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Posted: 2006-09-05 / Author: Prof PDF Strydom

Black Economic Empowerment In South Africa

Black Economic Empowerment in South Africa

Black Economic Empowerment (BEE) in South Africa is governed by the Broad-Based Economic Empowerment Act, 2003. The Act regulates the objectives of BEE, the establishment of the BEE Advisory Council, the BEE strategy to be formulated by the Department of Trade and Industry (DTI), the sectoral transformation charters and the financing of BEE. The DTI is primarily responsible for the management and implementation of BEE. In this exposition the sectoral BEE charters of the tourism- and financial sector will be considered and referred to as examples of broad-based BEE.

Historical background

The various reports on BEE that were released by the DTI concentrate on the economic, social and skills disadvantage of black people in South Africa owing to colonial rule and the apartheid system. These systems deprived blacks of access to assets such as land and capital. Moreover, blacks have been deprived of quality education and broad-based skills training. Unequal income distribution emerges as a major topic in these expositions. Moreover, it is maintained that the prominent unequal distribution in this country could easily lead to social instability. It is argued that globalisation tends to enhance unequal distribution as it discriminates against the unskilled in the sense that employment in the modern economic environment is primarily skills biased. These modern global developments, coupled with the historically deprived position of blacks have resulted in blacks occupying a minority position in the South African economy. From a macroeconomi! c perspective it is evident that black people have been denied access to market forces and consequently their skills could not be remunerated by the market mechanism. In terms of public choice theory one could speak of government as opposed to market failure. The extensive discriminatory government rules and regulations prevented market forces from remunerating and allocating the skills of black people effectively. It is not the market system that has failed us but the extensive government regulatory framework that obstructed the market from operating effectively. It is a matter of government as opposed to market failure that explains the historically deprived position of blacks. BEE is a specific government policy to advance economic transformation in order to enhance the economic participation of black people. The reversal of the political and social marginalisation of blacks that gained momentum since 1994 has to be extended to the economic sphere. Government intends to ! achieve this through its BEE policy.

Analytical background

The fighting of poverty is an important aim of government policy in South Africa. Poverty goes hand in hand with economic marginalisation in the sense that poor people, particularly black people in rural areas, have no or limited command over factors of production other than unskilled labour. In this respect the land reform programme together with the housing projects are important elements in the anti-poverty campaign. BEE is supplementing these measures. Over the past 10 years government has made little progress in alleviating poverty. BEE is, therefore, seen as an important new policy tool in alleviating poverty.

Several research papers at Wits University, the University of Stellenbosch and the University of Cape Town have emphasised that employment is the most effective way of fighting poverty. Employment creation in a growing globally integrated economy is primarily in favour of skilled people. In order to enhance the command over factors of production, particularly economic and intellectual skills, investment in people is imperative The outcome of this logic is that investment in people via education and health care are important in creating employment and fighting poverty. Within this framework it could be argued that an explicit policy of investment in people could play a significant role in fighting poverty while opening up access to factors of production for a large part of the South African people, including blacks. In the South African context such a growth policy that is to be achieved through a greater supply of quality people should be supported! by a more growth oriented macroeconomic policy as opposed to the present anti-growth macroeconomic policy in South Africa. Apart from this the liberalisation of the labour market is imperative. The various rigidities of the labour market such as insider-outsider rigidity coupled with hystereses are important barriers to employment growth in South Africa.

As opposed to a growth oriented policy that is aimed at quality people, a flexible labour market coupled with pro-growth macroeconomic policies the South African government is fighting poverty primarily through redistribution. Reforming the labour market does not feature on the policy agenda while education and health care are showing little progress in delivering quality people. The redistribution policy of government is not successfully fighting poverty. Recent research at the University of Kwazulu Natal and the University of Stellenbosch confirm that poverty has widened over the past 10 years in South Africa. BEE should be assesed within this redistribution framework and it is remarkable that the main rhetoric of the old RDP features prominently in official BEE documents. That means there is more emphasis on redistribution than on progressively inspired growth policies coupled with meaningful reform of the labour market.

