South African Institute of Race Relations NPC
Submission to the Department of Trade and Industry
regarding the draft Phase 2,
Broad-Based Black Economic Empowerment
Codes of Good Practice
gazetted for public comment on 10th October 2014
Johannesburg, 9th December 2014
Synopsis
The South African Institute of Race Relations (SAIRR), a non-profit organisation formed in 1929 to oppose racial discrimination, wishes to comment on three of the five issues included in the draft Phase 2, Amended Broad-Based Black Economic Empowerment Codes of Good Practice (Part 2 of the revised codes), that were gazetted for comment on 10th October 2014.
Statement 003
In setting out amended rules for transformation charters, sector codes, and new ‘transformation plans’, this statement aims at giving the Government significant scope to introduce black economic empowerment (BEE) requirements in various spheres of the economy, as designated by it. However, this contradicts the Government’s assurances that BEE is a voluntary process. The revised rules will also allow the Government to ratchet up already onerous BEE requirements both in these specified spheres and in other sectors already covered by sector codes. This will make BEE compliance significantly more difficult. It is also likely to deter investment, thereby restricting growth and adding to unemployment. This, in turn, will worsen the poverty and inequality that flows from widespread joblessness.
Statement 103
This statement deals with the recognition of equity equivalents for multi-national corporations. It makes an important concession in allowing BEE points to be scored for partial contributions that amount to less than 25% of the value of the South African operations in question. However, the new rules regarding ‘investment periods’ and ‘top-ups’ are so vague as to be largely unintelligible. This contradicts the rule of law, even though the Constitution requires respect for this founding value of the new order at all times.
Code Series 600
Ambit
This code series lays down revised rules of good practice for qualifying small enterprises (QSEs), with annual turnover of between R10m and R50m. It will apply to some 34 100 small and medium enterprises that are currently registered for Value-Added Tax (VAT).
The proposed rules will require these QSEs – which can presently choose four out of the seven elements of BEE to fulfil – to comply with all seven elements. (Though the revised codes refer to five elements, none of the existing elements has in fact been removed as some elements have instead been amalgamated with others.) In addition, the relevant BEE requirements have been significantly tightened up in all spheres.
Costly and unrealistic requirements
These changes could triple the costs of BEE compliance for small firms. Yet many of these small businesses are already battling to survive in an economic climate of low growth, high inflation, persistent electricity shortages, poor transport, high crime, and limited skills. Not surprisingly in these circumstances, South Africa also lags far behind other emerging markets as regards the size and success rate of its small and medium enterprises. The Government thus urgently needs to boost the small business sector, rather than undermine its profitability and reduce its prospects of survival.
Many of the BEE targets set in Part 2 of the revised codes are unrealistic and will be difficult and costly for QSEs to meet. They are also premised on the implicit assumption that demographic representivity is the ‘norm’ and that its absence in any sphere of business requires government intervention. However, the supposed ‘norm’ of demographic representivity is in fact a myth, for the phenomenon has never been found to exist in any heterogeneous society in the world (as research by Professor Thomas Sowell and other international scholars has repeatedly shown). This is largely because proponents of the alleged ‘norm’ overlook relevant differences in age, education, and experience which need to be taken into account, rather than disregarded.
Revised BEE targets
Raising black ownership to 25% and black management control to between 50% and 60% will be particularly difficult for many family-owned businesses to achieve. Increasing the target for skills development from 2% of payroll to 3% of payroll will be costly for many QSEs, especially as this comes on top of the skills levy (1% of payroll) already payable. To earn any BEE points, QSEs will also have to have their workplace skills plans approved by Sector Education and Training Authorities (SETAs), many of which are inefficient and poorly functioning.
Raising preferential procurement from ‘empowering suppliers’ to 60% of annual purchases on goods and services may also be difficult for QSEs to achieve, and is likely to add to procurement costs. In addition, the obligation to spend 2% of net annual profit on incubating and assisting suppliers and other enterprises that are 51% black-owned will be particularly onerous for existing small businesses, many of which are battling to sustain their own operations.
As for socio-economic development, the points available will drop from 25 under the current codes to a maximum of 5. In addition, charitable giving to children and the aged, for instance, will no longer earn any BEE points at all as the new rules will recognise only those contributions that are aimed at helping beneficiaries to earn an income.
