One South African company spent 300% of its profits to comply with BEE

One South African company paid 307% of its profit to comply with Black Economic Empowerment (BEE) in a single year, with the firm achieving Level 2 status. 

This means the company paid more money to comply with BEE than it generated for its owners and investors. This is unsustainable for any business. 

Codera Analytics and XA Global Trade Advisors revealed this as part of a research report into the costs of BEE to South African firms. 

The companies analysed responses to a survey sent to over 100 South African firms to understand the costs they pay to comply with the regulatory framework, or why they choose not to comply.

Their study of BEE’s impact on local companies found that the government’s transformation policies have not delivered inclusive economic growth. 

Rather, the policy framework appears to be an obstacle to growing economic activity in South Africa, with companies saying that compliance has no commercial benefit for them. 

This is despite the policy framework being designed around offering opportunities to do business with the state and large corporates to companies depending on their BEE compliance level. 

The policy framework has also increasingly become associated with cronyism and corruption, rather than the inclusion of a broad cross-section of South African society in the formal economy. 

Codera and XA pointed out that despite the immense resources spent on compliance with BEE and enforcing accreditation, there is little information about the impact of the policy framework. 

This is because the government does not publish compliance data, preventing proper research into compliance costs or economic impact. 

The lack of public information is why the two firms decided to conduct the survey, with the results showing just how substantial BEE compliance costs are. 

Respondents detailed how they spend millions of rands on compliance with little benefit. Companies with empowerment share policies reported that many beneficiaries are worse off than they would be without BEE investment vehicles. 

The research found that the median compliance cost is around R2.7 million, with the maximum cost reported being R105 million for a company with Level 1 accreditation. 

This is slightly skewed by the fact that 21% of respondents said they do not comply with BEE or are Level 8 accredited. 

One company reported paying 307% of its profit to comply with BEE in one year, while multiple entities said they pay greater than 5% of their turnover to comply. 

This can be seen in the columns on the right-hand side of the table below from the report published by Codera and XA.

BEE costs South Africa R290 billion

The research published by Codera and XA follows a comprehensive analysis done by Solidarity and the Free Market Foundation (FMF). 

This research was intended to calculate the overall annual cost of BEE compliance across the South African economy. 

Solidarity and the FMF estimate that BEE compliance costs South African companies between R145 billion and R290 billion annually. 

This equates to around 4% of the country’s GDP of R7.3 trillion, significantly hampering economic growth and investment. 

Much of this cost is borne through ownership stakes in companies that must be allocated to specific shareholders to comply with BEE requirements. 

The firms estimated that this amounts to R40 billion to R85 billion in annual compliance costs under BEE. Skills development follows in second place at R40 billion to R60 billion. 

While Solidarity and the FMF did not analyse the costs of complying with BEE at an individual company level, they did provide a standard example of how it would work. 

In this example, the firms analysed the compliance costs of a typical JSE-listed company with R10 billion in revenue. 

They estimated that this company would face a 10% increase in operating expenses, around R150 million, to comply with BEE. This translates into a 10% drop in earnings and a 15% drop in net profit. 

However, the firms admitted that compliance costs vary widely across sectors, with high-intensity sectors such as mining and finance facing greater scrutiny and higher costs. 

This also results in different types of compliance, with mining and finance companies under more pressure to shift ownership and management structures to comply. 

Low-intensity sectors, such as technology and tourism, face less pressure and scrutiny, with most of their BEE compliance focused on skills development.