B-BBEE proves that when one black person prospers, others do not necessarily benefit by proxy
BUSINESS LIVE / 04 AUGUST 2018 - 08:26 / GWEN NGWENYA
Rand for rand, black South African households today make less than they did relative to white South African households in 1996
The National Aeronautics and Space Agency (Nasa) defines a black hole as "a place in space where gravity pulls so much that even light cannot get out". There couldn’t be a more fitting description for broad-based black economic empowerment (B-BBEE); a policy that has absorbed significant resources — financial and nonfinancial — and which remains a dark area in terms of policy evaluation.
B-BBEE, like its predecessor BEE, still takes and takes, diverting time and money from real black economic empowerment and funnelling it into narrow enrichment.
The purpose of B-BBEE policy is to achieve the economic inclusion of black people into the economy. For such a goal, bottom-line indicators should surely include poverty, unemployment, income and net assets. Yet the effects of B-BBEE on those indicators are nearly nonexistent.
In fact, very little credible evaluation of the effect of B-BBEE in overcoming broad economic exclusion is in the public domain. A World Bank report titled Overcoming Poverty and Inequality in SA, published in March, makes no mention of B-BBEE.
It is either a significant oversight or a telling omission that in this comprehensive report on poverty and inequality, led by the Department of Planning, Monitoring and Evaluation together with Statistics SA, that no analysis on the effects of B-BBEE is provided.
How can it be that there is nothing to say about SA’s central economic inclusion strategy, B-BBEE, in a paper ostensibly about economic inclusion? Or is it rather that what can be said is too unpalatable?
The World Bank’s response to me was that analysis of the effect of B-BBEE on economic inclusion was absent due to the unavailability of data, and that the link between economic inclusion and B-BBEE may not be direct.
The World Bank report is an exceptional piece of work, and it is a pity that there was insufficient data to analyse B-BBEE in a study focused on inequality. It did, however, point me to another paper titled An Incomplete Transition: Overcoming the Legacy of Exclusion in SA’. This paper confirms that "little evidence exists about the extent to which BBBEE achieves its goals".
The paper goes on to propose a social contributory pension, funded through property taxes, as an alternative to B-BBEE. This adds to a growing view that B-BBEE as a policy approach must be reviewed.
I cannot say whether the World Bank’s proposal is one the DA would support, but certainly there is now a commitment in the DA to an alternative empowerment framework. Earlier in 2018, the leader of the DA, Mmusi Maimane, wrote that "we need a wholesale change in empowerment policies, to move away from race-based policies that enable elite enrichment, towards policies that fundamentally break down the system of deprivation that still traps millions of South Africans in poverty".
And the senior policy body of the party, the federal council, reaffirmed that commitment at its latest meeting. The pressing need to go back to basics and sound economic principles of wealth accumulation is evidenced by SA’s dire economic situation.
In 1996, the average white South African household received a total income of R131,504, while a black household received R30,460. Put differently, for every R1 received by a white household a black household received 23c.
Twenty-one years later in 2017, white households received an annual income of R648,222 and black households R133,243. Shamefully this means that for every R1 received by white households today, black households now receive 20.5c.
Black South African households today, rand for rand, make less than they did relative to white South African households in 1996. BEE has been the gravitational centre of transformation policy in SA and the fight to reduce income and wealth inequality, yet despite the rising cost of compliance, we do not seem to be making a dent. In fact, on some indicators we’re going backward.
Unfortunately, much of the reporting on the success of B-BBEE still focuses on the share of black ownership of listed companies on the JSE. An analysis from the JSE conducted by empowerment advisory group Alternative Prosperity showed that as of 2013, 23% of the JSE’s top 100 was held by black people (10% directly, and 13% indirectly through pension funds and other investment vehicles). The proportion held by white South Africans was 22%, the rest held by foreign investors and a remainder of 16% was as yet unanalysed at the time of releasing the results.
