WL049/03

24-06-03

 

SACOB

 

Broad Based Black Economic Empowerment Bill - Commentary

    1. Introduction

      1. SACOB is a business organization that represents, through its affiliated Business Chamber structures, trade associations and individual corporate enterprises, some 35 000 businesses both large and small throughout South Africa. It is for noting in the Memorandum to the Bill (para. 4) that four organizations were consulted. They include the Black Business Council, the Black Business Working Group, the Big Business Working Group and NEDLAC. SACOB regrets that in such an important matter, and where existing businesses will be expected to play a leading role, it was not consulted. Comment therefore will be directed more towards the concerns that SACOB has over the affect that this proposed legislation could have upon business and in particular small business.

      2. In setting the scene for its comments, SACOB confirms its support for Broad Based Black Economic Empowerment. It is necessary to bring about a normalized business community that is representative of the demography of South Africa. In this regard, SACOB believes that the principles contained in South Africa's Economic Transformation: A Strategy for Broad-Based Black Economic Empowerment should be the foundation for legislation to bring about the desired results.

      3. By far the largest proportion of SACOB's membership base is small to medium sized business. SACOB strives to speak on behalf of the formal business sector on various legislative issues that impact on business. It is in this context that it makes commentary on the Broad Based Black Economic Empowerment Bill (BBBEE Bill). In making this submission, reference has been made to the DTI's Strategy for BBBEE (March 2003), as well as the undertakings made by business at the Growth and Development Summit held earlier this month.

      4. SACOB fully understands the need to bring the previously marginalized segments of the population into the mainstream of economic activity. We understand the rationale for adopting this legislation which is covered in the Preamble to the Bill. However, SACOB must express some reservations, particularly in regard to the adoption of legislation that has the potential to undermine the continued viability of many small business enterprises. We are also concerned about compliance conditions imposed on prospective investors, and we must warn against the possibility of undermining efforts to foster national cohesion and identity. It is for this reason that effective communication of the underlying rationale and specific requirements are critically important, and SACOB would be more than willing to play an active role in the form of joint seminars, presentations and the like.

      5. Notwithstanding the need to accelerate participation in the economy by previously disadvantaged persons, SACOB views Black Economic Empowerment as an ongoing process that may not necessarily achieve dramatic and sustainable results in the very short term, but that will be of long term benefit to the country and its citizens. Thus one of the cornerstones of Black Economic Empowerment requires us to establish firm roots in our education system, providing a foundation on which skills development and fuller participation in the South African economy can be built.

      6. Thus it is therefore important that the agreements reached at the Growth and Development Summit are implemented, culminating in economic growth and development and opportunities for all South Africans, irrespective of race, colour or gender.

    1. Black Economic Empowerment (BEE)

    1. In its acceptance of the need for all South Africans to participate in the main stream of the economy, SACOB has sought for solutions of a sustainable nature rather than those of a quick fix nature. Foremost has been the need to find a solution to overcoming the country's low economic growth. ('A rising tide floats all ships'). Job creation, government's primary goal, is more likely to be fulfilled under a high growth regime. In the pursuit of high growth and job creation attention has been focused upon small business, and efforts to strengthen its voice.

    2. SACOB has and is still engaged in efforts to bring about unity in the realm of organized, representative business. It has engaged with its black partners in reaching a consensus on BEE. A degree of consensus emerged in 2000 whereby emphasis was given to BEE advancement through a system of incentives and rewards rather than a regulated framework of legislation that envisages penalties (contract exclusion) as contemplated in the BBBEE Bill. In fact SACOB is spearheading an initiative that aims to develop a charter for the

 

IT industry that takes into account the current and projected needs of the operators in the industry, the scope for new companies, the skills shortage and the development of the necessary skills. All stakeholders are involved in the process, including the Departments of Trade and Industry and Government Communications.

    1. The 'Bumiputra' experience

      2. It would appear to SACOB that the Government plans to follow an economic development policy similar in many respects to the Malaysian New Economic Policy of the 1970's ('bumiputra') - a policy that discriminated in favour of Malay Malaysians against Chinese Malaysians. A significant difference exists between the circumstances of Malaysia at that time and the circumstances of South Africa at present. The 'success' of the Malaysian experience was to no small extent assisted by the high rate of economic growth (8% during the 1970's, 5% during the 1980's) that Malaysia enjoyed. Thus in the case of Malaysia, the discriminatory policies could be focused upon who would be the beneficiaries of fast economic growth. Whether that policy would succeed under a low growth regime (3%) as enjoyed by South Africa is doubtful, and may have unintended negative consequences.

