South African Institute of Race Relations NPC
Submission to the Department of Trade and Industry
regarding the draft
Broad-Based Black Economic Empowerment Regulations, 2016
Johannesburg, 17th March 2016
Synopsis
The Department of Trade and Industry (DTI) has invited public comment on the draft Broad-Based Black Economic Empowerment Regulations (the regulations) published in the Government Gazette on 17th February 2016. This submission is made by the South African Institute of Race Relations NPC (IRR), a non-profit organisation seeking to promote democracy, human rights, development, and reconciliation.
The time allowed for comment on the regulations has been a mere 30 days. This short period means that the constitutional requirement for proper public consultation has not been met.
Some of the provisions in the regulations are ultra vires the Broad-Based Black Economic Empowerment Amendment Act of 2013 (the BEE Amendment Act). Worse still, they are extraordinarily intrusive and will expose business to ever more bureaucratic demands while exacerbating uncertainty about BEE rules.
In example, the BEE Amendment Act empowers a new Broad-Based Black Economic Empowerment Commission (the Commission) to ‘receive and analyse’ BEE compliance reports from organs of state and listed companies. Yet the regulations instead allow the Commission to assess the ‘status of compliance’ of these entities, demand corrections, and conduct site visits aimed at checking reports and assessing ‘non-compliance’.
In addition, the BEE Amendment Act gives the Commission the capacity to ‘maintain a registry of major broad-based BEE transactions’ above a value specified by the minister. Yet the Commission will now be allowed to ‘assess’ a relevant ownership deal ‘at any time’ so as to ‘determine its adherence’ to BEE rules. It will further be empowered to demand that ‘steps be taken to remedy the transaction within a reasonable period’.
These provisions will allow the Commission to re-open an ownership deal concluded several years ago and now under water, and demand that it be ‘remedied’ to its satisfaction. This is not only ultra vires but extraordinarily intrusive and economically damaging.
Still more damaging is a provision saying that organs of state, in ‘determining the qualification criteria’ for the issuing of licences, the implementation of procurement policy, and the granting of incentives ‘must give more consideration to companies that are at least 51% black-owned’.
These provisions will apply to virtually all companies, both large and small. Moreover, if the DTI revives and enacts the Licensing of Businesses Bill of 2013, they will apply to every enterprise without exception, from micro enterprises to the largest corporation.
The revised generic codes, with their more onerous BEE ownership obligations, came into effect less than a year ago. Now the requirements are to be changed again – and virtually all companies are to be put under great pressure to raise BEE ownership from 25% to 51%.
Compliance costs are likely to be huge. Meeting the 25% ownership requirement is already likely to require BEE deals valued at R2 trillion, as the National Empowerment Fund estimated in 2007. If the ownership target is to be doubled, the value of the necessary deals may have to double too. However, allocating so much scarce capital to BEE deals will hardly help to improve infrastructure, increase employment, or enhance competitiveness.
In addition, if many more BEE ownership deals have to be done, existing shareholders, many of them institutional investors such as pension funds, will find their holdings diluted even further. Hence, much of the costs of enriching a small group of BEE owners will again be borne by ordinary savers and pensioners, many of them black.
In addition, the more a 51% BEE ownership requirement is imposed, the more this will amount to an indirect or regulatory expropriation. However, no compensation will be payable for this under the definition of expropriation in the Expropriation Bill of 2015 currently before Parliament. This additional erosion of property rights will further reduce business confidence and undermine the investment climate. It could also trigger disinvestment, increased capital outflows, ratings downgrades, runaway inflation, and a downward economic spiral.
With South Africa already on the brink of recession, the regulatory shackles on business must be lightened, not made heavier still. Instead of constantly increasing the BEE burden, it is time for the DTI to call a halt.
When the ruling party urged the introduction of BEE in 1994, it said this was aimed at ‘removing all the obstacles to the development of black entrepreneurial capacity and ‘unleashing the full potential of all South Africans to contribute to wealth creation’. BEE was never supposed to put a stranglehold on the economy or eliminate existing property rights. Nor was it intended to keep ever more South Africans mired in poverty for the benefit of a relatively small (and politically connected) elite.
BEE has failed in its objectives. It needs urgently to be replaced by a new system of ‘economic empowerment for the disadvantaged’ or EED. This would shift away from the current narrow focus on redistributing a static, if not shrinking, economic pie. Instead, EED would put a necessary emphasis on rapid economic growth, excellent education, and very much more employment as the most effective and sustainable means of increasing opportunities for all.