But the racial percentage of ownership does not tell us how many black individuals actually benefit. Hypothetically, 100 black "industrialists" could own 10% of the JSE, and those same 100 could increase their share to 15%. Increasing black ownership does not necessarily mean the number of beneficiaries increases. The bedrock measurement of any empowerment policy must be the extent of economic beneficiaries.
B-BBEE escapes this by having people believe that when one black person succeeds the rest benefit by proxy; the politically connected have been able to twist the values of ubuntu for perverse financial ends.
In fiddling with gimmicks, our empowerment policy has completely lost touch with how wealth is created. Income, spending habits, savings and investments are all predictors of wealth. If we are serious about economic empowerment for the greatest number, then unwavering focus must be placed on getting the fundamentals of wealth creation right:
• Creating an environment that is conducive for businesses of all sizes to create jobs. Jobs provide the income people need to escape poverty.
• There needs to be an almost singular focus on steering the education system towards excellence. The economic returns to education, particularly at the higher levels, i.e. completing secondary and tertiary education are significant. Highly skilled people tend to earn more. For wealth accumulation people need not only a job, but to have a job that pays them well enough to put money towards savings and investment; getting them onto a wealth accumulation path.
• Without a job, and without the skills to earn a higher income, exposure to wealth creating investments is minimal. The proportion of South Africans’ income going towards retirement is declining. In 2017, South Africans invested only 10.8% of their gross income in retirement products, down from 15% in 2008.
Outside of retirement, few South Africans put money away with the purpose of accumulating wealth. As of July 2017, only 3% of South Africans held investments in unit trusts, mutual funds or ETF’s.
And only 1% owned listed shares directly. Part of the reason is that financial literacy is low and also that people’s incomes are severely strained. Financial literacy and incentives make it accessible and worthwhile to save and invest.
• For many working South Africans, of all races, supporting adult dependants is an enormous strain on their income, again reducing their ability to accumulate wealth. The phenomenon is often informally referred to as "black tax" due to its greater prevalence among black South Africans. Old Mutual’s Savings and Investment monitor shows that at least one in three working South Africans support "other dependents"; that is, other than children. Government tax policy could do more to lighten the load on taxpayers who are supporting adult dependants, potentially through tax credits.
Public and business sentiment on B-BBEE
In a poll conducted by market research firm, Markdata, on behalf of the South African Institute of Race Relations, South Africans were asked whether BEE had helped. The perception that BEE had helped was lower the more specific and closer to home the beneficiary. Of those responding, 51.4% felt BEE had helped poor black South Africans, 34.4% felt BEE had helped their community, and only 13.1% felt BEE had helped them personally. These results show that government advocacy of BEE is somewhat effective; and that while many South Africans may not have benefited from BEE there exists a stronger perception that someone out there must be benefiting, just not me.
In terms of business sentiment a survey was conducted in 2010 by Prof LP Kruger at Unisa of the top local South African businesses ranging from small and medium enterprises, to large multinational companies. The perceptions and thoughts of 500 individual managers on the effects of BEE on 10 selected dimensions of business performance were sought. The majority of respondents indicated that they disagreed with the notion that BEE would improve their company’s performance in any of the 10 dimensions.
As far as international investors are concerned, the Business Climate Survey published in 2017 by the EU Chamber of Commerce and Industry in Southern Africa, highlighted B-BBEE as one of the top three challenges in SA (the Chamber represents SA’s main trading partner and all European investors in Southern Africa).
Fundamentally B-BBEE policy will not provide the great leap forward to SA becoming a broadly prosperous nation. Countries that have achieved it do not owe their success to shortcuts, but to the hard slog of growing the economy, getting people into jobs and improving the educational outcomes that support higher incomes.
They have poured efforts into financial literacy and better policy support for redistributive spending patterns such as for taxpayers with adult dependants. If policy is not supportive of and measured by its contribution to the wealth accumulation lifecycle then it is unlikely to enable broad wealth creation and economic inclusion.
• Ngwenya is an MP and is the DA’s head of policy.
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER