Small business and the BEE burden – BizNews, 4 March 2015

When it first came to fruition under Mandela’s South Africa, the equal opportunities act showed huge promise in rectifying inequalities perpetuated by the Apartheid government. Twenty odd years later, BEE has grown out of proportion and deviated from its original purpose – to empower those who were historically disadvantaged.

By Caitlin Hogg: 

When it first came to fruition under Mandela’s South Africa, the equal opportunities act showed huge promise in rectifying inequalities perpetuated by the Apartheid government. Twenty odd years later, BEE has grown out of proportion and deviated from its original purpose – to empower those who were historically disadvantaged – and rather ensures that not only is our society drifting further and further from its constitutional commitment to non-racialism, but too continues to create a gap between the top earners and the rest of the South African population. Let’s not forget to mention the financial strangulation updated legislation is sure to impose on small business. Head of Policy Research at the IRR Anthea Jeffery offers an alternative in Economic Empowerment of the Disadvantaged (EED) and stipulations thereof that could actually be a feasible alternative. 

By Anthea Jeffery:

In his budget speech last week, finance minister Nhlanhla Nene allocated R3.5bn for ‘training and mentoring’ for small businesses. But a lack of skills is not the key constraint holding back small firms. Equally important are anaemic rates of economic growth (1.5% of GDP in 2014) and a host of other barriers, from electricity shortages to saturated markets and high rates of crime.

In the 2015 budget, Nene also promised to ‘reduce regulatory barriers’ for small firms. But this pledge is at odds with the increased regulatory burden his cabinet colleague Rob Davies is planning to impose on small (and other) businesses via the revised black economic empowerment (BEE) generic codes due to take effect on 30th April 2015.

Under these revised codes, qualifying small enterprises (QSEs) – redefined as firms with annual turnover of between R10m and R50m – will no longer be able to choose four out of seven BEE elements to fulfil. Instead, they will be expected to comply with every aspect of BEE, from ownership through to socio-economic development. (Under the revised codes, the number of BEE elements has formally been reduced to five, but no element has in fact been removed. Instead, some elements have been combined with others.)

The revised codes require QSEs to raise black ownership to 25% and black management control to between 50% and 60%. Both targets will be difficult for family-owned firms to meet without losing control of businesses they have laboured to build up. Increasing spending on staff training from 2% of payroll to 3% of payroll will also be costly, especially as this comes on top of the skills levy (1% of payroll) already payable to the State.

Raising preferential procurement from ‘empowering suppliers’ to 60% of annual purchases will also be time-consuming and expensive. In addition, spending 2% of net annual profit on helping enterprises that will now have to be 51% black-owned will be particularly onerous.

As for socio-economic development, the points available will drop from 25 under the current codes to a maximum of 5. Charitable giving to children and the aged will no longer earn any points at all, as such donations are not aimed at helping beneficiaries to earn an income, as the new codes require.

The changes envisaged are likely to triple the costs of BEE compliance for QSEs. Yet South Africa already lags far behind other emerging markets on the size of its small business sector. Hence, Davies should be working together with Nene to help small firms, not trussing them up in ever more intrusive BEE red tape.

In addition, race-based BEE policies contradict the Constitution and its commitment to non-racialism. They also help only a relative elite, while harming the truly disadvantaged by deterring investment and the generation of new jobs.

BEE cannot be ‘reformed’ to overcome these inherent weaknesses. Instead, BEE codes for QSEs – and larger enterprises too – need to be scrapped in their entirety and replaced by a non-racial system of ‘economic empowerment for the disadvantaged’ or ‘EED’.

In this voluntary new system, EED points will be available to firms in the following circumstances, for example:

  • Rapid economic growth, rather than redistribution, will be the overriding policy priority. To help promote growth, firms will earn EED points for all direct investments made and corporate taxes paid;
  • Labour laws will be re-oriented to help the jobless gain access to employment. Firms will earn EED points for every job they sustain or generate from year to year;
  • Schools will come under community control and parents will be given state-funded education vouchers so they can send their children to the schools of their choice. Firms will earn EED points for ‘topping up’ these education vouchers or donating directly to schools;
  • School leavers will be given state-funded vouchers for university or technical education. Firms will earn EED points for topping up these vouchers or donating to the relevant institutions;
  • State-owned enterprises will be sold off to the private sector to help overcome the electricity crisis, expand essential infrastructure, promote competition, and bring down costs. Firms will earn EED points for infrastructure successfully and timeously brought on-stream;
  • Entrepreneurship will be promoted via a venture capital fund with monies from both the State and the private sector. Aspirant entrepreneurs will be given state-funded vouchers for training in financial management and other essential skills. Firms will earn EED points for contributing to venture capital funds or topping up these training vouchers.

 

Most South Africans have long agreed on the need to expand opportunities for the truly disadvantaged. BEE was supposed to do this, but it has not succeeded. Like other affirmative action measures all around the world, it helps the top 15% and bypasses the remaining 85%. Worse still, it harms that 85% by promoting crony capitalism and helping to choke off investment, growth, and jobs.

BEE has been tried; and BEE has failed. It is time to replace with it EED – and a rising tide of rapid economic growth that will far more swiftly lift all boats.

Jeffery is Head of Policy Research at the IRR and the author of the first comprehensive book on empowerment policies, entitled BEE: Helping or Hurting?

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