New rules came into force for South Africa's Black Economic Empowerment (BEE) codes on May 1, but confusion over the implementation of these reveals again just how little control the state really has over its affirmative action policy.
It's this that has left the government open to manipulation by accountants and lobbyists, who are more intent on making a quick buck, and has steered the process away from one of a balanced fair one for firms.
Confusion reigned recently, until the Department of Trade and Industry (its minister Rob Davies is pictured above) issued a notice on Monday, in which among others it extended until October the date by which sector-specific BEE codes must be aligned to the codes of good practice (which affect all other sectors).
There are currently eight sectors codes covering the construction, property, transport, financial services, accounting, tourism, IT, agriculture and forestry sectors. The department wants to better align sector codes with requirements and measurements in the new BEE codes.
Until the publication of the clarification notice businesses in these sectors were uncertain over whether codes for their respective sector would still apply from this month, or whether they must switch to following the general BEE codes.
The department said in a media release on Monday (that accompanied the clarification notice) that it will release the final codes for qualifying small enterprises (firms with an annual turnover of R10 million to R50 million) by October, along with various other codes (the scorecard for specialised enterprise, the recognition in the sale of assets and the recognition of equity equivalent for multinationals).
Who's in control?
The latest saga is just one in a long line of bungling by the state. These include confusion at one time over whether small firms could rate themselves and a failure to crack down effectively on firms accused of fronting (using fake black equity partners or employing accounting tricks to gain BEE points).
In the end poorly trained state officials have opened the state to being manipulated by outsiders - accountants and black investors - who stand to win either through a steady stream of income from BEE certificates or from equity stakes in white-owned companies.
It hasn't helped that BEE has become ever more complex - involving not only the percentage of black ownership a firm has but also such areas as the number of black employees a company has, how much training it spends on black employees, as well as the time and money allocated to mentoring black entrepreneurs and buying from black enterprises.
Like this the government has had little choice but to become ever more reliant on the accountants to write the BEE codes and to even issue notices and guidelines. Some of the accountants include those that helped to author the first and recent BEE codes of good practice. If that is not a conflict of interest, what is?
Likewise the codes have created a minefield for companies, necessitating ever more reliance on accountants who often use dubious accounting tricks to help clients to score the points they need to win business with corporates and to clinch government contracts.
In addition BEE has in recent years been hijacked by the black business lobby (see this earlier post and this one too), which pressured the department to include in the codes minimum requirements for equity, in order to force all white-owned companies with an annual turnover of above R10 million to have a minimum of 10% black ownership, or risk losing BEE points.
While doing so, the codes now exempt all black-owned companies up to R50 million a year, from having to get a BEE rating - something which goes against the very principle of broad-based transformation that the initial BEE law of 2004 sought to promote.
Many analysts and consultants believe the new codes will only increase the incentive to front - to misrepresent their BEE score by using accounting tricks or by paying off a black representative to gain quick equity. This, despite fronting now having been made a criminal offence.
Over the knee
Like this it's difficult to see how the accountancy field and black investors don't have the government over their knee. What is needed are well-trained technical public servants able to guard against outside influence while being able to assert their own authority.
More importantly the country badly needs less rules and red tape, which stifle businesses. A greater effort to help grow scalable, high impact firms. South Africa needs more of such firms, Endeavor said this week, rather than simply thousands of micro-firms, if it is to create the jobs the country badly needs.
One way to do so is to increase the turnover threshold at which small businesses are exempt from having to undergo a BEE rating. Currently it's set at R10 million, with firms of between R10m to R50m being rated slightly less onerous codes.
Black business owners fare badly not just in South Africa - but in the US and Brazil too when compared to white compatriots (see this earlier post). Increasing investment in quality education, health, improving security and widening internet coverage in poorer communities may help.
South Africa's recent scourge of xenophobic violence is a warning of things to come if more jobs are not created soon enough. Piling on more rules is certainly a great way to keep jobs down.
Timm is a South African who writes on small business and is currently in São Paulo. Follow him on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a