South Africa’s affirmative action programme – Black Economic Empowerment (BEE) – has taken a worrying turn. Since the 1990s when the first BEE deals emerged there has been much criticism of BEE. Many say it has benefited merely a select few, who in many instances sell their black credentials to white-owned firms without active participation in the respective companies themselves.
The biggest concern now is that BEE has been captured by a black lobby group – the Black Business Council (with its secretary Sandile Zungu pictured above). Though some (eager to see the rise of more formidable black capitalists) may sing their praises, they could represent a major threat to entrepreneurship and transformation in South Africa.
The council claims that it is all for creating black entrepreneurs who can stand their own, but they continue to insist that big companies be forced to give more shareholding to black managers – essentially fuelling the very rent-seeking that the Department of Trade and Industry says it is trying to root out.
The group formed in 2011 after splitting from the country’s major business body Business Unity SA over what they saw was a failure to assist black business effectively.
Since then they have scored a number of victories after lobbying the government. These include the setting up of the small business ministry and getting the department to put in place a measure in the new BEE codes (which are expected to come into effect in May next year) to exempt all black businesses with annual sales of less than R50-million ($4.6-million) from BEE verification.
Firms are not obliged to undergo BEE verification, but big companies and the state use a points system, (termed the BEE scorecard) based on the BEE codes, when deciding who to source goods or services from.
Last year BEE analysts spoke out against the measure included in the new BEE codes to exempt black firms from with sales of less than R50-million from BEE verification.
They said it went against the broad-based nature of the codes (which incentivise companies to not only sell stakes to black partners, but also to train more black staff and assist and buy from more black businesses).
However under the new codes white-owned small businesses, with an annual turnover of above R10-million will have to fulfil more criteria if they want to avoid seeing their BEE score radically reduced. For small business this could be damaging.
At the time the former chief executive of the Black Business Council, Xolani Qubeka, said it was “grossly unfair” for black-owned firms to have to pay “up to R40,000 (about $3,700)” for a BEE rating only to get a BEE level six rating, while a white-owned company notched up a level three rating.
Capturing state money
The black lobby group is also expected to gain another way – by capturing state money going to business support programmes.
The organisation already offers an aptly named Black Industrialists Development Programme which invests in training and provides practical skills to black business owners.
But the black business lobby body's biggest drive at the moment is to get the government to set aside a certain percentage of procurement strictly for black businesses. The Department of Trade and Industry has long been against the National Treasury’s stance on set-asides.
It's deputy minister Mzwandile Masina (pictured here with DJ's Oskido and Sbu alongside him) last month claimed that big business in South Africa only gave "crumbs" to black business and that the Preferential Procurement Policy Framework Act needed to be changed to achieve South Africa’s developmental goals. "We want set asides for black people — we see it in a lot of countries, why not South Africa?"
However he is wrong. While several countries have set-asides in place to procure from small businesses, none have measures in place to procure solely from one race group. Opting for additional race-based mechanisms may be a step too far for South Africa's new democracy.
In Malaysia a plan launched last year that will among other things require every government ministry to carve out contracts from big projects to award to indigenous Malay-owned businesses (the $9.4 billion Bumiputera Economic Empowerment Plan) has been met with a hail of criticism.
Both indigenous Malays (who are supposed to benefit from the new programme) and Chinese and Indians say the new plan is racist and will only make Malays more dependent on the state.
A former minister of the majority party UMNO, Zaid Ibrahim, has even described race-based policies as an "addiction" which makes Malays lazy, while lawyers have branded the the plan as unconstitutional as it exceeds the quotas stated in the federal constitution.
Some say the plan is merely a veiled bid by Malaysia's Prime Minister Najib Razak to regain support from Malays for his UMNO party after the less than satisfactory result it achieved in recent elections.
Back in South Africa, the country's Treasury also argues that the measure is unconstitutional and that it will raise the cost of state procurement if put into effect. In May last year the business lobby said it would test the Treasury’s prohibition of "set-asides" for black-owned firms in awarding government contracts in the Constitutional Court.
In the meantime the department announced last month that it would from now on carry out BEE verifications, in place of the private consultants that at present conduct verifications.
Its principle gripe is that majority white-owned firms are often able to score more BEE points than many wholly black-owned firms, using creative accounting tricks. This has allowed white firms to out compete many black firms in the awarding of state tenders (where ones BEE score counts for 10 or 20 points depending on the size of the contract).
But South Africa must listen carefully. Malaysia's new programme is a warning to South Africa. The risks are clear - too many handouts will lead to increased dependency - and not more. Like this black entrepreneurs will before extensions of the state itself, never really doing things themselves. Corruption will also likely increase.
In the words of Malay Economic Action Council chief executive officer Mohd Nizam (pictured here) to teach young entrepreneurs, you can’t have government officers or professional speakers do the job: “You need professional entrepreneurs. From there, you can create a partnership between new and seasoned entrepreneurs".
Steadily more black entrepreneurs worthy of standing on their own two feet are rising up in South Africa. What is sorely lacking is more such entrepreneurs. The government can help things along by focusing more on the basics - like better internet, more quality education, and infrastructure such as housing and hospitals. But it should beware of interfering too much or adding more race-based policies.
Big companies should also get stuck in. The new codes incentivise companies to incubate and buy more from black suppliers. And a recently instituted incentive from the Department of Trade and Industry assists the private sector in setting up business incubators. These are examples where the government has got it right.
The black business lobby should add to these with its own initiatives - but race-based set-asides and continuing equity cuts will only worsen the ability of black entrepreneurs to stand on their own and compete in the marketplace. A more business-minded approach is needed.
To read part I of this article (Worrying plan to create black oligarchs) click here.
Stephen Timm is a