With growth of 3%, it takes 24 years to double your income.’

 BEE and other forms of redistribution tether South Africa’s growth rate to around the 3% a year, making it hard to break above that level. At this rate of growth, as Ms Marcus says, it will take a quarter of a century for the size of the economy to double. Through this long period, it will be the poor who pay the price for the hobbling of the country’s great potential.

 BEE, by contrast, like other affirmative action measures around the world, will never help more than a relative elite. It is deeply flawed – and it cannot be ‘fixed’. It is time to jettison it as part of a big shift from redistribution to growth; from a focus on enriching the few to removing the obstacles to the advancement of the many.  

 

 South African Institute of Race Relations                                                            

4th December 2012

 

IRR TV


BEE SHOULD BE SCRAPPED, NOT REFORMED

South African Institute of Race Relations

Submission to the

Department of Trade and Industry

Regarding

the Revised Broad-Based Black Economic Empowerment

Codes of Good Practice

Johannesburg, 4th December 2012

 

Structure:

Introduction: the current generic codes (page 1)

Criticisms of BEE and calls for reform (page 3)

            from the ANC (page 3)

            from Cosatu and the SACP (page 3)

            from small black business and other commentators (page 4)

            calls for reform (page 4)

Key differences between the current and revised codes (page 5)

            The current codes (page 5)

            Revised codes (page 5)

            Implications of the revised codes (page 8)

Economic costs and consequences of BEE (page 9)

            Direct costs (page 9)

            Indirect costs (page 10)

The need for a new approach (page 11)

           

Introduction: the current generic codes

Black economic empowerment (BEE) is currently governed, in the main, by the Broad-Based Black Economic Empowerment Act of 2003 (the Act) along with the generic codes of good practice (the codes), which were gazetted by the Department of Trade and Industry (DTI) in February 2007 and entered into force in August 2008.

 The generic codes potentially apply to firms in all sectors of the economy, unlike the various sectoral charters which have been negotiated by stakeholders within specific sectors and apply solely within those spheres. (Examples of sectoral charters include the liquid fuels charter of 2000, the mining charter which entered into force in 2004 as an adjunct to the Mineral and Petroleum Resources Development Act of 2002, and the finance charter of 2003.) The generic codes currently do not apply within parts of the economy where recognised sectoral charters are in force.

 The current generic codes put pressure on businesses with annual turnover exceeding R35m to comply with seven components or ‘elements’ of BEE. Firms with annual turnover between R5m and R35m are expected to comply with four out of the seven elements but may choose for themselves which these four should be and ignore the other three. Firms with annual turnover of less than R5m are exempt from BEE obligations. [Department of Trade and Industry, Codes of Good Practice on Black Economic Empowerment, Government Gazette, 9 February 2007]

 The codes lay down different compliance targets for each of the seven elements. For example, under the ownership element, firms must seek, by 2017, to transfer 25% (plus one vote) of their equity to ‘black’ South Africans, these being Africans, Indians, or so-called ‘coloured’ people. Under the preferential procurement element, by way of further illustration, firms must seek to buy 70% by value of the goods and services they need each year from ‘empowered’ firms with good BEE status levels (see below). Procurement from a firm with the highest possible BEE rating is regarded as equivalent to R135 for every R100 spent.

 Companies are measured each year on the extent of their compliance with the targets laid down for each element in the generic codes. The process of measuring compliance and assigning points for performance is carried out by accredited BEE verification agencies. These agencies are supposed to apply uniform methods laid down by the DTI in a verification manual, but this is a lengthy and complex document which is not easy to understand or apply in a consistent manner.

 Verification agencies are expected to check on how well firms have met their BEE targets and then accord them BEE points according to scorecards laid down in the codes for each of the different elements of BEE. For example, a maximum of 20 points can be earned for meeting the target of 25% on the ownership element, while another 20 points can be earned by firms that succeed in bringing their procurement from black-empowered firms up to 70% of the value of their total annual procurement.

 Based on the points earned on each element and the overall score thus attained, verification agencies must assign firms a BEE status level identifying the ‘level’ of their ‘contribution’ to BEE. There are eight levels of BEE contribution. These range from level one, the highest, for firms with 100 points, to level eight, the lowest, for those with 30 points. Firms which earn less than 30 points in a year are seen as making no contribution to BEE, while procurement from such firms counts nothing in the earning of BEE points.

