BEE ownership deals get the most attention, but their capacity to change the racial bias in the South African economy seems to be limited. Preferential procurement, however, is the sharpest tool in government’s transformation armoury. But it could also increase corruption and cronyism, increase the cost of doing business through a new layer of regulation, and hurt small businesses.
These issues were raised at a recent trade and industry parliamentary portfolio committee workshop on the broad-based BEE codes of good practice, the regulations that give effect to the BBBEE Act.
At this workshop, the trade and industry department, which has been toiling to refine the codes and aid their implementation, pointed out that the broad-based scorecard “converts all enterprises into drivers of BEE through preferential procurement”.
The way preferential procurement works is that big and medium-sized companies which deal with government must comply fully with the final version of the codes, gazetted in February.
Companies must score on all seven elements of the broad-based BEE scorecard, not only ownership, and an important element is procurement. That means they must require the companies that supply them with goods and services to comply with the codes. In complying with the codes, those suppliers also must buy from companies that comply and so on, ensuring that racial transformation should cascade throughout the economy.
For this to work, though, the legislation that deals with procurement must change, because it currently calls only for black ownership and gives only empowered companies a price preference of 10% to 20%.
The trade and industry department and the national treasury have finalised a draft Bill to change the Preferential Procurement Framework Act to align it with the codes, but the finance minister still has to send it to Cabinet for approval.
The question is how far government can go, legally, morally and practically, in discriminating against companies that do not comply with the codes.
The changes proposed in the draft Bill, according to presentations at the parliamentary workshop, seem to show that the new law might test the limits of discrimination for affirmative action allowed in the Constitution.
An empowered company can win a tender, though its price might be 10% to 20% higher — depending on the amount of the tender — than that of “non-empowered” competitors.
Economists call this kind of preference a “rent” — that is, something for nothing — and clearly, unless there are enough empowered companies competing to supply government, there is a potential cost to the fiscus because, logically, the empowered companies will ask for the extra 10% or 20%. But treasury has been prepared to bear this loss to support BEE.
It has also meant that white-owned firms can still win tenders if they cut their prices. Logically, it might be cheaper for them to get empowerment partners rather than routinely cut their prices.
Now, I might be wrong, but if I read it correctly, just to be evaluated, the company tendering or bidding needs a minimum score under the “recognition levels” of the codes. “Organs of state” will determine the minimum recognition level needed.
If you find this horrendously complicated, you are not alone. The complexity of the codes has created a whole new industry of interpreters and soothsayers, as well as verification agencies to audit company compliance. Bear with me.
The recognition levels range from 10% to 135%. Reaching the 10% level means a company has a score on the generic BEE scorecard of between 30 and 40 and is a “level 8 contributor”. Having a recognition level of 135% means a company has scored 100% and is a level-one contributor.
The point is if the recognition level is set at, say, four, then those companies that for one reason or another are “too white” — leaving aside small businesses with less than R5-million turnover — will be excluded automatically because they will score below the minimum level. Companies will no longer be able to win tenders on price alone.
That small businesses are assumed to be black for the purposes of the codes softens the blow somewhat. They will have an automatic recognition level of four. But it does mean that actual discrimination against companies that are too white replaces preference for companies that are black enough.
Our liberal Constitution insists on equal protection and non-discrimination, as well as providing for affirmative action.
I leave this for the legal experts and the politicians to argue. Clearly, if this is seen as “fair discrimination”, then it might hold. Fairness, however, is not only in the eye of the beholder, but also changes depending on who is wielding the sharp tool of procurement and who is feeling it.
More worrying are the unintended consequences. It fell to the ANC’s Ben Turok, harsh critic of the World Bank, IMF and neoliberalism in general, to warn about the dangers of preferential procurement encouraging crony capitalism. And, responding to a question from the trade and industry department about introducing penalties for non-compliance because of the slow pace of transformation, he also warned about the dangers of over-regulation.
In doing this he took the words out of the mouth of DA spokesperson Les Labuschagne, who nonetheless made a telling point about the effect on small business. Though small businesses are exempt under preferential procurement regulations, Labuschagne pointed out that white small businesses are at present being discriminated against because not everyone, especially junior officials, knows this.
There also is the danger, not raised in the committee, that over-ambitious regulation will encourage fronting.
At the workshop, the trade and industry department raised the prospect of treating fronting on the same level as fraud, but the department really should not be taken in by the occasional hysteria the topic elicits. Fronting will be with us as long as there are empowerment regulations. The Malaysians have reportedly not been able to avoid it. Putting in more rules and regulations is all very well, but who is going to police compliance?
My problem is — except in extreme cases of misrepresentation — the difficulty of definition. Here, what comes to mind are black-owned agencies that spring up between government and suppliers. They are businesses and they are black, but are they not a form of fronting?
HP’s equivalent
Hewlett-Packard is the first foreign company to be officially exempted from having to do a black economic empowerment deal.
The trade and industry department told Parliament recently that it had approved Hewlett Packard’s “equity equivalent” of $13,5-million, which at the current rate of exchange comes to about R100-million.
Contacted for further information, a Hewlett-Packard spokesperson declined to disclose details, stating that the company would make an official announcement on Monday.
Foreign multinationals — as opposed to South African multinationals or those of South African origin — that, for reasons specified in the codes, do not want to do equity deals, can claim ownership points on the broad-based BEE scorecard based on their equity-equivalent programmes.
They must be able to prove it is their global practice not to sell equity in foreign subsidiaries or branches. — Reg Rumney