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Opinion: Black Economic Empowerment is on life support

MONEYWEB / 12 JULY 2018 - 00:44 / PAUL JANISCH

And Rob Davies is about to pull the plug on SA’s empowerment progress and inclusive economic growth.

South Africa was a battered and bruised country when President Cyril Ramaphosa took over the reins.

Minister of trade and industry Rob Davies (pictured) has proposed that all 51% or more black-owned businesses should be exempt from BEE compliance altogether. Picture: Waldo Swiegers/Bloomberg

There was an air of immediate optimism after his state of the nation address. It seemed as though his Thuma Mina proposal was going to get the country to work and everyone was going to roll up their sleeves and get involved. Ramaphosa started out by cleaning up aspects of his cabinet and the entities immediately under his control. Many commentators lamented about the continued employment of dubious cabinet ministers such as Bathabile Dlamini and Malusi Gigaba. Those two ministers have been put in their place, with their ability to destroy society and the economy.

Ramaphosa did however retain one minister in his original portfolio, who has caused an immeasurable amount of harm to the economy: Rob Davies, the Minister of Trade and Industry.

I’m not in a position to comment on his broader role as minister, but I have watched him destroy whatever good that a Black Economic Empowerment (BEE) policy had the potential to deliver.

Davies appears to work on the principle that if it’s not broken then change it and make it more onerous. The warning signs were there when he amended his BEE codes in 2012, after giving the initial codes a mere five years to succeed. At the time, I thought that this was as a result of certain powerful lobby groups that had the ear of then President Jacob Zuma. It seems as though this was an incorrect sentiment. Davies has continued on this strategy of destruction since the advent of Ramaphosa’s presidency.

I can only speculate about the reasons for the revision of BEE codes in 2012. But I suspect that some quarters were unhappy with the seeming ease of compliance and that black businesses were finding it difficult to compete with their white-owned counterparts, who were achieving scores that rivalled theirs without ownership. News of the revised BEE codes, along with other unsubstantiated allegations that black companies were being wholly ripped off by verification agencies, prompted Davies and his department to change the structure of BEE and make the targets and requirements more onerous. On top of this, they ensured that the BEE scorecard marked negatively against those who did not meet certain sub-minimum requirements under three elements [RM1]. To skew the system in favour of black-owned businesses, Davies automatically exempted businesses that are 51% or more black-owned with an annual turnover of over less than R50 million and promoted them to BEE levels that would give them a huge leg up under state procurement – a level that the average business that had less than 51% black ownership would be hard pressed to match.

I would suggest that even though the revised targets made compliance more onerous, companies were finding ways to comply. And, as with all systems, a variety of clever schemes were identified to get to 51% black ownership with minimal fuss or a reduction in control.

In some cases, these schemes had raised the ire of BEE Commissioner Zodwa Ntuli, who realised that she could do nothing about them unless she went to court. Her toothlessness was brought to the attention of Davies, who then attempted to close up some of these loopholes in amendments that were published for comment in the last three months.

However, Davies did not think that he should merely close up the loopholes and proposed a wide variety of amendments that would address a few of the government’s educational and employment challenges.

Choosing to ignore Ramaphosa and the ANC’s Thuma Mina programme, Davies decided to exempt all businesses whose ownership levels are 51% or higher from any of the elements within the BEE codes, irrespective of turnover. The most notable amendment was the requirement that companies should pay 2.5% of their payroll over to black students as bursaries in exchange for four points under skills development.

In his wisdom, Davies tied this requirement to the BEE scorecard benefits that the Youth Employment Service (YES) would provide. In other words, if you want to benefit from the promotion that YES could provide, you have to have achieved all four points for bursaries.

This proposal was greeted with almost no enthusiasm from big business, prompting Davies to withdraw the requirement from the amendment. Davies still made sure that whatever benefit the YES could offer (which could mean a promotion up to two levels for over-achievement of the YES targets) would be negated by other onerous and counter-productive conditions. This should have been a major red flag for Davies but he must have thought that 2.5% of payroll to be spent on bursaries was an achievable target. It seems he failed to speak with those entities that have been forced to comply with his revised BEE codes. Using the payroll spend of one of the big four banks in 2012, my calculations show that a large financial institution would need to spend close to R400 million to get these four points. In fact, it’s doubtful whether Davies has ever spoken to the business community. It’s even more doubtful whether he has ever considered the comments that come from those entities after he has published the amendments for comment. I have my absolute doubts that he has applied his mind to or even read the drafts that he has published for comment since he began his tenure in 2009. Now when you consider that he has proposed that all 51% or more black-owned businesses should be exempt from BEE compliance altogether and automatically be promoted to a level that few companies with less ownership can compete with, you start to see a picture emerging. The whole BEE process is being set up for failure. As 51% black ownership becomes more of a requirement, more companies will find ways to restructure within the prescripts of the BEE codes. This means that they will no longer need to consider bursaries, skills development, who or what their suppliers look like. Enterprise and supplier development contributions as well as socio-economic development contributions will dry up altogether.

Narrow-based BEE will become the norm and black-owned businesses will find it unnecessary to own the means of production because they can earn a very decent living acting as agents or resellers for established businesses that couldn’t be bothered with ownership. These same black businesses will become plentiful and will be forced to compete with each other in terms of commissions that are paid out. The more resourceful black-owned businesses will ensure that they are on the necessary vendor lists to streamline the process. Who then is left to attend to the social redress that BEE is supposed to address? The only likely candidates will be those companies subject to the Minerals Act and those listed on the JSE that will never be able to get to 51% black ownership.

I am heartened by the corporate protest that resulted in Davies withdrawing his bursary proposal as a condition for YES compliance. But it’s not enough. Even the most jaded naysayer will recognise that this country’s future is dependent on a consistent BEE strategy that stimulates inclusive growth and drags us out of the mire that Zuma left us in. We need more corporate activism across the spectrum.

Failure to do so will have dire consequences for us all. Davies’ economy-wrecking strategies need to be checked all along the way. Let us see if large business is up to the challenge. Paul Janisch is the strategic director of the Caird Group, an independent broad based BEE consultancy.

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LINK : https://www.moneyweb.co.za/moneyweb-opinion/black-economic-empowerment-is-on-life-support/​

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