 Since BEE is supposedly voluntary, no formal penalties apply for failure to meet the compliance targets laid out in the codes. However, firms with poor BEE scores under the codes are likely to be barred from government contracts, and may also find it difficult to obtain necessary licences from the State. In addition, since businesses can earn additional BEE points by procuring goods and services from companies with good BEE scores, all firms are under pressure to seek high BEE status levels so as to give other companies incentives to buy from them. Conversely, firms with low BEE status levels may find themselves left out of procurement chains and battling to do business at all.

 The rules governing BEE are thus complex and multifaceted. They are often also vague and difficult to interpret or apply, but their scope has nevertheless expanded over the years. As BEE obligations have grown, so too have criticisms of the policy. BEE is supposed to help empower the poor, but instead it has brought most benefit to a small politically-connected elite while fuelling corruption, discouraging investment, squandering skills, and diverting scarce capital from more productive use.

 In recent times, many of the criticisms of BEE have come from within the ruling African National Congress (ANC) and its allies in the Congress of South African Trade Unions (Cosatu), and the South African Communist Party (SACP). Even black small business, which was supposed to draw particular benefit from BEE, has been critical of it.

 

Criticisms of BEE and calls for reform

From the ANC: ‘South Africa’s BEE policies…have not worked,’ said the minister of finance, Pravin Gordhan, in November 2010. ‘BEE policies did not make South Africa a fairer and more prosperous country. They led to a small elite group benefiting, and that was not good enough in terms of benefiting 45m people.’ [Business Report 29 November 2010]

 In September 2011 President Jacob Zuma echoed this concern, telling the Confederation of Black Business Organisations: ‘We are concerned that BEE has not yet benefited a wide enough segment of our society.’ Mr Zuma also lamented the lack of ‘visible black industrialists’ after a decade or more of BEE interventions, adding: ‘We do not see large factories or mines that are owned by black people… The economy must produce authentic black entrepreneurs, who own factories and manufacture textiles, metal products, or whatever the market requires.’ [President Jacob Zuma, address to the Confederation of Black Business Organisations, Sandton, 6 September 2011]

 From Cosatu and the SACP: Cosatu has often criticised BEE for enriching the few and giving impetus to corruption. In October 2012 Zwelinzima Vavi, general secretary of Cosatu, criticised the policy again, castigating ‘the oasis of opulence’ to which a narrow ‘black elite’ had managed to gain entry via ‘dirty’ BEE ownership deals. [Business Day 18 October 2012]

 According to the SACP, BEE needs a drastic overhaul as it is ‘a failed project “at the heart of the corruption”…rampant in South Africa’. Adds the party: ‘We must honestly and urgently review BEE as it has not addressed the huge economic inequalities and has led to the empowerment of only a small elite instead of the majority.’ [The Citizen 28 April 2011]

 From small black business and other commentators: In November 2010 the president of the National African Federated Chamber of Commerce and Industry (Nafcoc), Lawrence Mavundla, said that BEE and preferential procurement had marginalised small businesses rather than helping it. It had also promoted ‘tenderpreneurs who were tender thieves because they got their tenders through [political] connections’. [Business Report 30 November 2010]

 Repeated criticism has also come from Moeletsi Mbeki (brother of former president Thabo Mbeki). In his book Architects of Poverty: Why African Capitalism Needs Changing, published in 2009, Mr Mbeki wrote that BEE ‘strikes a fatal blow against black entrepreneurship by creating a small class of unproductive but wealthy black crony capitalists made up of ANC politicians’. It thus robs South Africa of the key to economic and industrial development: an entrepreneurial bourgeoisie. ‘These are the businessmen, industrialists, risk-takers and private investors who alone can create a developed, modern state.’ [Business Day 17 July, 14 December 2009, The Citizen 21 September 2009]

 Since then, Mr Mbeki has continued to question the value to the country of creating what he terms ‘a class of idle rich ANC politicos’. What South Africa needs is an entrepreneurial middle class capable of creating wealth and expanding the economy, he says. Instead, BEE is generating an entitlement culture, ‘whereby black people who want to go into business think they should acquire assets free, and that somebody else is there to make them rich, rather than that they should build enterprises from the ground’. [Business Day 10 February 2011]

 In 2011 Jenny Cargill, a BEE consultant who for many years was a proponent of the strategy, warned that BEE ownership deals had cost between R550bn and R600bn between 1998 and 2008, yet were largely ‘non-productive’. By contrast, adds Ms Cargill, the amount spent by the State on housing and land reform in the same period was much less, at R87bn. Moreover, she notes, the more scarce capital is put into empowerment financing, ‘the less there is for housing, infrastructure, and so on’. [Business Day 11 March 2011; Jenny Cargill, Trick or Treat: Rethinking Black Economic Empowerment, Johannesburg, Jacana Media, 2010]

 

Calls for reform

Calls for reform have grown in tandem with such criticisms of BEE.  However, instead of recognising the high costs and inherent unworkability of BEE, the DTI’s response has been to tighten up the BEE codes still further via the proposed revisions gazetted by the minister of trade and industry, Rob Davies, in October 2012.


