South Africa’s Democratic Alliance publishes its Broad-Based Black Economic Empowerment programme

A handbook for companies on how to apply affirmative action in South Africa

THE DA’S PLAN FOR BROAD-BASED BLACK ECONOMIC EMPOWERMENT THAT WILL BOOST ECONOMIC GROWTH AND JOB CREATION

During apartheid, racial separation and economic discrimination were the defining characteristics of South Africa. Black South Africans were subject to ruthless asset-stripping and restrictions: labour laws that prevented their advancement, land expropriation, business regulations banning black ownership, Bantu education, and laws that prevented black South Africans from living in metropolitan areas.

The DA looks forward to the time when everyone in South Africa can participate fully in a non-racial economy and society. South Africa must continue on the journey towards achieving justice for all. In order to achieve this, we need to make strategic interventions to counter the effects of apartheid’s asset stripping and restrictions. This can be done by growing our economy and creating more jobs for South Africans. Broad-Based Black Economic Empowerment (B-BBEE) is one of the interventions that will help to achieve this.

The Constitution provides a mandate for B-BBEE, as it supports measures to empower persons or categories of persons disadvantaged by discrimination. The majority of South Africa’s people have a legitimate claim to economic redress. If we not do succeed in providing redress, the process of reconciliation, and how South Africans relate to one another, is put at risk. Within this context, the DA supports the underlying principle of B-BBEE.

We are, however, concerned that the guiding principle of B-BBEE is being undermined by a number of factors that have played out in the public sphere and in the media. These include a ‘get rich quick mentality’ among some B-BBEEE tenderers; the emergence of ‘fronting’; the rise of ‘tenderpreneurs’; a lack of long-term sustainability, and the fact that some B-BBEEE beneficiaries do not feel incentivised to create opportunities for others.

The DA believes that we need to change how we implement B-BBEE by altering the scorecard, not discarding it. There have been some notable successes in B-BBEE, and the DA is today submitting working proposals that draw upon these successes to make it work better. This can be done by sharpening the definitions, streamlining and altering the weightings of the scorecard and introducing measures to address our most pressing challenges: job creation, education and skills development.

We will push for such changes in the Portfolio Committee for Trade and Industry, where three sets of regulatory frameworks will soon come under review: the B-BBEE Amendment Bill, amendments to the Preferential Procurement Policy Framework Act (PPPFA) and the Revised Codes of Good Practice on B-BBEE.

The PPPFA and B-BBEE Act

Amendments to the PPPFA and the B-BBEE Act were published in December last year. The DA is in broad agreement with them. Specifically,

* The DA supports the intention of the legislation to prohibit and punish fronting activity, its clarification of the definition of fronting, and the strict penalties the legislation proposes for those found guilty of fronting. It is important that fronting in respect of all B-BBEE elements is recognised as a criminal offence – and not just the misrepresentation of black ownership.

* The DA welcomes the alignment between the Codes of Good Practice and procurement regulations, and specifically the fact that the empowerment status of firms tendering for government business must be determined on the basis of all B-BBEE elements, rather than on the basis of ownership alone. This will encourage the business community to broaden its focus in terms of empowerment to include alternative empowerment mechanisms.

There are, however, some concerns which will need to be clarified in the committee:

* Section 12(A) of the B-BBEE amendment bill gives the Minister the right to allow organs of state and public entities to determine their own “transformation policies”, which would take precedence over the Codes of Good Practice. We remain concerned about the potential abuse that may arise from this.

* The appointment of the head of the B-BBEE Commission by the Trade & Industry Minister might bring into question the Commission’s impartiality. The DTI will thus have to give additional assurances that the Commission will remain impartial.

* The Commission has the power to investigate allegations of fronting and may delegate its “duties and functions” to the Special Investigating Unit or “any other person or organ of state”. We believe that it is necessary for these powers of delegation to be clarified.

* The Bill requires that all “public companies listed on the Johannesburg Stock Exchange” provide to the Commission (a) “the report on their compliance with B-BBEE” and (b) “any other prescribed information”. Given the already cumbersome regulatory environment in which South African businesses have to operate, we will question the limitations on the powers of the Commission to call for information.

* The B-BBEE Commission will now take responsibility for responding to technical questions. The DA will seek specific information on how the Commission will be capacitated to deal with these queries, so as not to repeat the lack of responsiveness by the DTI in handling queries in the past.

The Codes of Good Practice:

The DA believes that there has been an over-emphasis on the ownership component of the empowerment scorecard. Too few have benefited from the government’s insistence on focusing only on ownership for the past few years. This has been to the detriment of other B-BBEE components that have the potential to expand access to economic opportunities.

