When the Cabinet is handed the final version of the department of trade and industry’s Broad-Based Black Economic Empowerment Codes (BEE codes), small business will be watching to see how government intends to regulate them.
Governments have always been keen to regulate business. But one would struggle to find an intervention more subtle, far-reaching and — here’s the rub — more complicated than the BEE codes.
In Malaysia, the government simply decreed “thou shalt not do business without a Malay partner”, leading to widespread fronting.
But with South Africa’s BEE codes, black ownership is only one of six ways in which the BEE credentials of a company can be measured, the others being how many black staff a company has; how many black senior managers it has; how much it buys from other BEE companies (BEE procurement); how much it spends on training staff; and spending on charities and helping to develop enterprises.
In the United States, state organs give preference to minority-owned businesses when handing out contracts, limiting the empowerment effect to government procurement. In South Africa, this preference goes way beyond government buying power.
Large companies, eager to please government, want to score as many points as possible for BEE procurement, especially since their scoring for black ownership can be a bit thin. They therefore order their suppliers to score high BEE points or risk losing their custom.
Those suppliers, now also eager for BEE points, do the same to their suppliers, and so the pressure cascades down to the smallest exhaust fitment centre, stationer and florist.
Having a good BEE score becomes almost as necessary as having a business card. If this system works, governments the world over will be queuing up to study the South African model.
But implementation is going to be difficult. Nowhere is it more fraught with problems and unintended consequences than in the small business sector. Ask the implementers of the Skills Development Levy System: eventually small businesses had to be exempted because of the almost universal lack of cooperation with the well-intended incentive scheme.
The same happened with a clause in the Promotion of Access to Information Act, which required of every business to have an “information manual”. After several “final” deadlines, the department of justice had to postpone its implementation on small businesses for five years. It will probably be quietly scrapped.
Although the final BEE codes are not yet public, the designers in and around the trade and industry department seem to have anticipated at least some of the possible problems.
Probably the most serious is that of verification. It would be unthinkable to require of every business to be audited once a year for BEE at a time when government is trying to cut down on red tape for small business. Only registered Pty (Ltd) companies have to be audited in South Africa. The vast majority of businesses, close corporations, partnerships and sole proprietors don’t.
One possible solution is the exemption of businesses doing an annual turnover of R1million or R2million — the final threshold will become clear once the final codes are made public — from the BEE system.
It means that a white-owned business below the threshold will automatically be regarded as a level four BEE contributor. (There are eight levels, one being the highest and eight the lowest.)
Level four means that a company buying something from that business can record 100% of the spend as BEE procurement. Black-owned exempted businesses will be regarded as level three BEE contributors — 110% of the money spent on them may be recorded as BEE procurement.
It remains to be seen whether a 10% difference in BEE procurement value gives enough advantage to black micro-entrepreneurs who may be less experienced, skilled or resourced than their white-exempted counterparts.
Exemptions also raise serious possible complications.
Will some businesses deliberately choose to remain below the threshold in order to avoid the hassle of BEE scoring? Thousands of lifestyle entrepreneurs seek comfort zones, not empires, yet they are important job creators. Any disincentive for them to grow could hurt job creation.
Some businesses may also nominally split to remain below the threshold. Auditing is also an issue. Will state and corporate procurement officers accept an exempted business owner’s word that his or her turnover falls below the threshold? If yes, how many business owners will simply lie? If no, will they have to bring audited proof? At Pty (Ltd) audit costs?
A BEE audit of a business starts at about R4Â 500, depending on its size. To impose that kind of annual cost on all non-exempt businesses, especially on those just above the threshold, is simply not practical.
According to trade and industry department deputy director general Lionel October, the government will allow a business to do its own assessment. Where proof of BEE credentials is required, the organisation needing the proof must pay for it.
How many small businesses — overwhelmed as they are just being in business — are capable of doing a proper scoring themselves? Whether they hire a consultant or go on a BEE scoring training course, the cost of doing business has increased.
The one aspect of the codes that is small-business friendly — actually white small-business friendly — is the fact that those with annual turnovers of below R20million will be able to choose which of the six measures they want to leave out, and be scored on only five. This will be a major relief for small, white family-owned businesses, which will be able to leave out the black ownership measure.
Until now only ownership has been used by government in determining a company’s BEE status. This has advantaged black-owned businesses. The implementation of the new codes means that the six indicators will all be used to score BEE points.
Black business owners will be losing some of the advantage they enjoy.
Will the small business sector survive the introduction of the new BEE codes? It is too early to tell, but the answer is probably, painfully, yes. Small businesses are chaotic and mercurial. They disappear, shrink, morph and generally never do what you want them to do.
Will the new BEE system survive the small business sector? The new codes could well prove too difficult and costly to regulate. Leading government figures have made it clear that empowerment should not be a brake on growth.
Small business could still be given blanket exemption in a few year’s time, leaving government to regulate only large businesses, such as the case of the Employment Equity Actonly 50 and above need report.
Only 50 and above need report
If you access the department of labour website and click on employment equity, you are greeted by 10 “plain English” guides to employment equity legislation, nine forms and sample documents and 11 “special reports, guides and other useful information”.
Faced with this introduction, it’s not surprising that business owners and entrepreneurs sometimes feel anxious about fulfilling legislative requirements.
If you have 50 or more employees, or less than 50 employees but a turnover of at least R2-million, or you are bound by a collective agreement, you are regarded as a designated employer. All municipalities and organs of state are also designated employers.
Once you are such an employer, you will continue to be one even if you drop below the threshold, or if your employee numbers fluctuate.
If you have more than 50 but fewer than 150 employees, you must submit a report within 12 months of becoming an employer, and thereafter every year ending with an even number. If you employ more than this number, you must report within six months of becoming an employer and thereafter every year. Your report should contain all the required information and be signed by the CEO.
If you can’t submit a report, you must inform the department in writing, and give reasons.
- Foreign nationals can be included in reports, but don’t qualify as designated groups for employment equity purposes.
- emporary employees who have worked for three continuous months or more must be included in reports, even if they were recruited by an employment agency.
— Jocelyn Newmarch