Key differences between the current and revised codes

The aim of the revised codes is to strengthen BEE rules regarded by many BEE proponents as too lenient, ‘like an exam which is easy to pass’, as a BEE analyst, Duma Gqubule, said in February 2012. [The New Age 23 February 2012] According to Dr Davies, the revised codes will help ‘plug the gaps businesses have taken advantage of’, including a ‘tick-box’ mentality. [Business Day 3 October 2012]

 

The current codes

The current codes contain seven elements. These elements, and the points that can currently be earned for each of them, are: [The Citizen 3 October 2012; Department of Trade and Industry, Revised Broad-Based Black Economic Empowerment Codes of Good Practice, Government Gazette, 5 October 2012, pp9-10]

            Element                                                                                   Points available

·      ownership                                                                                                20

·      management control                                                                                10

·      employment equity                                                                                  15       

·      skills development                                                                                   15

·      preferential procurement                                                                         20

·      enterprise development                                                                           15

·      socio-economic development (or corporate social responsibility)             5

Total points available:                                                                                    100     

 

Revised codes

The new codes propose reducing these seven elements to five, to be achieved by combining some of the current elements. Management control will thus be combined with employment equity to generate a single new element called management control. Similarly, preferential procurement and enterprise development will be combined into one element called ‘enterprise and supplier development’.

 The five ‘new’ elements and the points available for each will be as follows: [The Citizen 3 October 2012; DTI, Revised codes, pp9-10]

            Element                                                                                   Points available

·      ownership                                                                                                 25

·      management control                                                                                 15

·      skills development                                                                                    20

·      enterprise and supplier development                                                        40

·      socio-economic development                                                                   5

Total points available:                                                                                      105

 All companies (except exempted micro enterprises with annual turnover of R10m, rather than R5m, as at present) with have to comply with all five elements. [Finweek 18 October 2012] Smaller firms will no longer be able to choose four out of seven, as is currently the case.

 In addition, three of these five elements are identified as ‘priority’ elements, where a minimum ‘threshold’ level of compliance, amounting to 40% of the specified targets, must be attained.  These three elements are ownership, skills development, and enterprise and supplier development. 

 All enterprises with annual turnover exceeding R50m (up from R35m) must achieve the 40% minimum on all three of these priority elements, failing which they will have their overall BEE status level reduced by two levels. [Business Day, The Citizen 3 October 2012] (Under the current codes, as noted and further explained below, there are eight levels of BEE ‘contribution’ ranging from ‘level one’, the highest – for firms with 100 points – to ‘level eight’, the lowest, for those with 30 points.)

 Qualifying small enterprises (those with annual turnover of between R10m and R50m, up from the present R5m to R35m) must achieve the 40% minimum on the ownership element and on one of the other two priority elements: either skills development, or enterprise and supplier development. If they fail to achieve the 40% minimum on ownership and on the other priority element they have selected, their BEE status level will be reduced by one level. [The Citizen 3 October, Business Day 4 October 2012]

 All companies – including the South African subsidiaries of foreign multinational corporations – which were previously able to gain good BEE rankings without changing their ownership by focusing on the six other elements in the 2007 codes, will now have to attain the 40% minimum level of compliance. Since 40% of the ownership target of 25% is 10%, they will have to ensure that black ownership of their assets or equity rises to at least the 10% mark. [Business Day 4 October 2012] In addition, companies whose existing ownership deals do not meet the new minimum requirement, will ‘have to restructure or refinance their existing deals’, says Ajay Lalu, another BEE analyst. [Finweek 18 October 2012]

 The new category of enterprise and supplier development carries the most weight in the scorecard, counting for 40 of a possible 105 points. [Business Day 3 October 2012] Firms will be expected both to develop new black enterprises and also to ensure their ‘sustainability’. This suggests that they will have to turn their BEE start-ups into profitable businesses, irrespective of how difficult this may be.  In addition, targets for preferential procurement will be raised from 70% at present to 80% of total annual purchases. Moreover, companies will be required to source this procurement from ‘value-adding suppliers’, defined as entities whose net profits before tax, together with their total labour costs, exceed a quarter of their revenue. This provision is aimed at barring companies from sourcing from agencies which do not add value or create jobs. [Finweek 18 October 2012] The aim, says the minister of trade and industry, Rob Davies, is to help ‘deliver real empowerment which will ensure increased participation of black people in the economy as industrialists and manufacturers’. [The New Age 3 October 2012]

