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The BEE code and economic transformation

Do the black economic empowerment codes envisage the transformation of the economy – or do they have another agenda?

There is a very interesting clause in the practice note for the Youth Employment Service (YES) document that appears to defy any form of logic.

The YES programme is now linked to the black economic empowerment (BEE) scorecard and promises to promote companies up to two levels if they employ unemployed black youth for a period of 12 months.

The clause states that exempted micro enterprises (EMEs) or 51% black-owned qualifying small enterprises (QSEs) that wish to claim this benefit need to get measured on the full scorecard before they can benefit from the YES promotion.

For the uninitiated, an EME turns over less than R10 million per year and a QSE between R10 million and R50 million. EMEs with less than 51% black ownership are level 4 BEE contributors, 51%+ black-owned EMEs are automatically level 2, and 100% black-owned businesses are level 1 – which is the top of the BEE pile. The same levels apply to 51% black-owned and 100% black-owned QSEs. All other QSEs need to go through the rigorous, onerous and expensive process of implementing a BEE scorecard and taking the level that this process delivers.

It must be stressed that the process is costly, complicated and unlikely to deliver great results if your company has little (10% or less) or no black ownership. In my experience, a level 8 (which is the entry level to the scorecard) is pretty much what most companies would have to settle for without black ownership.

Why?

This begs the question – why would an exempt micro enterprise that is automatically a level 4 go through a verification to get to a level 7 or 8 and then embark on the YES programme to be promoted to a level 5 when they are already a level 4?

Similarly, why would a 51% black-owned QSE want to get verified in the hope that they come up with a level 3 and then go through the YES process to get to a level 1, when they are automatically a level 2?

And why would a 100% black-owned company even bother with YES?

Herein lies the conundrum. Minister of trade and industry Rob Davies has been forced to exclude smaller businesses from his YES programme even though they are the most likely employers of black youth under the YES programme.

The only logical reason he has done this is because a level 4 can get to a level 2 within a year just by employing a number of people that the business might actually need. But then this would pose a threat to black-owned level 2 and 1 businesses when it comes to state procurement.

There is a five and six preference point advantage, depending on the value of the tender, between a level 4 and a level 2 under the 2017 Preferential Procurement Policy Frameworks Act (PPPFA) regulations. This perceived threat to smaller black-owned businesses has to be mitigated against by discouraging lesser owned competitors from reaching their own BEE levels through any programme that promises a promotion of a couple of levels.

The minister himself has tacitly confirmed the onerous nature of the revised BEE scorecard by publishing a proposition that all 51%+ black-owned companies should all be promoted to level 2 irrespective of their turnover. I have a 100% black-owned client that is over the R50 million turnover threshold that could not get better than a level 5 when we took them through the whole BEE scorecard. This company would have truly appreciated the instant promotion that would have come at a fraction of the cost and hassle.

Dubious motive

These developments have me questioning the motive behind the revised BEE codes.

The department of trade and industry (dti) crowed that these codes were more broad-based than ever, stating that they will touch more of the people who need this empowerment than its predecessor.

But if this is the case then surely all companies, irrespective of ownership levels, should be involved in the process? The more companies that hire black people, train them and buy from black-owned businesses and support the black poor, the greater the impact on the economy and society in general.

Yet 51% black-owned companies that turn over less than R50 million don’t have to contribute to any of this because they aren’t measured on it.

I think the reasons behind this are simple, and I must confess that I have been unduly influenced by Institute of Race Relations CEO Dr Frans Cronje’s arguments about the national democratic revolution.

Cronje argues that the National Democratic Revolution (NDR) led by the ANC strives to rid South Africa of all the vestiges of its colonial past. Part of this process would see 51% of the entire economy in black hands. The reward for those companies reaching 51% would be that they may never have to implement a BEE scorecard at all. Everyone would be a level two or higher. And the need to support black-owned businesses and charities would disappear because all businesses would be black-owned.

Punitive

To someone like Davies, a member of the South African Communist Party, this is the purest and cleanest form of transformation.

But it is a very lofty ideal that is unlikely to be achieved in a free market economy. Those companies that do not wish to adhere to this ownership target will be forced to implement the complex BEE scorecard.