    2. BBBEE and Small Business

    1. Policy makers regard the growth and development of the small, medium and micro- enterprise sector as the prime instrument for job creation. Over the years, numerous initiatives have been sought to unlock the potential of the small business sector. These have been covered in the DTI Strategy Document. However, the outcome of those initiatives has not been notably successful in the creation of jobs. SACOB submits that the reason for that failure is to no small extent attributable to a serious underestimation of the effect that a highly regulated business environment has on business in general and small business in particular. The compliance costs associated with conducting a business operation is overwhelming for many small entrepreneurs.

    2. The BBBEE Bill constitutes one more such measure that in this specific case can, in our experience, have unintended consequences in the way that it is applied. By way of threatening contract termination procedures, should certain BEE targets not be met, the brunt of the BEE compliance exercise is seemingly being handed down to existing small business. The survival strategy for such businesses must now be assessed in terms of their ability to comply or to close down. The attendant risks for compliance are not inconsiderable.

    3. Consider two of the compliance requirements that have to be secured within a time span, namely ownership and management. The changes demanded for both pose hazardous options for small businesses. Under the DTI's guide for 'preferencing and target support', a black enterprise is defined as one in which 50,1% of the business is owned by black persons. A black empowered enterprise is defined as one that is at least 25,1% owned by black persons. Both categories are required to have substantial management control.

    4. As regards ownership, it must be recognized that the scale of operations of most small businesses is beyond the interest of any large black empowerment consortium. Thus, a small business must perforce seek out an unknown and unproven small black business as a possible partner. For any small business operation seeking to meet an ownership compliance requirement, the quality of a partner and its ability to provide a financial stake are important. The chances of a black partner being able to sink equity into the operation are remote. Such a constraint requires the adoption of a suitable instrument that will enable a black partner to be brought into the operation. If a reputable firm is engaged to devise an appropriate strategy, the cost can be prohibitive. Of course, if the new arrangement succeeds, both parties are winners. If it fails, the fall-out will probably be borne by the non-black partner. Finding a means by which a proportion of the business risk can be shifted onto the black partner's shoulders is difficult. It is a problem area recognized by the DTI and for which creative solutions must be found.

    5. As regards management, the ability to create or develop such capacity for a small business is no mundane task. The prospect of attracting suitable black management expertise from outside is a limited option for most small businesses. The alternative is to create and develop management from within its own limited human resource base - a more than a short-term task.

    1. The Politicization of Business

      2. SACOB acknowledges that it is impossible to do business without being attuned to politics. This realization goes for business in both the developed and the developing world. Seemingly, the scale of that interplay is far greater in the developing world, such that in some cases it is difficult to determine just where business ends and politics begins. SACOB would not wish for that interplay to become overly emphasized in South Africa for it could be extremely damaging. It is with that in mind that concern must be voiced over the prospect of the establishment of an 'advisory' council whose function will be to advise government on the implementation of BEE (refer to 3.5.6.2 of the Strategy Document), without sufficient clarity on its composition, role and mandate.

    2. Racial Discrimination - Principle

    1. It would be naïve to suggest that South Africa is not nor should be a colour-blind society. It is therefore unreasonable to suggest that the law should likewise be colour-blind. The BBBEE legislation must be regarded as a benign pro-black discriminatory measure. Nonetheless, as with other legislation that bears a discriminatory flavour, SACOB again urges government and legislators alike to implement the legislation within a time frame that would provide a reasonable opportunity for past imbalances to be rectified, and within which the face of economic activity can be changed to reflect the demography of the country, after which special dispensations will no longer be necessary. SACOB looks forward to the time when racial legislation can be entirely expunged from the statute books.

    2. SACOB's reasoning for this is that frequently, racially based policies, like other entitlement policies start out as temporary measures but end up as permanent measures.. SACOB therefore appeals to legislators to ensure that racial legislation is not going to be perpetuated. Let us avoid the mistakes of the past.

 

    1. Conclusion

 

In concluding, SACOB reiterates that it recognizes the need for, and supports a process of Broad-Based Black Economic Empowerment. The consequences of not taking positive steps to include previously disadvantaged persons into the mainstream economy would be to perpetuate the inequities of the past.

However, the Chamber feels that any legislation giving effect to such empowerment must be sufficiently flexible to ensure that:

SACOB is willing and prepared to participate in the drafting codes of practice and guidelines. This willingness is demonstrated by the leadership role it is playing in the development a charter for the IT industry that it intends to use as a blueprint for similar processes in other industries. Black Economic Empowerment is necessary in South Africa, but it must be meaningful to those to whom it is directed, provide a benefit to existing businesses and support the growth of the economy, to the benefit of all South Africans.