Are the calls for BEE revision growing? – an alternative plan

December 4, 2019

BIZNEWS /  03  DECEMBER 2019 - 11.02 /LINDA VAN TILBURG

 

 

 

To comment on the success of Black Empowerment policies is a bit like the game “Whack a mole”.  Although some people like Moeletsi Mbeki openly state it is a policy that deters investment in the country, most people prefer to say nothing or if they do comment they quickly retreat before they can be slapped down.

 

The comments that you do hear, include the criticism that it benefits only a select few and that the trickle-down effect that it was supposed to help the poor, did not take place. Inequality in South Africa has grown to one of the highest in the world. It has also not lead to a development of skills on a broad basis as only a select few have been chosen and have benefitted greatly. In South Africa, it is not uncommon to hear of a young black businessmen who has 10 or more 26% stakes in companies and associated board positions. As a businessman recently said; this nurtures a portfolio approach that is not conducive to developing deep operational skills. BEE companies also appear to have a licence to charge more for their products and services which does not help the economy. There are cases where a company charges X for its products and services and by the time that BEE partners have been engaged; the final price could be 3X. Terence Corrigan from the Institute for Race Relations writes in the Daily Friend that it is time for BEE to go. – Linda van Tilburg

 

 

 

 

Time for BEE to go

 

By Terence Corrigan*

 

It’s rare that a corporate leader in South Africa is willing to rise above the parapets on a touchy issue, and noteworthy when one does. So it was interesting to hear Capitec CEO Gerrie Fourie speak out recently against Black Economic Empowerment (BEE).

Speaking to radio host Bongani Bingwa, he said: ‘If you look at BEE in totality in South Africa, unfortunately, it hasn’t worked because it should be there to help all South Africans and unfortunately it has only helped a couple of people. I think that is something that we need to work on as South Africans.’

This is an important assertion, but in the politically saturated environment in which the country’s businesses must operate, it is – in public at least – an atypical one.

This is not to say that Fourie’s views are unique. BEE has long been attacked by such public intellectuals as Moeletsi Mbeki. And even from within the ruling party, there have been acknowledgements that BEE was not achieving the transformational goals its proponents had hoped for, and doubts about whether its outcomes justified its costs.

 

Thus, some years ago, then finance minister Pravin Gordhan remarked that ‘BEE policies have not worked and have not made South Africa a fairer or more prosperous country’. His colleague, then ANC secretary general and now mining minister Gwede Mantashe, memorably decried the excessive expenses the state was incurring through this policy: ‘This thing of having a bottle of water that you can get for R7 procured by the government for R27, because you want to create a middle-class person who must have a business, is not on … It must stop.’

 

For all this, BEE remains a well-near sacrosanct element of policy, justified not only as an economic necessity but as a moral imperative. To the extent that BEE is open to any serious critical scrutiny within government, it is often said that it must be made ‘better’ or – as the President said in Parliament earlier this year – that it must be ‘strengthened’. Employment equity, the intimate policy cousin of BEE, is set to be applied more ‘harshly’.

For all this, BEE is a major impediment for businesses operating in South Africa. Recognising the political context, most people decline to speak up publicly, or they phrase their words carefully. But meeting onerous racial targets, not least involving the ceding of ownership, is at best a serious consideration and more likely a disincentive for investment.

 

From time to time – as with the escalating demands of the Mining Charter – business leaders may be moved to express themselves publicly on the matter. In private, as we at the Institute of Race Relations (IRR) have experienced, criticisms are often robustly expressed by businesspeople, local and foreign. For the most part, though, they will express concerns delicately and indirectly, the favourite term for conveying disapproval being ‘policy uncertainty’.

 

A European Union discussion paper last year on investment in South Africa is an example of this. While the EU tries to present itself as supportive of the goals of the policy, it is clear that BEE constitutes a significant hindrance to new investment by European firms, and an obstacle for those operating here.