Ramifications
As one commentator has warned, the revised codes are ‘likely to turn BEE into a nightmare for business, the Government, and the South African economy’. Increased compliance costs will reduce the profitability of firms, limiting growth and hampering the generation of new jobs. In addition, the fundamental changes to the generic codes now being made by the Department of Trade and Industry (DTI) are widely seen by business as unexpected and unwarranted. Their introduction is adding to policy uncertainty – for no one knows what additional changes may be ushered in – and is likely to undermine the investment climate even further.
However, South Africa cannot afford these outcomes when the small business sector is so small, the projected rate of economic growth in 2014 is already down to 1.4% of gross domestic product (GDP), and the unemployment rate (on an expanded definition that includes discouraged workers) has long exceeded 35%.
In addition, when the economy predictably begins to flag still further under the burden of these revised rules, the impact will fall most heavily on the 17m or so South Africans who live in relative poverty. These individuals are likely to suffer significant harm. At the same time, few will have any realistic prospect of ever benefiting from BEE ownership deals, management posts, preferential tenders, employee training, or new small businesses to run.
Contradiction with the Constitution
Both the current and proposed new BEE rules contradict the Constitution’s strong emphasis on non-racialism as a founding value of South Africa’s new order. By implicitly requiring racial classification and racial differentiation, BEE rules clearly contradict the equality clause and its express prohibition of racial discrimination. BEE rules are also not saved by the affirmative action provisions in the equality clause, which allow redress for unfair ‘disadvantage’ but make no mention of race, racial targets, or any supposed need for demographic representivity.
These core constitutional considerations are sufficient in themselves to require a shift from BEE – with its emphasis on race – to a different and more effective form of affirmative action which may be termed ‘economic empowerment for the disadvantaged’, or ‘EED’
Deep-rooted social factors beyond the ambit of BEE to address
Many of the reasons for persistent racial inequality in South Africa lie in factors that BEE rules, both current and proposed, are unable to address. These include a widespread breakdown of family life, leading to single parenthood and absent fathers; bad public schools and often ineffective teachers, high rates of crime; widespread alcohol and drug abuse; a debilitating dependence on the Government to provide; and a mistaken reliance on BEE targets and set-asides that generally benefit a relative elite while bypassing the poor.
In the United States, where 50 years of race-based affirmative action has done little to assist the truly disadvantaged among African-Americans, commentators and policy makers have begun to recognise the need to start addressing these deep-rooted social issues. This is encouraging a shift away from race-based affirmative action towards interventions that are based on socio-economic factors such as income, schooling, neighbourhood, and family structure. These interventions provide a far more realistic way of benefiting the marginalised, while also having the advantage of being race-neutral.
In South Africa, however, the current and proposed BEE generic codes remain primarily aimed at those people who are identified as ‘black’. The poor have generally been harmed rather than helped by these policies, which have worked primarily for the benefit of a relative elite within the black majority. Moreover, as this elite has moved up the economic ladder, so race has become an increasingly unreliable predictor of disadvantage. Yet existing BEE policies, as well as Part 2 of the revised codes, overlook this reality. This allows the relative elite to continue garnering the benefit of race-based preferences, even as the poor are left further and further behind.
A shift from BEE to ‘EED’
BEE needs to be transformed into ‘EED’ or ‘Economic Empowerment for the Disadvantaged’. EED differs from BEE in two key ways. First, it is not race-based, but uses income and other indicators of socio-economic disadvantage as the foundation for its interventions. This allows racial classification and racial preferences to fall away, instead of becoming permanent features of policy. This in turn will reduce racial awareness and potential racial polarisation, helping South Africa to uphold the principle of ‘non-racialism’ embedded in the Constitution.
Second, EED focuses not on BEE outputs in the form of numerical quotas, but rather on providing the inputs necessary to empower poor people. These include decent schooling, opportunities for tertiary training on the sound foundation thus laid, a realistic chance of jobs and income, and the entrepreneurial skills and other inputs needed for success in business.
