BEE is falling apart in front of everyone’s eyes

The government’s Black Economic Empowerment (BEE) framework has come under intense scrutiny from business leaders, civil society groups, and even members of the ANC. 

More pressing than the criticism, however, is the rise in non-compliance with BEE regulations and the significant share of companies that refuse to have BEE shareholders. 

A recent survey from Codera Analytics and XA Global Trade Advisors shows that non-compliance remains significant. 

The data collected from respondents showed that 37% of firms are non-compliant or are BEE Level 8, which is the lowest rung of compliance. 

Furthermore, the report showed that 67% of respondents have no BEE shareholders, indicating that even those who are compliant do not comply through ownership stakes. 

Nearly a quarter of respondents indicated that they do not comply or do so to the smallest extent possible because they view the policy framework as illegitimate. 

While those in this group are most likely not to comply at all, the vast majority of other firms that do not comply attribute their non-compliance to other reasons.

Many, for example, believe that BEE regulations are too burdensome, with the operational changes being too costly to implement. 

The report found that one company paid 300% of its annual profit to reach BEE Level 2, while many others spent over 5% of their turnover to achieve higher compliance levels. 

A larger hurdle is the startup cost of compliance, with the median set-up cost as a share of annual turnover being 2%. 

Some companies reported paying R27 million to reach BEE Level 4 after opening for business. 

While compliance is costly, most businesses do not understand the benefits of complying with BEE regulations, particularly at higher levels. 

Many firms that do not comply, or do so only to a small extent, said it was because of a lack of commercial benefit or because they do not do business with the government. 

This undoes the main incentive for compliance with BEE, which is the ability to do business with the state or large corporates. 

If this does not outweigh the cost of compliance, there is little need for a business to spend millions of rands to comply with the framework. 

The cost of compliance is also exacerbated by the complexity of the regulations and regular changes to the framework. 

Around 10% of respondents who avoided compliance cited the complexity and uncertainty surrounding BEE regulations as reasons for not participating. 

The end of BEE 

The rise in non-compliance by companies with BEE regulations has been accompanied by intense criticism of the policy framework from all corners of society. 

Much of the criticism points to the framework being abused by a handful of well-connected individuals to secure contracts or deals at the expense of true empowerment. 

The policy framework has become increasingly associated with cronyism and corruption, with very few ordinary South Africans benefiting. 

Perhaps the biggest indicator of the unsustainability of the current BEE framework is the government’s willingness to entertain a debate about it. 

Finance Minister Enoch Godongwana told Parliament earlier this year that there needs to be an honest debate about BEE. 

Godongwana said the debate around BEE must focus on the policy’s efficacy and whether it is actually driving the empowerment of black individuals in South Africa. 

“If the debate starts there, it can start from an objective basis of analysing some of the unintended consequences, and then we can have a constructive discussion,” he said. 

This has been coupled with critiques from Trade Minister Parks Tau, who said the framework needs to be changed to prevent corruption and cronyism. 

Tau has tabled the biggest change to BEE since its inception, with his proposed Transformation Fund set to fundamentally change how companies can comply with the regulatory framework. 

This will make compliance less burdensome and administratively complex for businesses, as they can earn BEE points for contributing to the fund. 

Tau’s draft changes show that the intention is for the fund to be capitalised through businesses’ enterprise and supplier development contributions. 

This fund will then be used to invest in and finance small- and medium-sized black-controlled businesses. 

Under the existing BEE codes, all businesses must make contributions, in cash or in kind, to these types of businesses, with some also being their suppliers. 

This gives companies points for their BEE scorecards, increasing their chances of securing government contracts or deals with big businesses. 

Tau’s changes are set to allow businesses to instead make contributions to a centralised fund, which will then deploy money to beneficiaries in line with BEE principles.

This would mean that businesses would no longer have to identify their own enterprise and supplier development beneficiaries or go through third-party intermediaries.

Efficient Group chief economist Dawie Roodt said this indicates the government is beginning a process of redefining BEE and potentially bringing it to an end as South Africans know it. 

In his most recent State of the Nation Address, President Cyril Ramaphosa said the government is undertaking a review to refine, rework, and strengthen its broad-based BEE framework to ensure that it supports greater transformation and inclusive growth. 

“This shows that BEE is probably going to be redefined, and I think this is probably the beginning of the end of BEE as we know it,” Roodt said. 

He explained that the existing BEE framework is likely to be replaced with the new Transformation Fund, with businesses paying into the fund to secure points for their BEE scorecard. 

“This will probably be the end of BEE when this process is followed through to its conclusion,” Roodt said.