 The points available for the new merged element of ‘management control’ (previously both management control and employment equity) will effectively be reduced from 25 to 15. These points will also be obtainable solely via the appointment of black people to senior and middle management positions. [Business Day 3 October 2012; DTI, Revised codes, pp21-23]  Appointing black people as junior managers will no longer earn any points at all. Yet the junior management targets are the easiest to fulfil in a country where relatively few black South Africans have tertiary qualifications or fall within the 40-64 age cohort normally considered eligible for more middle and upper management jobs.

 Though Indian and coloured people, for historical reasons, often have better education and skills than Africans, no points will be available for appointing Indian or coloured people to management posts in excess of their share of the economically active population. Whether this share is to be determined according to national or regional demographics – which will make an important difference to Indians in KwaZulu-Natal and coloured people in the Western Cape, where the regional representation of these minorities substantially exceeds the national average – will be decided under the Employment Equity Act (the EE Act) of 1998. Under a bill tabled in 2012 to amend the EE Act, the labour minister is to be given the power to determine this key question by means of regulation.

 The number of points required to gain good BEE scores will be increased significantly. For example a company which attains 65 points on the current scorecard ranks as a ‘level four’ contributor to BEE, but will drop to become a ‘level seven’ contributor under the revised codes. To regain ‘level four’ status, it will need to score 80 points. [Finweek 18 October 2012; DTI, Revised codes, page 10]

 

Level of BEE contribution                   Qualifying points                     Level of BEE recognition

Level one contributor                          ≥ 100 points                           135% (R100 ≡ R135)

Level two contributor                         ≥ 95 but < 100 points             125% (R100 ≡ R125)

Level three contributor                       ≥ 90 but < 95 points               R110% (R100 ≡ R110)

Level four contributor                         ≥80 but < 90 points                R100% (R100 ≡ R100)

Level five contributor                         ≥ 75 but < 80 points               80% (R100 ≡ R80)

Level six contributor                           ≥ 70 but < 75 points               60% (R100 ≡ R60)

Level seven contributor                      ≥ 55 but <70 points                50% (R100 ≡ R50)

Level eight contributor                        ≥ 40 but < 55 points               10% (R100 ≡ R10)

Non-compliant contributor                 < 40 points                             0% (R100 ≡ R0)        


Implications of the revised codes

Speaking at the launch of the revised codes, the chief executive of the Black Business Council, Xolani Qhubeka, said the codes were ‘a step in the right direction’. [The New Age 3 October 2012] But other BEE practitioners are concerned that that ‘the more stringent regulations will cause public despondency’. Said Chris van Wyk, chief executive of the verification agency AQRate, in July 2012: ‘The [BEE] system is a voluntary one. If this thing is going to be forced down their throats, corporate South Africa is going to walk away.’ [Mail & Guardian 15 June 2012]

 Keith Levenstein, head of the BEE verification agency EconoBEE, adds that the targets now envisaged are ‘unrealistic’, particularly in requiring procurement from suppliers that are ‘value-adding’. [Moneyweb Business 16 October 2012] In general, the only businesses that meet the definition of value-adding are those ‘with high profit margins and high labour costs compared to their turnover’. Accounting, consulting, and legal firms may qualify, for ‘their stock-in-trade is their staff and intellectual property’. But large engineering and manufacturing firms are rarely ‘value-adding’, according to the code’s definition. Nor are companies in the wholesale and retail trade, or those in the oil trade. ‘A company that needs to be highly mechanised, like an oil refinery, simply does not spend anywhere near 25% of its turnover on its labour force’. Moreover, even if a business immediately took on thousands more people, in an attempt to qualify as value-adding, ‘this would have an almost reciprocal effect of decreasing profits by the same amount, and it would still not be able to become a value-adding supplier’.

Mr Levenstein says that some two thirds of firms are unlikely to qualify as ‘value-adding suppliers’. Procurement from these companies will thus not count for BEE purposes, reducing their incentive to improve their BEE scores. Many could decide that attempts to boost their BEE rankings are no longer worthwhile in these circumstances. [Moneyweb Business 16 October, Finweek 18 October, Business Report 30 November 2012]

 The revised codes also hold implications for current sectoral BEE charters, such as the mining charter and the finance one. In April 2012 Sidwell Medupe, spokesman for the DTI, said: ‘All the charters that have been gazetted will have to be aligned to the new codes to ensure consistency in principles and management.’ [The New Age 23 April 2012] Dr Davies, speaking at the launch of the revised codes, was less categorical, saying only that his department ‘would encourage sector charters to be aligned to the codes’. [The New Age 3 October 2012] Some BEE consultants are pushing for the abolition of all sectoral charters, saying they provide a way (as Mr Gqubule puts it) for ‘industry to dodge transformation’. [The New Age 23 April 2012] But the sectoral charters generally reflect prolonged negotiation within the relevant sectors, have mostly been endorsed by the DTI, and have guided BEE initiatives, in some instances, for many years. If they are now to be jettisoned, this will create yet more uncertainty. It will also breach previous government undertakings that BEE goalposts in the mining sector and elsewhere will not be changed.

 In addition, though the raising of thresholds for compliance (from R35m to R50m, for example) might suggest liberalisation, under the revised codes, all firms with turnover exceeding R10m (many of which are small and family-owned businesses) will come under increased pressure to meet BEE ownership targets. They will also find it significantly more onerous to gain and retain good BEE scores under the revised rules.

 Says Nomonde Mesatya, director of the empowerment unit within the DTI: ‘We are picking up concerns from a number of stakeholders that the proposed new BEE codes will have a negative impact on their scores. Yes, the proposals we have put on the table have been designed to be more stringent, which means people will have to do much more than before to earn good BEE scores.’  But she dismisses concerns of this kind, on the basis that ‘companies that run with a positive attitude towards BEE have no reason to worry… BEE implementation must be pillared (sic) by a positive attitude. They must focus on doing the right thing and points will follow.’ [The New Age 29 October 2012] However, the matter is unlikely to be so simple. In addition, the practical costs and consequences of BEE are already daunting and are likely to increase substantially if the draft codes are brought into effect.

 

Economic costs and consequences of BEE

Direct costs

The value of BEE deals done to date is difficult to quantify since many of these transactions have involved private companies and have not been disclosed. However, the deals which have been publicised have involved a huge allocation of scarce capital, amounting (according to Ms Cargill) to between R550bn and R600bn in the ten years from 1998 to 2008. Since then, the value of BEE deals has doubtless risen further.

 In 2005, well before the value of BEE deals had risen to R550bn, an ANC discussion document raised concerns about the utility of BEE spending, saying: ‘The financing of BEE deals that do not necessarily raise productive investment levels in the domestic economy is a drain on scarce capital assets and will impact on the medium-term investment level in the country’. The document expressed concern that this was making it more difficult to raise the growth rate, create jobs, and reduce poverty. [South African Institute of Race Relations, 2004/05 Annual Report, p21]

 Such concerns are still more salient today, for the Government is now finding it difficult to raise the R850bn it currently plans to spend on expanding essential infrastructure over the next three years. In addition, South Africa’s growth rate seems likely to drop below 2.5% in 2012, reducing  tax revenues. Moreover, two international ratings agencies (Standard & Poor’s and Moody’s Investor Service) have downgraded the country’s sovereign debt ratings to two (or three) notches above ‘junk’ status and put the country on negative watch. Especially in circumstances such as these, South Africa cannot afford to squander scarce capital on the racial reshuffling of share ownership. [Growth-Focused Policies, Fast Facts, November 2012, pp19-22]

 Apart from the financing of BEE deals, other direct compliance costs are considerable, though difficult to quantify. They include the proportions of after-tax profit that firms are currently expected to allocate to skills development (3%), enterprise development (3%), and socio-economic development (1%). Also relevant are the costs of the bureaucracy required to monitor BEE, the costs of the burgeoning verification industry, and the costs of internal ‘transformation’ managers and external transformation consultants. Increasingly, given the salience of BEE to company operations, chief executives are also having to spend time overseeing compliance with empowerment obligations. This, particularly for multinational corporations, is a major irritant, for it adds significantly to the costs of managing South African operations that contribute very little (often no more than 1%) to global profits.

 

Indirect costs

Indirect costs are even more difficult to quantify but are likely far to outstrip direct costs. For one thing, BEE reduces the economic freedom which experience around the world has shown to be essential to rapid growth and increasing economic prosperity. How much this has cost the country is impossible to quantify.