BEE as a process towards the restitution of historical distortions in respect of the economic marginalisation of black people should be embraced as an important step in favour of the transformation of our economy. Unfortunately BEE is very much part and parcel of government's redistribution policy framework as will be demonstrated below. BEE is not supported by a growth oriented macroeconomic policy and it certainly lacks extensive support from education and health care in the delivery of quality people. As will be demonstrated below, BEE contains a skill-training dimension but this is achieved through private sector resources, again emphasising the redistribution nature of the exercise.

BEE and the broader legislative framework

The Broad-Based BEE Act should be seen within the framework of several acts aimed at addressing economic inequality in South Africa. There was the National Small Business Act, introduced in 1996. It established several institutions to support black small businesses. In 1997 government launched the public sector preferential procurement policy in terms of which government purchases were focused on supporting black small enterprise development. These procedures were regulated by the Preferential Procurement Act in 2000. The Competition Act of 1998 carried exemptions from the provisions on anti-competitive practices if such practices were promoting black-owned or black-controlled enterprises to become competitive. In 1998 The National Empowerment Fund Act created a trust to hold equity stakes in state-owned enterprises as well as private companies on behalf of historically disadvantaged persons. The aim was to promote and support business ventures run! by historically disadvantaged persons. The Employment Equity Act of 1998 outlawed all forms of unfair discrimination in the work place. It required employers of more than 50 people to take affirmative action in order to achieve a representative employment of designated population groups in all occupations and organisational levels within a particular time period.

Government financial assistance for BEE

Government's approach towards the financing of BEE is that its own efforts are merely facilitating BEE and that the private sector should play a dominant role in the financing of BEE. Government has, nevertheless, allocated substantial funds for BEE. These were primarily channeled through the DTI and its agencies such as the IDC, the Land Bank, the Development Bank of Southern Africa, Nsika and Khula. The activities of the IDC give some indication of the extent of BEE funding via the state. The IDC started supporting BEE in the early 1990s when it secured the economic participation of previously disadvantaged persons in financing transactions involving National Sorghum Breweries, NAIL and MTN. Since 1990 the IDC has financed transactions exceeding R6 600 million.

Early private sector BEE initiatives

During the 1990s the private sector embarked on several BEE initiatives. Sanlam sold its major shareholding in Metropolitan Life, a JSE quoted company, to a black-owned consortium. This was followed by similar transactions that were characterised by financing procedures that were based on complicated corporate structures in order to generate the investment funds on behalf of the new black-owned shareholders. Unfortunately the sharp fall in the JSE during 1998 exposed the vulnerability of these transactions in the sense that the black-owned shareholders were unable to finance their debt in terms of the original scheme. From May to September 1998 the monthly average price level of all classes of shares fell by 39 per cent. Apart from these difficulties these so-called economic empowerment deals were characterised by limited multiplier effects in transmitting economic empowerment on a large scale. In a similar way government's efforts, discussed above! , proved to be slow in transmitting economic empowerment on a large scale. In view of this experience government embarked on a broad-based economic empowerment scheme.

Broad-Based BEE

Broad-based BEE is an explicit government policy aimed at redressing past economic imbalances. Moreover, BEE as an important policy instrument to broaden the economic base of the country, to stimulate economic growth, to create jobs while eradicating poverty. Within this framework of government policy BEE is regarded as an integrated and coherent socio-economic process that directly contributes towards the economic transformation of South Africa. It is intended to bring about significant increases in the number of black people that manage, own and control the country's economy as well as significant decreases in income inequalities. BEE is expected to facilitate human resource and skill development as well as investment in enterprises that are owned or managed by black people. The BEE scheme regulates preferential procurement. These claims in favour of BEE will be assessed later on. At this juncture we elaborate on the main elements of the scheme. !

Government is aiming to achieve meaningful progress in BEE by 2014. The following processes are to facilitate and to shape the BEE programme.