While much of the BEE system was of concern, ownership requirements arising from BEE topped the list of challenges facing EU-based firms. Demands to cede a portion of equity, or to underwrite an ‘equity equivalent’ are expensive and often impractical, particularly for smaller and family-owned firms. The discussion paper points out that when State-Owned Enterprises ramped up to 51% the ownership requirements that firms seeking contracts would have to meet, a number of EU investments were postponed.

Perhaps more striking is what BEE may mean for South Africa’s businesspeople. Since before 1994, policy makers have invoked entrepreneurship and small business as a foundational element of economic success and socio-economic progress. Indeed, EY executive Azim Omar recently put it thus: ’South Africa has a severe jobs crisis. The only way to help create jobs is through encouraging greater entrepreneurship and learning from people who have been successful despite a stagnant economy and difficult circumstances.’

 

This was part of the motivation for BEE, the understanding that emerging black businesspeople would be able to leverage preferential treatment to place themselves in the economic mainstream, and in so doing would create the jobs that the country’s people so desperately needed. (In the 1990s, a senior official at the Department of Trade and Industry said that government would help such businesses into the mainstream, after which they would need to ‘sink or swim’.)

On these terms, BEE has performed poorly. The Global Entrepreneurship Monitor has long shown South Africa as a society that respects and values its entrepreneurs, but in which entrepreneurship performs indifferently. And, rhetoric and policy interventions aside, there is little evidence for a flowering of small business.

 

The reasons for this are complex, but at the very least, there is little to suggest that BEE is playing a constructive role. Indeed, research by small business think tank SBP pointed to frustration with BEE. It was widely seen as a burdensome system that imposed costs for few benefits. Interestingly, this criticism was not limited to white businesspeople. A black entrepreneur quoted in one of SBP’s reports said: ‘I don’t see why I should pay people to say that I’m black. We need to be clear that we’re doing things for the right reasons – creating skills and improving the country.’

This comes back to the essence of Fourie’s concerns. BEE has produced neither large volumes of wealth and opportunities for the economy as a whole, nor extensive benefit to society. Perhaps it is time to accept that it probably never could. Preferential policies centred on race or ethnicity will tend to be most beneficial – indeed most accessible – to those in the target groups best placed to seize and exploit them. These will, in turn, tend to be those least disadvantaged. Where politics and business intersect, as in South Africa, political connections will inevitably loom large – at times larger than racial or ethnic considerations.

 

Such policies in Malaysia, for example (at one time regarded as a model for South Africa), have increasingly come under criticism for encouraging cronyism, and for failing to effect the structural transfer of economic control that had been intended – and also for sparking inter-ethnic bitterness.

In other words, contrary to what some commentators have argued, BEE has not failed in its implementation, but in its conception. This raises a choice. South Africa can continue on the current course, with all of its costs and the limits of its outcomes. Or it can change course, and consciously target those in the country who are poor, who lack the opportunities for mobility, and in the current political economy are unlikely to attain them.

We at the IRR advocate a policy that would do just this – Economic Empowerment for the Disadvantaged (EED). Rather than assuming growth with happen, and that this must be subjected to a tax of sorts, in hopes of redistributing some of the bounty to a small group of insiders, EED would seek to incentivise business to do what only it can, and what the country so desperately needs: to expand the pool of wealth and enable the country’s most economically excluded to draw from it.

 

Thus, a policy of EED would recognise investment, job creation, tax revenues and export earnings. It would reward training efforts and staff participation and profit-sharing schemes. It would credit initiatives in education, healthcare and housing for poor people. It would seek to confront exclusion and material deprivation directly and forthrightly, rather than through increasingly doubtful proxies.

Gerrie Fourie has done the country a service through expressing his sentiments openly and clearly. Perhaps, though, the last word belongs to his interviewer: ‘More now than ever really the voice of business is needed’. As the limitations of BEE become more apparent, there is a need to speak forthrightly in favour of an alternative. The country is paying a steep price for failing to do so.

 

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LINK : https://www.biznews.com/sa-investing/2019/12/03/calls-bee-revision-growing-alternative-plan

 

Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER

 

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