 In addition, BEE has clearly deterred direct investment in the crucial mining sector, and has played a major part in South Africa’s failure to benefit from the earlier global commodities boom. In addition, it has encouraged South Africa’s major mining companies to focus on expanding operations in other countries, rather than at home. Some, like Anglo American and Billiton, have also moved their primary listings abroad. [Anthea Jeffery, Chasing the Rainbow: South Africa’s Move from Mandela to Zuma, Johannesburg, South African Institute of Race Relations, 2010, p277]

 BEE has also deterred the foreign direct investment (FDI) the country might otherwise have attracted in the post-apartheid period. Since businesses which decided to bypass South Africa do not advertise such decisions, neither the government nor its citizens are ever likely to know the full extent of the FDI that has been jeopardised. [Business Day 29 June 2004]

 Most foreign diplomats and businessmen have been careful not to express concerns about BEE in public. However, in October 2005 the Dutch foreign minister, Bernard Bot, who was on a two-day visit to South Africa to deepen his country’s ties with Pretoria, said that ‘BEE requirements were a worry to foreign companies in South Africa and to those considering coming to the country’. Added Mr Bot:  ‘The way in which empowerment is being implemented is scaring away potential investors who do not wish to give up stakes in their companies. It is a bad thing when a foreign company has to sell a certain percentage of its equity…[and] at a price that is not the one [it] had in mind…because then you close the door to a number of companies that otherwise would be interested in investing in South Africa.’ [Business Day 12 October 2005]

 The current codes cater for this concern by allowing the South African subsidiaries of foreign multinationals to focus on the six other elements in the current BEE scorecard or to find ways of earning ‘equity equivalent’ points, through the provision of additional training, for instance. But the revised codes close off these options by demanding that all firms, whether foreign-owned or not, attain at least 40% compliance with the ownership target. Changing the goal posts in this way – particularly at a time of faltering growth, rising labour unrest, and declining competitiveness – could encourage firms already in South Africa to disinvest and those eyeing the country as the gateway to Africa to choose a different portal.

 

The need for a new approach

The Government assumes that tightening up the BEE codes will help solve deep-rooted problems of poverty, inequality, and unemployment. In fact, no such quick fix is feasible. After more than a decade of BEE policies covering the seven elements identified above and referred to below, it is more than ever apparent that:

  • preferential ownership transfers do not build entrepreneurship or the ‘visible black industrialists’ that Mr Zuma seeks;
  • promoting people into board and management positions without the necessary skills and experience undermines efficiency and,        depending on how far it is taken, can jeopardise the efficient functioning of institutions;
  • preferential procurement frequently inflates costs while eroding the quality of performance;
  • enterprise development is unlikely to succeed without adequate experience, infrastructure, and markets;
  • skills development is of course crucial to South Africa’s success but would be far better achieved via tax incentives for on-the-job training of a kind decided by business, not bureaucrats; while
  • socio-economic development (essentially in the form of state-directed corporate social responsibility) can do little to meet the country’s social needs or counter the negative effects of persistent and widespread unemployment.

 Already, far too much capital, skill, entrepreneurial effort, and bureaucratic oversight have been ploughed into trying to make BEE work. It is time to call a halt.

 Instead, the Government needs to identify the real barriers to the advancement of the poor and set about removing them. Among other things, it needs to embrace the hard tasks of fixing education, freeing the labour market from excessive regulation, ending damaging dirigiste intervention, building up international competitiveness, and making South Africa much more attractive to direct investors, both local and foreign

 The Government also needs to shift its ‘big idea’. For 18 years, the ANC has put its emphasis on redistribution, rather than on promoting economic growth. But a different way of dividing up the existing economic pie – without expanding it as well – will never be enough to meet the needs of a growing population. By contrast, as Gill Marcus, governor of the South African Reserve Bank, noted at a recent conference: ‘Growth matters. With growth of 7%, you double your income every ten years. With growth of 3%, it takes 24 years to double your income.’

 BEE and other forms of redistribution tether South Africa’s growth rate to around the 3% a year, making it hard to break above that level. At this rate of growth, as Ms Marcus says, it will take a quarter of a century for the size of the economy to double. Through this long period, it will be the poor who pay the price for the hobbling of the country’s great potential.

 BEE, by contrast, like other affirmative action measures around the world, will never help more than a relative elite. It is deeply flawed – and it cannot be ‘fixed’. It is time to jettison it as part of a big shift from redistribution to growth; from a focus on enriching the few to removing the obstacles to the advancement of the many.  

 

 South African Institute of Race Relations                                                            

4th December 2012

 

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