This is simply a punitive alternative. Its punitiveness is enhanced when you consider that the targets for elements like skills development, procurement and enterprise/supplier development are not only complex but extremely costly. It attempts to force smaller businesses to get to the 51% black ownership level in the quickest possible way. This pressure has resulted in many smaller white-owned businesses moving to 51% ownership through elaborate empowerment schemes that irritate BEE Commissioner Zodwa Ntuli because she is powerless to curtail them.

Once this concept is understood it becomes quite clear that the codes are less concerned about broad-based transformation and more concerned about giving black-owned businesses a massive competitive advantage over their lesser owned competitors, specifically in procurement that is subject to the PPPFA. To ensure that this advantage is maintained Davies has set up a series of codes that render it almost impossible to meet those levels when a company has to implement the BEE scorecard.

The exception that should be the rule

What is interesting though is that there is one sector code that is never expected to achieve 51% black ownership – the Financial Sector BEE Code (FSC).

This is because of listed shareholding and the requirement of the Banks Act that any shareholder with more than a 15% stake in a bank must meet certain liquidity requirements in the event that the bank requires the shareholder to bail it out.

The FSC is the only BEE code that focuses on the transformation of the entire sector by encouraging those companies to embark a wide range of initiatives that reach the largest amount of people.

I would argue that it is truly a broad-based code.

As for the other codes – they are a smokescreen and if they actually achieve any form of transformation in the future it will be an unintended consequence.

The transformation of South Africa will not come about as a result of those codes. Corporate South Africa needs to prepare to shoulder the blame from this fallout as it has for the government’s failures in the last two decades.

Paul Janisch is a BEE compliance specialist.

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“When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it.”
― Frédéric Bastiat “The law” 1849

Yet another poorly executed policy that undermines the benefits of having a free-market economy. At some point our government will need to decide which ideology they want to follow, implementing a socialist-like policy will do nothing for attracting foreign business. Currently we are probably viewed as the easiest way to enter the African economy with our poor exchange rate, customs agreements with other African countries and existing (or degrading) infrastructure.

BEE is legalized plunder and corruption is illegal plunder. When it comes to the destruction of the economy, BEE actually is much worse than corruption. With corruption the money is gone. With BEE, not only is the money gone, but the entire system of rule of law and property rights is abused and broken.

BEE exchanged rule of law for rule of man, and that is exactly tyranny.

The BEE codes have not led to economic transformation but rather fed the corruption machine of the criminal state that the ANC created.

So I think that there is another agenda – corruption without end by ANC cadres.

“These developments have me questioning the motive behind the revised BEE codes.” Not only questioning the motives, but the whole concept and implementation process. I see visions of Nazi’s measuring ears in their attempt to prove a point. It was as ridiculous as the current government making BEE more and more complicated, because they are trying to make a dead horse fly. The government is trying to achieve an outcome, without going through the (very necessary) stages of education and gaining experience… which would be true empowerment. Just handing over ownership has never and will never be empowerment.

Agree 100%. The radical empowerment transformation, the real RET, that should have become the sole focus in 1994 and beyond should have been built on three pillars – Education, Education and More Education (in all forms). Now this would have really been simple to define – demonstrably improving the skillset of a PDI (the definition of which could have been debated, preferably leaving out the issue of race and focussing purely on disadvantage) by levels of say 10 percent could have earned an enterprise a certain credit and the accumulation of a defined number of such credits would have earned the provider Social Empowerment points. Given realistic targets, an inclusive economy could have been the sole focus (achievable), rather than giving life and feeding the new era racism monster in SA which seemed to be beatable at the time. Life might have been so different now?

Why this obsession with ownership? There are many family owned businesses that employ black people. Much better system would be preferential treatment to those whose net tax rate is higher. At least this would help the country and not be racially divisive. It would also help level the playing field between large and small enterprises.

These great measures are all conditional on whether there is a country next Tuesday.

interesting comments coming on this one. And insults.

But this may depend on how you define “insult”.

If I say “Die ANC het hierdie land deur sy gat getrek” some people may find this statement insulting.

