A ‘dangerous strategy that will fail’ - Newsi

Apr 28, 2022
28 April 2022 - A few weeks ago, Minister of Trade, Industry and Competition Ebrahim Patel, was in fighting form in defence of government policy. At issue was the Broad-Based Economic Empowerment (B-BBEE). Opposition to this, the minister said, was a pernicious movement that was damaging South Africa’s future.

A few weeks ago, Minister of Trade, Industry and Competition Ebrahim Patel, was in fighting form in defence of government policy. At issue was the Broad-Based Economic Empowerment (B-BBEE). Opposition to this, the minister said, was a pernicious movement that was damaging South Africa’s future.

As a report in News24 put it ‘Resistance to transformation stymies economic hopes, says Minister Patel’.

Speaking at a conference held by the B-BBEE Commission, the minister stated: ‘Legal challenges against B-BBEE policies have sought to stall through litigation and aggressive posturing the necessary journey of transforming the economy. It is a dangerous strategy that will fail. It will ultimately undermine the social stability that democracy rests upon.’

His obvious point of reference was the recent case before the Constitutional Court between Sakeliga and the Minister of Finance. The case involved regulations issued in 2017 under the Procurement Act, specifically, ‘pre-qualification’ criteria. These could preclude particular businesses – based on such factors as their B-BBEE rating or ownership demographics – from tendering for contracts.

In a majority judgement, the Court held that the minister had acted ultra vires, and that the regulations were invalid. Treasury then issued a circular instructing that all tenders advertised after 16 February were to be held in abeyance, while no new tenders were to be advertised.

Sakeliga said it had ‘achieved the first significant roll-back of BEE through litigation.’ For the minister, this would have been an assault on South Africa’s ‘necessary journey of transforming the economy.’

Minister Patel is not alone. Race-based empowerment policy has been fundamental to government thinking in one way or another since the 1990s. ‘BEE policy is a thrust of this government, and if anything it needs to be enhanced,’ President Ramaphosa has said.

B-BBEE in this perspective is expounded as a means for ‘inclusion’. It would transfer wealth and assets into the hands of black people, opportunities to do so having been severely restricted under apartheid. It would reduce racial disparities, increase opportunities for entrepreneurship, create jobs and elevate societal prosperity in general. This would alleviate stresses in society, leaving all South Africans better off.

South Africa’s economy has underperformed for well over a decade. In the decade since 2010, GDP growth had not exceeded 3.3% for any year, until last – which was less an achievement than a partial recovery after the hammering inflicted by the COVID pandemic. On what is arguably the key indicator of economic progress, fixed investment, South Africa is at a long-term low: fixed capital formation stood at a paltry 13% in 2021, down from 13.7% in 2020. True enough, the pandemic certainly depressed these figures, but even in 2019, investment was at 15.3%, which was down on 15.9% in 2018.

The big question is whether current empowerment policy is doing anything to deal with this dire state of affairs.

Any evaluation of this must look beyond the stated intentions of the policy, and understand its outcome. There are both desirable and undesirable possibilities, costs and benefits, to just about any policy. A 2007 paper on South Africa’s empowerment policies (available on Treasury’s website) commented:

In discussing the benefits of BEE we included the social benefit of the avoidance of populism and noted that individual firms could not benefit from the whole extent to which they helped to provide a social benefit. In addition to social benefits however, there may be social costs of BEE. A clear one is that [Narrowly-Based] BEE via the forging of links between firms and politically connected people may lead to rent seeking and the introduction of regulations and policies that favour existing incumbents. This can reduce market competition and innovation and it can also distort government policy. This may appear as benefits on firms’ balance sheets because it increases profits, but it is obviously a cost for society and likely reduces economic growth.
This comment reflects long-standing sensitivities around the elitist nature of the policy and the consequent concentration of its benefits among a small group, whose members are often politically connected. (The SA Communist Party has expressed concerns about this.) The policy has evolved somewhat in an attempt to address this critique, seeking ‘broad-based’ benefits – hence the current nomenclature.

But BEE is an inherently elitist programme, irrespective how many Bs are prefixed. This is clear in the stress on ownership requirements, which are by their nature not widely distributable. This in turn has produced an inevitable blowback against the policy.

Ceding a portion of an enterprise is a major strategic decision, and not one to be taken lightly. Meeting the policy objectives of the political elite does not make this case. Still less would shedding equity be attractive to smaller and family-owned enterprises.

B-BBEE Ownership provisions have been raised by European investors – among South Africa’s most important – as a hindrance to their expansion in South Africa. A 2018 report stated: ‘This has compromised existing and prospective investors’ ability to continue and/or expand their operations in South Africa. It has been particularly difficult for greenfield investors, for family-owned European companies as well as multinationals, who are often reluctant to dilute their control of assets.’ Revealingly, the same report that the ‘equity equivalent’ schemes (which would circumvent the ownership requirements) were expensive and difficult to implement.

Along with ownership, procurement has been a point of contention in respect of B-BBEE. In question is whether the state should pay a premium for goods and services delivered by suppliers meeting particular (non-economic) characteristics, or to shield them from competition, to assist them into the economic mainstream. And if so, to what degree. The 2017 regulations would seem to answer ‘a great deal.’

That said, significant potential downsides exist. The most obvious is the manipulation of the procurement systems to favour the politically connected in the guise of ‘inclusion’. This has been a repeatedly expressed worry since the 1990s – the paper referred to above termed it ‘rent seeking and the introduction of regulations and policies that favour existing incumbents’ – and one that has unfortunately, proven to be valid.

The scale and obscenity of this phenomenon is evident in the report of the Zondo Commission. Interestingly, the report draws attention to the constitutional position. Section 217 specifies that in procuring goods and service, the state ‘must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective.’ This is qualified by a provision that permits the consideration of other factors, including those relating to historical disadvantage.

In discussing these tensions, and the lack of clear legislative direction to resolve it, the Zondo Commission’s view is that a rational economic proposition is paramount:

Ultimately in the view of the Commission the primary national interest is best served when the government derives the maximum value-for-money in the procurement process and procurement officials should be so advised. The same problem is encountered when a choice must be made between the competing virtues of localisation and lower cost. Again, the view of the Commission is that the legislation should make it clear that in such a case the critical consideration is value-for-money.
Indeed, the application and misapplication of empowerment in tendering goes well beyond the suboptimal allocation of funds. It has also arguably created some perverse incentives. Where it may have been intended to bring new entrants into the economic mainstream, it encouraged a reliance on the state, not a competitive, entrepreneurial self-confidence. Think ‘tenderpreneurship’.

Or in signalling a restrictive approach to bidding, empowerment policy acts as a disincentive to activity in the broader economy. Thus, the report on European firms mentioned above indicated that when State-Owned Enterprises raised ownership requirements for obtaining contracts – procurement in other words – a number of proposed investments from European firms were deferred.

Seen thus, the cost imposed by B-BBEE is probably removing South Africa bit by bit further from its aspirations, irrespective of its intentions.  

Minister Patel is, however, correct to note that social stability is an anchor for democracy. The riots of July last year were a visible reminder of how precarious South Africa’s position has become – a combination of socio-economic grievances, long-standing misgovernance and pathological political impulses, largely within the ruling party.

Getting South Africa on an economic track that promotes inclusion – which would necessarily mean entrepreneurship, investment, growth and employment – is a critical part of getting South Africa right. But it’s hard to find much that speaks in favour of B-BBEE in achieving this. Quite the contrary.

And perhaps sticking rigidly to it ‘is a dangerous strategy that will fail.’

Terence Corrigan is a project manager at the Institute of Race Relations


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