ANDILE NTINGI: Is BEE here to stay or is it facing its demise?

If staunch supporters of BEE policy have not yet hit the panic button over the legal and regulatory setbacks suffered by the policy, they had better do so now. There is a concerted pushback under way against BEE, not just to roll it back but to end it.

Resistance to BEE is gaining momentum despite the failure of the policy to alter the ownership patterns of the SA economy, which is still overwhelmingly dominated by white-owned businesses, foreign multinationals and state-owned enterprises (SOEs) nearly 30 years after the end of apartheid.

In response to calls for BEE to be scrapped or drastically amended, which grew louder in November, President Cyril Ramaphosa defended the policy, arguing that the fate of black people cannot be left to the markets and that a policy intervention such as BEE is still needed to bring black people into the mainstream economy.

While Ramaphosa did his best to allay fears over the policy being abandoned, there is no denying that BEE is losing credibility in the eyes of many South Africans because of its unintended consequences and its failure to uplift the majority of intended beneficiaries.

The pushback against BEE happens at a time when there is a rise of organised extortion groups that are demanding to be given contracts or paid bribes in various sectors of the economy, including mining, construction and transport, under the guise of enforcing BEE compliance in those industries.

These extortionist groups, which in some instances use violence and threats to achieve their goals, are a clear impediment to economic activity and attracting investment, risking SA’s economic prosperity.

First setback

The first major setback BEE suffered was in 2018 when the high court in Pretoria ruled in favour of the Chamber of Mines and against the department of mineral resources & energy in a matter concerning the “once empowered, always empowered” principle.

The chamber, which is now called the Minerals Council SA, was seeking a declaratory order to have the “once empowered, always empowered” principle adopted as law ahead of the implementation of Mining Charter III, also known as the Broad-based Socio-economic Empowerment Charter for the Mining & Metals Industry.

This court judgment in effect recognised the continuing consequences of previous BEE ownership transactions, implying that mining companies were not obliged to perpetually replace black investment partners in the event the original partners sold their shares. The ruling also meant mining companies could retain their black ownership status and mining licences after the exit of black shareholders.

This court victory bolstered resistance to BEE in other heavily regulated sectors such as financial services, where there was a push for the adoption of the “once, empowered, always empowered” principle. There has been a dearth of major BEE deals since before the 2008 global economic crisis due to companies resisting having to redo BEE transactions. 

Second setback

After BEE deals dried up as a source of wealth accumulation after the 2009 global economic crisis, prominent black people who could no longer lean on their political connections to acquire stakes in large, white-controlled companies had to find an alternative source of generating wealth.

Their next target was procurement, where they took advantage of preferential procurement regulations to access lucrative government tenders. Many of these politically connected people became wealthy middlemen, selling goods to the state at huge markups, something that would have been impossible to achieve if these goods were purchased directly from the manufacturers or retailers.

In 2017 the National Treasury introduced preferential procurement regulations that disqualified BEE-noncompliant suppliers from bidding for government tenders. This action resulted in business group Sakeliga launching a lawsuit to challenge the enforcement of the regulations on the basis that they were unlawful and did not promote “value for money” procurement of goods and services by the government.

The litigation by Sakeliga resulted in BEE suffering its second major setback when the Constitutional Court ruled in favour of the business group in January last year. This judgment forced the National Treasury to gazette new procurement rules in November, which exempt government entities from being legally obliged to comply with BEE and local content regulations when purchasing goods or contracting service providers, if that noncompliance makes commercial sense.

The biggest implication of this judgment is that local and black suppliers must compete on price and quality to access tenders. The ruling will also result in the state minimising wastage when procuring goods and services.

In 2016, former chief procurement officer Kenneth Brown revealed that 40% of the government’s R600bn annual spending on goods and services was eaten up by fraud, which manifested in grossly inflated prices charged by suppliers. The new regulations came into effect on January 16.

Recommendations 

But do these setbacks mean BEE is in its sunset or termination phase? There are people who believe the policy’s days are numbered, and I agree that it cannot carry on in its current form. It must be reformed to inculcate a culture of entrepreneurship in black communities and contribute to employment creation and economic growth.

I believe the following interventions can make BEE more effective: 

• There must be a concerted effort to position development finance institutions such as the National Empowerment Fund and Industrial Development Corporation to help black entrepreneurs acquire businesses in industries they have operational experience in. During the apartheid era an institution known as the Bantu Investment Corporation funded the acquisition and transfer of white-owned businesses to black entrepreneurs.
• The government must consider introducing tender set-asides that ring fence at least 20%-30% of the procurement of goods and services to be sourced from black suppliers that are the primary producers of those goods and services. Tender set-asides have been successfully implemented in Malaysia and the US. In the US set-asides are used to empower ethnic minorities such as African Americans, indigenous tribes and Hispanics, while in Malaysia set-asides are used to benefit the Bumiputeras (ethnic Malays), who make up 67.4% of that country’s population. Like SA, the US economy is dominated by white capitalists, while the Malaysian economy is largely controlled by ethnic Chinese. African American scholar Bessie House-Soremekun concluded in a research paper that entrepreneurs who benefited from set-asides in the US were more successful than those who didn’t.
• The private sector must embrace the elements of BEE that encourage the development of skills and small businesses. Key pillars of BEE such as skills development, and enterprise and supplier development must be retained in an amended BEE policy. The enterprise and  supplier development element, which encourages large corporates to fund black businesses or procure from 51% black-owned companies with revenues not exceeding R50m, is critical in developing small, medium and micro enterprises. As a country we cannot do away with it. 

It remains to be seen whether it is too early to start writing the obituary of BEE. Will those seeking to kill the policy prevail over those defending it, or can it be successfully reformed? One thing is clear to me: BEE cannot survive in its current form.

• Ntingi is the founder of GetBiz.