If the ANC says that their current tripartite delegation to Venezuela is “for make benefit glorious nation of South Africa” I will find this insulting.

If the idea is to eliminate poverty, surely the following would be easier.

Tax companies based on how many poor (regardless of colour) they employ.

e.g. For every 50 lowest tax bracket employees, a company gets an extra 5% reduction in tax rate. Minimum tax rate can be set at say 14%. That would encourage companies to hire up to 500 low bracket employees to pay only 14% tax on earnings.

More incentives too if they upgrade poor to higher tax bracket.

Something like this would give companies a real incentive to employ more poor and would be highly progressive.

People respond to incentives, not punishment based on color. A quick policy change could have tremendous consequences.

Embarrassing that it still exits along with AA after 2.5 decades.

I know of a few “BEE” companies where it is a handful of guys who rent a office somewhere which is barely ever open but go down to the parking and it’s ferrari, C63 AMG, Range Rovers etc all for the two guys that supposedly work there. It’s a feeding frenzy that has cost SA billions if not trillions in potential economic activity and jobs.

Now the codes are so complicated that literally no one can definitively tell you what is going on, Gov has already all but destroyed the construction industry and mining industries, telecoms & banking are on route and the BEE codes continue to be more onerous and more costly. AA continues to lead to skills departing SA.

Just seems like one big unsustainable pot that is now reaching boiling point and people like Rob Davies seem blissfully unaware.

The more they transform the economy the more it implodes. 25 years ago they had a slice of the wedding cake. When transformation reaches its logical conclusion they will have the entire portion of a cupcake and will still be wondering what happened.

BEE/AA is one of the (four or five) structural economic problems in RW Johnson’s famed book, that will need reform in order to put SA back on track towards a western, industrialized economy.

On the other hand, one accepts that AA/BEE is a necessary evil to benefit the majority, as they would otherwise not be able to compete in a western economy, mostly due to lack of acceptable basic education.(…laws to protect the majority against the minority…only in SA)

I think AA/BEE will win/survive up to a point (along with other structural problems needed to be dealt with, Labour, rule of law, education).
BEE/AA will survive so long there are still enough funding to “carry” it, e.g. from future retirement fund savings & taxpayer contributions, mix of co-worker employment environment…the strong carry the weak.

Once funding dries up, this social experiment will eventually reduce to nothing (along with whole economy).

AA/BEE is here to stay….fair enough…then the western, industrialised economy WILL HAVE TO GIVE.
These two idiologies are mutually exclusive.

The only thing anyone needs to know about transformation is that at the end of the day whatever is transformed, is destroyed. The rest is irrelevant.

There can be little the economy has transformed. There can also be very little doubt there has been Radical Economic Transformation. I don’t recall Zuma ever saying in which direction RET would be? If you look at Eskom, unemployment, SARS, economic and labour policies, construction mafia etc. I would called that RADICAL.

On what basis can the ANC apply BEE?

The peer group of SA black people – the populations of say Botswana, Zimbabwe and Mozambique, have hardly developed their economies and have started very few small to mid sized commercial businesses.

The same here – BEE takes what it has not built.

Just reading through the article with all its qualifications and rules – what a dis-incentive to start a business.

Remove the red tape so that the economy can unleash its energy!

Something the author, and all promoters of “BEE”, fail to grasp is that it is a complete cost to the economy and disincentive to “normal” business practice. The principle is as completely wrong as apartheid. But I think the killer is that insolvent SA cannot afford it and its multiple layers of negative value businesses (e.g. “BEE Compliance Specialists”). This is nowhere more clearly shown than Eskom. Talk about diligently holing the Titanic below the water line!

Say what you want, but BEE equals apartheid by another name.

The fact that the majority has to be protected from a small minority of people speaks volumes about us as a nation.

Time for the non-Black Business Council, non-Black Lawyers Association, non-Black Accountants etc. because BEE and other racist policies have so discriminated against other races that we also have to segregate ourselves on race in order to be heard.

Couldn’t read a third of this article and then my brain melted. Why would a foreign investor want to invest in this ‘free carry’ for the unwilling and unable? They wouldn’t and hence any FDI that is not in listed bonds or equities is very close to zero

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