Legislation
Government conducts the overall BEE process by means of the Broad-Based Black Economic Empowerment Act of 2003.

Regulation
The progress in achieving BEE will be measured by a scorecard that indicates the achievement of sectoral or enterprise BEE targets over a particular time period ending in 2014. Scorecards measure three elements of BEE viz.

Direct empowerment through ownership and control of enterprises and assets. Human resource development and employment equity. Indirect empowerment through preferential procurement and enterprise development.

The scorecard will enable government to apply BEE criteria in determining qualification criteria for the issuing of licenses, concessions or other authorisations. The scorecard will be an important instrument in the determination of governments' preferential procurement policy as well as in the determination of criteria for the sale of state-owned enterprises.

Direct empowerment refers to an increase in the ownership and control of the economy by black people. This implies that a significant proportion of black ownership in a particular enterprise must be a controlling interest. Control means the right or the ability to control the majority of the votes attached to issued shares. The right or ability to appoint or remove directors by the majority shareholder. The right to control management.

The financial sector scoreboard has 25% as the ownership target for this sector by 2010. The tourism industry scoreboard has an ownership target of 21% for 2009 and 30% for 2014.

The human resource development and employment equity component requires firms to comply with the Employment Equity Act, i.e., to secure an equitable representation of blacks in all occupations and at all levels of organisation over a particular time interval. Skill development and training is to be achieved through the private resources of the firm. The financial sector's scorecard has the following targets in terms of employment equity and skills development by 2008:

Senior management 20%-25%
Middle management 30%
Junior management 40%-50%

Skill development comprises 1,5% of the annual payroll to be spent on skill development of black employees.

The tourism industry's scorecard has the following employment equity targets:

35% of black people in management by 2009 and 50% in 2014 53% of total staff will be black by 2009 and 75% by 2014

For skills development 3% of payroll expenditure will be devoted to skills development over the period 2009-2014. Black employees will receive 75% of the expenditure on skill development over the period 2009-2014.

Indirect empowerment measured by the scorecard refers to preferential procurement by private firms from BEE compliant companies. The financial sector scorecard is targeting 50% of the value of all procurement from BEE accredited companies by 2008 and 70% by 2014. The tourism industry scorecard requires 40% of total procurement to be spent on BEE compliant firms by 2009 and 50% by 2014.

A second component of indirect empowerment is enterprise development. That means investment in black owned and black-empowered firms as well as joint ventures with such firms that result in substantial skill transfer. The financial sector scorecard evaluates these actions in terms of a percentage of the rand amount spent on such developments. The tourism industry scorecard requires 1% of post-tax profits and1% of management time over the period 2009-2014.

The scorecard is an instrument in the ranking of firms. The financial sector distinguishes a rating in terms of 5 categories. The tourism sector distinguishes 3 categories that coincide with the categories that government applies in the ranking of firms.

A good contributor to BEE is a firm with a score of 65% and above

A satisfactory contributor to BEE is a firm with a score of 40% to 64,9%

A limited contributor to BEE is a firm with a score of below 40%.

Ownership and control feature prominently in terms of weights. In the 2014 tourism target it is the single most important element. That means that BEE is an important redistribution policy instrument. This conclusion is becoming more evident if we argue that skill development is a public good. The state is allocating private resources under BEE towards the production of a public good that should be delivered by the state. In the same direction, employment equity requirements are supporting that aspect of government's labour market policy that is concerned with redistribution. One could also maintain that government is applying BEE as a leverage instrument to achieve its labour market redistribution aims under the Employment Equity Act. Looking at the scorecard in this way renders 60% of the DTI weights in favour of redistribution. For the tourism sector this amounts to 63% in 2009 and 62% in 2014. For the financial sector this arithmetic renders 42! %. From this exposition it is evident that BEE and the scorecard in particular will be important instruments in allocating economic resources. The importance of the market system in remunerating and allocating skills and factors of production is overruled by one administrative percentage after the other. It would appear that this policy framework shares one important feature with the past, from which we so desperately want to escape namely the element of government failure.

