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New thinking the key to the future- South Africa- BBEE

South Africa’s economy, battered and bruised, is now reopening. Over the past few weeks, much has been said about how the post-Covid-19 world would (or at least needed to be) vastly different from what went before.

But on some key questions, the future promises much more continuity than change. And this is a sad prospect.

Little over the weeks of the lockdown illustrates this quite like the continuing obsession with racial markers in our economy – exemplified by the apportionment of relief funds for business according to Broad-based Black Economic Empowerment (B-BBEE) criteria. This is entirely to be expected of our political class, since it is a matter of deep ideological conviction.

It is more remarkable when it is endorsed by those with credentials in business. A case in point is the former head of Business Leadership South Africa, and current Chancellor of the University of the Free State, Professor Bonang Mohale.

He offered a fulsome endorsement of the policy at the time of the pandemic. His specific prompt was the judgment handed down by Judge Jody Kollapen of the Gauteng North High Court, which had approved the Department of Tourism’s policy.

‘It is the law,’ Prof Mohale writes, ‘and our job is to comply.’

This is at best half-accurate, and an inadequate response. South Africa has legislation to give effect to government’s B-BBEE policy. For particular purposes (contracting with the state and obtaining licences for a limited range of activities), compliance is a requirement for business in the country. For the most part, however, compliance with B-BBEE is not. Small firms are exempt from its provisions and many others choose not to comply. There is a decent body of evidence that for most companies – particularly those on the smaller side – being suitably accredited imposes considerable burdens for few rewards.

The SME Growth Index, a wonderfully informative longitudinal study carried out for several years by business environment researchers SBP, showed that for small and medium-sized enterprises, B-BBEE was of little practical value. This was the case for firms owned by black and white entrepreneurs. 

Not compelled by law

From the perspective of government, the law requires that B-BBEE status be considered when procuring from business or entering into partnerships with private firms. BEE also applies to grants for the expansion of businesses and the provision of investment incentives. But these situations are very different from the granting of disaster relief in the face of a national disaster. The Government was not compelled by law to apportion relief as it did.

Besides, as in much of our legislation, there is a wide scope for ministerial latitude. The Act states: ‘The Minister may, after consultation with the relevant organ of state or public entity, exempt the organ of state or public entity from a requirement contained in subsection (1) or allow a deviation therefrom if particular objectively verifiable facts or circumstances applicable to the organ of state or public entity necessitate an exemption or deviation.’

In other words, there was no compulsion on government to provide relief funds on the basis of B-BBEE criteria, and even if there had been, this could be waived. Government’s hands were not tied by legislation; it chose to do this, and it was a poor choice. It took race-based policy – a policy that for business had been discretionary – and prioritised it as a condition for support that might mean survival or failure.

Prof Mohale is on stronger ground with a broader point about the need to counter exclusion in the economy (even if, in making his point, he puts forward some questionable assertions).

The most important mechanism for economic inclusion is employment. To hold a job is not only to earn an income, but to have a chance at mobility and a sense of dignity. And as Prof Mohale knows, this is impossible without businesses to provide it. ‘You can’t be pro-growth, therefore pro-poor and be anti-business’, he said a while back. To which one might add: the more stringent your conditions for participation in the economy are, the fewer businesses and therefore the fewer job opportunities will exist. A tumultuous tide sinks many boats, and drowns the crews that sail them.

Distressingly smaller

Businesses that are ‘non-compliant’ with B-BBEE policy nevertheless pay taxes, provide employment, participate in value chains and generally help keep the country going – all of this despite a very tough business climate (at the best of times). This is particularly the case in the formal SME space; despite a decades-long policy commitment to growing the presence of such firms in the economy, credible research by the Small Business Institute and SBP put the number of these firms at just under 268 000 (2016 figures). This was distressingly smaller than had previously been believed, and illustrates part of the economy’s structural weakness.

Indeed, Prof Mohale has himself rightly noted in the past that in South Africa, small businesses contributed only a fraction of new jobs compared with the 80% or so in the economies of its BRICS counterparts. 

Let it not be forgotten that this problem existed long before the COVID-19 crisis. South Africa’s economic growth rate has been anaemic for a decade, and South Africa entered the pandemic in a recession. South Africa lost its last investment grade rating on the day it was locked down.

Meanwhile, a Stats SA survey of businesses – published on 21 April – found that somewhere over 84% of businesses believed that they could not survive without turnover for up to three months. And more than a third of these firms believed they were unlikely to hang on for a month.

Frankly, South Africa cannot afford to lose the businesses it has, and if its economy is to have a fighting chance of recovery, it needs every ounce of entrepreneurial ability and the participation of every businessperson it can muster – irrespective of race or gender (this applies as well, incidentally, to suggestions that foreigners be excluded from parts of the economy).

‘Totally idiotic’

As the perceptive journalist Justice Malala commented about the government’s stance on relief: ‘This is well and truly and totally idiotic. It makes no sense whatsoever at any level. Say goodbye to jobs, GDP growth or a Moody’s or Fitch upgrade any time soon.’

The thrust of race-based policy needs to be rethought. We at the Institute of Race Relations (IRR) fully recognise that the ugly and brutal racial history of South Africa lies at the roots of many of the country’s problems. What is far less clear is whether current race-based policy offers any solutions. The evidence for this is unconvincing. And to the extent that it raises the costs of doing business or aggravates rather than reduces social cleavages, it is counterproductive. Indeed, this is why the South African Communist Party – hardly the allies of the IRR – has taken issue with it.

Our alternative, Economic Empowerment for the Disadvantaged, would target as its beneficiaries people on the basis of their socio-economic status, and would incentivise business to provide the necessary investment, jobs and social spending. It would move aggressively on the hard but unsexy choice of education and regulatory reform.

Given the country’s history and the patterns of deprivation, the vast majority of its beneficiaries would be black – and if some poor white people benefited too, what coherent moral argument could be made against that? Would there be anything in this, to borrow Judge Kollapen’s words, that would be ‘shameful’?

‘It is the law,’ Prof Mohale writes, ‘and our job is to comply.’

From a former head of Business Leadership South Africa, and the chancellor of a university, these are disappointing sentiments. If our society is to have a prospect of rehabilitation, we need bold thinking, sometimes unpopular thinking, and not meek acquiescence. Indeed, as concerning as decisions around the B-BBEE stipulations of state aid may be, the state pointed out in the court case that only around 4 000 businesses would benefit from the funds available. The coffers are empty.

New thinking may be a necessity for survival.


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