Ratcheting up the BEE rules, yet again – BizNews, 21 April 2016

By Anthea Jeffery 

By the end of this month – less than a fortnight away – the Department of Trade and Industry (DTI) plans to gazette the final version of the draft Broad-Based Black Economic Empowerment Regulations (the regulations) it published in mid-February 2016 for comment within 30 days.

Few commentators seem to realise just how damaging the regulations are likely to be. Hence, a mere 21 submissions were made to the DTI, so helping the department to brush away the concerns that were raised. Perhaps the 500 or so individuals and organisations that made submissions on the draft generic codes in 2012 – only to see their views almost completely disregarded in the final version gazetted in 2013 – no longer believe that the DTI’s public consultations are intended to be meaningful.

The regulations are supposed merely to flesh out the provisions of the Broad-Based Black Economic Empowerment Amendment Act of 2013 (the BEE Amendment Act), which came into force in 2014. However, in some respects they go further and are thus ultra vires the BEE Amendment Act. Worse still, they will expose business to ever more bureaucratic demands while increasing uncertainty about BEE requirements.

For example, the BEE Amendment Act gives a new Broad-Based Black Economic Empowerment Commission the capacity to ‘maintain a registry of major broad-based BEE transactions’ above a value specified by the minister. Yet, according to the regulations, the Commission will also be allowed (despite the absence of any statutory authority for these additional powers) to ‘assess’ a relevant transaction ‘at any time’ so as to ‘determine its adherence’ to BEE rules. It will further be empowered to demand that ‘steps be taken to remedy the transaction within a reasonable period’.

These provisions will allow the Commission, for example, to re-open an ownership deal that was concluded several years ago and is now under water – and demand that it be ‘remedied’ to its satisfaction. This is not only ultra vires but extraordinarily intrusive and economically damaging.

Still more damaging is a provision saying that organs of state, in ‘determining the qualification criteria’ for the issuing of licences, the implementation of procurement policy, and the granting of incentives ‘must give more consideration to companies that are at least 51% black-owned’.

These provisions will apply to virtually all companies, both large and small. Moreover, if the DTI revives and enacts the Licensing of Businesses Bill of 2013, they will apply to every enterprise without exception, including the small and medium enterprises most needed to generate more jobs.

The revised generic codes, with their more onerous BEE ownership (and other) obligations, came into roughly a year ago. Now the ownership requirements are effectively being ratcheted up once again, for many companies will come under significant pressure to raise BEE ownership from 25% to 51%. This is a substantive policy change, which needs to be debated and approved by Parliament, not imposed via regulation without adequate public consultation.

Compliance costs are likely to be huge. Meeting the 25% ownership requirement is already likely to require BEE deals valued at R2 trillion, as the National Empowerment Fund estimated in 2007. If the ownership target is to be doubled, the value of the necessary deals may have to double too. However, allocating so much scarce capital to BEE deals will hardly help to improve infrastructure, increase employment, or enhance competitiveness.

In addition, if many more BEE ownership deals have to be done, existing shareholders, many of them institutional investors such as pension funds, will find their holdings diluted even further. Hence, much of the costs of enriching a small group of BEE beneficiaries will again be borne by ordinary savers and pensioners, many of them black.

In addition, the more a 51% BEE ownership requirement is imposed, the more this will amount to an indirect or regulatory expropriation. However, no compensation will be payable for this under the definition of expropriation in the Expropriation Bill of 2015 soon to be put before the National Council of Provinces for adoption. This erosion of property rights will further undermine the investment climate.

Moreover, if BEE ownership is to be raised to 51%, this will generally imply a loss of current majority control. This is likely to be particularly damaging to business confidence and investor sentiment.

As Nigerian billionaire Aliko Dangote warned in 2013, even a 25% BEE ownership requirement is enough to deter FDI. In his words, a BEE ownership requirement is like ‘a forced marriage’, in which a business must partner with ‘someone who may not have the same appetite’ and ‘who does not have the equity behind them’ to make a real contribution.

Adds Dangote: ‘The whole world needs capital. If you make it difficult for me to invest in one country, then I will move my capital somewhere else where it is easier to invest… In Nigeria, we used to have these laws demanding that any [foreign] investor had to have a Nigerian partner. But that just dried up the capital flows. Now anyone can do business with anyone in Nigeria.’

Since even a 25% BEE ownership requirement is enough to deter foreign investors, pressure for 51% BEE ownership will clearly be even more inimical to FDI. What foreign investor will want to come to South Africa if this implies the loss of ownership and control under an effective indigenisation requirement? Yet South Africa urgently needs FDI for increased growth, as its own savings rate (at roughly 15% of GDP) is far too limited to fund essential fixed investments in electricity generation, transport logistics, and social infrastructure such as hospitals and schools.

Moreover, with South Africa already standing on the brink of recession, the regulatory shackles on business must be lightened, not made heavier still. Instead of constantly increasing the BEE burden, it is time for the DTI to call a halt.

When the African National Congress (ANC) urged the introduction of BEE in 1994, it said this was aimed at ‘removing all the obstacles to the development of black entrepreneurial capacity and ‘unleashing the full potential of all South Africans to contribute to wealth creation’. BEE was never supposed to put a stranglehold on the economy, or erode the property rights essential to growth and prosperity. Nor was it intended to keep ever more South Africans mired in poverty for the benefit of a relatively small and politically connected elite.

BEE has failed in its objectives. It needs urgently to be replaced by a new system of ‘economic empowerment for the disadvantaged’ or EED. This would shift away from the current narrow focus on redistributing a static, if not shrinking, economic pie. Instead, EED would put a necessary emphasis on rapid economic growth, excellent education, and very much more employment as the most effective and sustainable means of increasing opportunities for all.

By Anthea Jeffery, Head of Policy Research at the IRR and author of BEE: Helping or Hurting? The content of the regulations is further explained in the IRR’s submission to the DTI, which can be accessed by clicking here.

Read the column on BizNews here.