Given widespread inefficiency, wastefulness and corruption within the public service and many public institutions, a host of other reforms should also follow. To increase the quality of education, for example, public schools – some 80% of which are largely dysfunctional – should be sold off to civil society organisations or private firms that would have to compete on price and quality for the custom of parents armed with education vouchers provided by the State. Such vouchers would be funded from tax revenues and would be roughly equal to what the Government now spends on every pupil at a public school (roughly R12 000 a year). Financially empowered parents would have the capacity to ensure that principals and teachers are appointed on merit and assessed on performance, that the relevant curriculum is completed each year, and that discipline is maintained.
A similar approach could apply to the country’s floundering public hospitals and clinics. These too could be privatised and encouraged to compete for the health vouchers provided to all households from tax revenues collected by the State. Membership of private medical aids would become affordable to many more, while competition for new customers, together with effective steps to increase the supply of health practitioners and reduce the regulatory burden, would help to hold down medical inflation and raise the quality of the services provided.
State-owned enterprises, most of them inefficient and a continuing drain on the public purse, should be sold off to the private sector, accompanied by measures to guard against new monopolies and promote competition. This would unleash the creativity and dynamism of business in overcoming the electricity crisis, expanding essential infrastructure, and maintaining resources already built up.
A host of municipal functions could also be outsourced to the private sector. This should be done under a competitive and transparent tendering system that would be kept free of corruption and other abuses of power by ending the culture of impunity and punishing transgressors. Functions assumed by business in this way could range from maintaining roads and filling in potholes to fixing traffic lights and bringing chaotic billing systems into order. Rates and other revenue would continue to be redistributed in large measure to historically disadvantaged areas, but monies would be better spent – with far more bang for every buck.
Instead of race-based BEE equity deals, which largely benefit a small black elite with close ties to the ruling party, all employees should be given the opportunity to take part in employee share ownership programmes. This would give all staff tangible reasons to raise productivity, reduce absenteeism, and boost the economic performance of firms. It would help tie pay increases to productivity gains and improve the ‘co-operation in labour-employer relations’, for which South Africa ranks last among 148 countries in the World Economic Forum’s most recent global competitiveness report. Says labour expert Tony Healy: ‘It would begin to win the hearts and minds of employees . . . and create wealth’ for them as well.
All other aspects of BEE, as set out in the generic codes, should be scrapped. Preferential procurement makes for corruption and waste and needs to be stopped, as the secretary general of the African National Congress (ANC), Gwede Mantashe, stated in 2012. In the same year, Mr Mantashe also urged BEE companies to ‘stop using the State as their cash cow by providing poor quality goods at inflated prices’, which are sometimes four times higher than what the private sector would pay. However, this is unlikely to occur while preferential procurement policies remain in place. Other BEE requirements also place too heavy a burden on South Africa’s fragile economy to merit their continuation; especially when they bring so little benefit to the truly disadvantaged.
Freed from the leg-iron of BEE, the private sector could begin to concentrate again on its core business. The black entrepreneurship so long stifled by apartheid would then no longer be undermined by the culture of entitlement that BEE has fostered. Black South Africans would also be freed from a system that makes them increasingly dependent on the Government – and which often disregards and diminishes black achievement in its narrow focus on monitoring and measuring the BEE contributions made by whites.
A new dynamism would then enter the economy. With the heavy hand of the State removed, the BEE burden removed, labour regulation substantially reformed, and the infrastructure backlog diminishing, direct investment would begin to soar. Business and entrepreneurship would thrive, and jobs would rapidly expand. The skills of all South Africans would be used to the full, while new skills would soon be generated to help meet growing demand. With demand for labour rising, wages would go up as well – not because of government fiat or violent strikes but in response to market forces.
With economic freedom expanding in this way, South Africa could soon join the ranks of the most free countries – nations where annual average GDP per head stands at some US $38 000 or R420 000 and even the poorest 10% of people have annual average GDP per head of around US $12 000 or close on R135 000. The average rate of economic growth could also rise to the key figure of 7% of GDP a year. As former Reserve Bank governor Gill Marcus has pointed out: ‘With growth of 7% a year, you double your income every ten years.’ A rising tide of this magnitude would swiftly lift all boats. Nothing could do more to overcome past wrongs and build prosperity for all.
South African Institute of Race Relations – 9 December 2014
Related content – SAIRR Submission on draft Phase 2 of the Amended BBBEE Codes of Good Practice 9 December 2014
