Broad-based black economic empowerment (BEE) has had a significant impact on the way business is done in South Africa – particularly for owner-managed small and medium-sized companies, family firms, professional practitioners as well as large public interest entities.
This is despite the fact that the BEE compliance standard and environment is voluntary and self-regulatory.
There are numerous examples of challenges that test the credibility and viability of the government’s broad-based BEE initiative to promote economic transformation to enable meaningful participation in the economy by black people. These include delays of four years and more by organs of state and state-owned enterprises (SOEs) in implementing the first version of the broad-based BEE codes after they became operational, the capacity of verification agencies, transformation charters and sector codes, charter committees promoting changes to key thresholds and targets in the codes, and onerous scorecard compliance targets and indicators.
The legal requirement of the Broad-based BEE Act that every organ of state and public entity must take into account was made effective in December 2011, and applied by SOEs from December 2012.
A significant problem is the propensity of organs of state and public entities to impose pre-qualifying criteria (usually more than 50 percent black ownership) before applying the codes. This needs to be challenged at the highest level.
There is ample anecdotal evidence that significant progress has been made over the years by businesses in implementing the government’s initiative to promote meaningful transformation of the economy.
This progress was largely driven by the largesse of big businesses, and then with the application of the codes by organs of state since the amendments of the Preferential Procurement Policy Framework Act effective from December 2011.
Empirical studies should be conducted and the effectiveness of the codes assessed only after a period of a few years application of the current codes by organs of state and SOEs. It seems the amended codes were based on reasons of political expediency rather than sound analysis and review.
The amendments will have far-reaching negative consequences. They demonstrate unrealistic expectations, failed consensus, and a lack of understanding of what really drives transformation, complexity of the codes of good practice, the government’s failure to take note of commentary on the proposed changes and the public sector’s failure to timeously implement the codes.
BEE-driven transformation needs to be broad-based and entail the involvement of all stakeholders, led in particular by business and not political agendas. The issuing of new onerous and complex amendments that focus on ownership is punitive for non-compliance with minimum thresholds for the three new priority elements.
There are indicators which demonstrate why the application of the amended codes will turn BEE into a nightmare for business, the government and the South African economy. Specific issues include:
There is excessive focus on black ownership in the amendments, which is contrary to the government’s stated policies and it appears to be a reversion to narrow-based rather than broad-based BEE.
The primary reason for the perceived failure of economic transformation is due to the problem that many role players, including the government, have viewed broad-based BEE from the narrow ownership perspective.
A significant concern and perceived threat exists for many business owners and managers, particularly as broad-based BEE touches a raw nerve – ownership and control.
Already buckling under new regulations, many see broad-based BEE as another compliance cost. Numerous grey areas have been created by the codes, which have been compounded by the amendments.
The original codes attempted to encourage the achievement of transformation through phased implementation of scorecard targets over a 10-year period.
Business had the understanding that BEE will have a limited lifespan and that the goal posts or measurement criteria would be in place for 10 years – 2014 was the anticipated sunset year, but with the delay in gazetting the final codes the 10-year term could be interpreted as 2017.
The significant amendments to the codes after only five years since they became effective in 2007, and little more than a year after organs of state (December 2011) and SOEs (2012) were required to apply the codes, appears to be unfounded, arbitrary and politically motivated.
The negative impact of the amendments is evident in the debacle and public frenzy around the socio-economic development element; particularly contributions to charitable organisations. The government undertook to retract the proposed amendments, which is indicative of one case of the effect amendments will have on key stakeholders.
Nevertheless, notwithstanding the government’s commitment to retract the amendment the minister proceeded to make a significant amendment by reducing the number of points from 25 points to only 5 for qualifying small enterprises.
A similar debacle is predicted in relation to businesses now that the amendments have been gazetted. The effects are potentially calamitous and the negative consequences (maybe unintended) disastrous for corporate South Africa.
There is an overwhelming sense that the amendments are draconian and counterproductive. The net result will be to further polarise business and the government, and create a backlash and negative consequences for the economy.
The codes and related targets should have remained unaltered, and the technical errors and interpretive issues addressed and clarified.
Tony Balshaw is the managing partner of Mazars East London and is the partner-in-charge of its broad-based BEE and family business divisions.