The Cabinet has approved the revised B-BBEE Codes of Good Practice to be published for public comment. The DA will use the public consultation around these proposals, as well as their consideration in the Portfolio Committee on Trade and Industry, to advocate for ten principled changes to the code. These are as follows:

1. Recognition for contributions to job creation

We will propose an increased weighting to the socio-economic development component, and call for points to be awarded in recognition of employment creation. Employment is the most sustainable way to lift people from poverty, and it acts as an economic multiplier by increasing people’s purchasing power. Specific recognition must be given for job creation by South African businesses.

2. Encouraging access to employment through the Youth Wage Subsidy

An alternative scorecard should recognise job creation via the DA’s proposed Youth Wage Subsidy programme. As it stands, the scorecard for the skills development element awards points for the percentage of black employees participating in learnership programmes offered through the Sector Education and Training Authorities (SETAs). SETAs are an unwieldy and ineffective tool to bolster skills development, lacking the flexibility to respond to the market.

3. Encouraging participation by black new entrants in ownership transactions

The DA will propose increased recognition for the participation of “black new entrants” in ownership equity programmes. The ownership element currently awards only 2 bonus points for equity deals that benefit individuals who have not previously held ownership in other entities with a total cumulative value of more than R20 000 000. These points can be increased, while reducing the threshold for qualification as a “black new entrant”. This will promote broad-based participation in equity transactions, and help reduce the incentive to “re-empower” those who have already gained access to wealth though B-BBEE.

The DA believes that there should be a cap on the monetary value for individuals and companies participating in B-BBEE deals. This will not prevent black entrepreneurs from accessing investment opportunities. Rather it will determine the extent to which their participation will be deemed to contribute to broad-based empowerment.

4. Allowing local companies to make use of equity equivalent programmes as an alternative to ownership reform

The present Codes allow foreign-owned companies to use specified development programmes as an alternative to equity transfers. Contributions are measured against 25% of the value of the entity’s operations in South Africa. These programmes have the potential to benefit many more people. They provide an alternative to ownership schemes that often tie up capital in B-BBEE, without creating productive participation by black South Africans in the economy. We believe that this option should also be available to local companies.

5. Incentivising both internal and externally focused skills development initiatives.

Cabinet indicated that a decision has been taken to make skills development more outwardly focused. The scorecard currently only recognises contributions to skills development for an entity’s own employees in the skills development component. This excludes South Africa’s large unemployed population from capacity-building initiatives initiated by the business community.

The DA will propose that contributions to skills development opportunities for any South African earning less than R15 000 per month be recognised in the skills development component. Recognition of skills development contributions for non-employees will encourage businesses to invest in equipping South Africans to participate in the formal economy.

6. Increasing the weight of the enterprise development element

We support the proposed merger of the management control and employment equity elements to create an integrated measurement of black participation in strategic decision-making and key management roles. This would allow for additional points to be allocated to both enterprise development and socio-economic development.

To ensure that enterprise development initiatives assist emerging entrepreneurs who add productive value, the Codes must incentivise support to enterprises with black owner-managers, rather than simply firms with black shareholding. Given the potential job-creating power and growth contribution of small businesses, consideration could be given to the recognition of all enterprise development initiatives in support of businesses below a specified turnover threshold – regardless of the racial profile of the small business owners.

7. Recognition for talent management strategies

Employment equity drives will only be sustainable if they are coupled with appropriate strategies to attract, develop and retain talented staff. Recognition for the development of effective talent management strategies should be included in the employment equity element of the scorecard.

8. Recognising support for local industry

Businesses that use local resources should be rewarded for their investment in the South African economy. The DA will support changes to the preferential procurement component that increases recognition for procurement from locally owned businesses, and removes the exclusion benefit for imports. Industries that rely on imports will not be adversely affected as they will continue to be benchmarked against their peers who face the same global supply realities. The aim must be to retain as much capital as possible in the local economy, especially in the rural areas.

9. Easing the regulatory burden on small businesses

Small and medium size enterprises employ 68% of South Africa’s labour force, but carry a very high administrative burden. We welcome the intention to make an upward adjustment in the thresholds for compliance for exempted micro enterprises. We similarly welcome the move to qualify the B-BBEE scorecard and propose that these thresholds are regularly adjusted for inflation.

We are, however, concerned about the proposal that requires Qualifying Small Enterprises (QSEs) to comply with the full B-BBEE scorecard and believe that it is likely to make it much more difficult for small businesses to become compliant with the Codes and reap the potential benefits of a good empowerment status.

10. Reducing the cost of compliance

The cost of compliance to B-BBEE regulations for QSEs can be reduced by introducing B-BBEE audits, once every two years, that produce scorecards which will be valid for 24 months. This would also allow businesses to implement empowerment programmes with slightly longer timeframes.

In sum, the DA’s approach is a unified one: ensuring that the Constitution continues to frame the principles of B-BBEE, and creating the right policy environment for it to succeed. For B-BBEE to succeed, millions of poor and unemployed black South Africans must benefit from it, so that they can lift themselves and their families out of poverty, acquire new skills and ensure that their children are able to gain access to the formal economy.