Looking at the development of new black controlled enterprises the DTI guideline is 10% while tourism proposes 14% in 2009 and 10% in 2014. The financial sector is putting more emphasis on this component by a weight of 22%. We conclude that BEE allocates a greater weight to the redistribution of existing enterprises as opposed to the development of new black-owned enterprises.

Restructuring of state-owned enterprises
BEE is to be achieved through the transfer or sale of equity stakes in state-owned enterprises. Moreover, preferential procurement policies by state-owned enterprises will support the development of BEE.

Preferential procurement by government
Government is focusing its preferential procurement policy on the development of BEE and government departments are legally bound to follow specific codes of practice in channeling their preferential procurement towards black-owned firms.

Participation of black business organisations
Government is developing means of involving black business organisations in the institutional framework that will enhance BEE.

BEE advisory council
The Minister of Trade and Industry is responsible for the BEE Advisory Council. This body advises the President in respect of BEE and to review the progress in achieving BEE targets. It will promote partnerships to enhance BEE and it will advise at the sectoral level as well as the enterprise level in respect of the development of BEE charters. It will also advise on codes of practice and guidelines regarding the promotion of BEE.

Partnerships and charters
Apart from legislation, regulation, preferential procurement, financial and institutional support, government is to seek partnerships with the private sector to accelerate BEE. In this regard the private sector is interpreted very broadly since it comprises private businesses, trade unions and community-based organisations. One could maintain that sectoral and enterprise based charters are a particular form of such partnerships. Charters are to define special mechanisms through which a sector or enterprise will achieve BEE. Government does not expect every sector and every firm to develop empowerment charters but sectors and enterprises that are extensively conducting business with government are strongly encouraged to develop BEE charters. Sectors that have been identified by government for the purpose of BEE, such as tourism, are strongly encouraged to develop charters. Voluntary participation in promoting BEE! is primarily via the scorecard.

Small businesses

A black small medium enterprise (SME) in terms of the financial industry charter is an enterprise with a turnover from R500 000 per annum to R20 million per annum and which is a black company or a black empowered company. A black company is more than 50% owned and controlled by black people. A black empowered company is one that is more than 25% owned by black people and where substantial participation in control is vested in black people.

The tourism industry charter defines a black SME as an enterprise with a turnover of up to R10 million per annum and with more than 50% direct ownership and management by blacks.

In the financial industry charter a financial institution with less than 50 staff members and less than R10 million of designated investments will be exempt from the provisions of the charter unless it opts to be bound voluntarily. In terms of the tourism charter a small business is one with an annual turnover of less than R5 million and with a staff complement of less than 50 employees. The tourism charter exempts a business with a turnover of R5 million and less per annum from the ownership requirement.

From the exposition above it is clear that the role of small businesses, whether white-owned or black-owned is not clear in the BEE programme. A white-owned small business in the tourism industry is exempt from ownership requirement but is obliged to adhere to other aspects of the score card. The financial sector is more explicit in its exemption of small businesses. Small businesses could easily end up in a no mans land where existing rules do not apply to them but where they are discriminated against in terms of preferential procurement.

Towards the end of 2005 the government promulgated new rules regarding BEE and small businesses in terms of a set of codes of conduct. The codes regulate the different elements of the small business score card as well as the criteria in terms of which a small business qualifies as a score card BEE participating business. The following 7 elements of broad-based black economic empowerment are covered by various codes, i.e., ownership, management control, employment equity, skills development, preferential procurement, enterprise development and residual or enterprise specific aspects. Each element (or indicator) carries a weight of 20%. That means that the 7 indicators carry 140 available BEE points. A qualifying small enterprise may elect to be measured in terms of 5 of the 7 elements of BEE.

The BEE status of a small business is defined in terms of 8 categories or levels. The top level secures a BEE procurement recognition level of 135% while level 8 secures only 10%. It follows that a non-compliant firm secures zero percent BEE procurement recognition.

Very small or micro enterprises qualify for BEE compliance exemption. Moreover, they qualify for a level 4 BEE status should they wish to be a participating firm. This secures them with a 100% BEE procurement recognition level. These firms are defined as enterprises with a turnover of less than the VAT registration limit. This tax benchmark is R300 000. In the event of the splitting up of a firm with the aim of qualifying for BEE exemption such procedures will be viewed as an explicit attempt at circumventing the BEE Act.

In order to establish whether a firm is a BEE qualifying enterprise the DTI has identified different firm sizes across various sectors in accordance with the Standard Industrial Classification. In the construction industry, for instance, these different categories are as follows. A medium size firm is one with less than 200 paid employees and a total annual turnover of less than R20 million. A small company has less than 50 paid employees with a total annual turnover of less than R5 million. A very small firm employs less than 20 people with a total annual turnover of less than R2 million. A micro enterprise employs less than 5 people with a total annual turnover that does not meet the VAT registration limit.

These new regulations have clarified many uncertainties regarding the position of small enterprises. From this exposition it follows that ownership and management control feature prominently while skills and enterprise development occupy a secondary position. This clearly illustrates the strong redistributive nature of the small business BEE project. Moreover, the project is clearly aimed at the medium to larger small businesses because they command more resources for redistribution. One would have expected a serious BEE project to accommodate small to micro enterprises more explicitly for future growth and employment.

The relatively high targets for employment equity demonstrate how BEE is being used as a leverage instrument in achieving the labour market redistribution aims of the Employment Equity Act.

Small businesses are often associated with niche markets and therefore they rely on small suppliers, in many cases individual traders or craft people. This is an important reason why these ventures are associated with employment creation. For these enterprises the high 50% BEE procurement target in respect of suppliers have little meaning. It is evident that the redistribution-biased approach of the small business BEE project is likely to fall short in terms of incentives for small businesses.

Summary and conclusion

Black economic empowerment as a specific programme to reverse the systematic exclusion of blacks from full participation in the economy in the past is a commendable effort. The present approach by government to form partnerships with the private sector through charters in achieving this goal is moving in the right direction.

A major criticism against the BEE programme is the fact that it is primarily redistribution inspired. It would have been far more effective if the emphasis had been on the development of new black-owned businesses. As indicated above, this appears to be a relatively small element in the BEE programme and this is regrettable. The evidence shows that government has been unsuccessful in reducing poverty meaningfully through its redistribution policy stance over the past 10 years. In view of the redistribution character of BEE it is likely to disappoint in its efforts to eradicate poverty, to create employment and to enhance economic growth. Its redistribution nature will in all probability merely be beneficial to a small black elite. Without an extensive investment in people BEE will in all likelihood follow the example of other South African redistribution policies in the sense that it will contribute towards a greater unequal distribution of income ! because it will create larger income disparities within the black community by benefiting elitist groups.

GLENHEATH
RUITERBOS
23 October 2005
Revised 28 March 2006

REFERENCES
Bhorat, H. et al. (2001) Fighting Poverty: Labour Markets and Inequality in South Africa, Landsdowne, UCT Press.
Department of Environmental Affairs and Tourism (2005) Tourism BEE Charter and Scorecard.
DTI (2004) Conceptual Framework: Principles and Definitions of Broad-Based BEE.
DTI (2004) South Africa's Economic Transformation: A Strategy for Broad-Based Black Economic Empowerment.
DTI (2005) The Codes of Good Practice on Broad-Based Black Economic Empowerment â?" Phase One.
DTI (2005) Statement 1000: The Organisation of the Qualifying Small Enterprises Codes of Good Practice, the Elements of Broad-Based Black Economic Empowerment and the Qualifying Small Enterprises Scorecard.
Financial Sector ( no date) Financial Sector Charter and Scorecard.
Van der Berg, S. and Louw, M. (2004) Changing Patterns of South African Income Distribution and Poverty, South African Journal of Economics, 72(3):546-572.

Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics


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