Conventional small business development thinking suggests South Africa’s BEE codes are pure red-tape poison. But even the most cynical critics of BEE have to take note of the billions of rands that could be unleashed by supporting small business.
In the thick of it
Defenders of South Africa’s stance point to the exemption from the BEE codes of businesses with a turnover of less than R5-million a year, but they are not exempt. Rather they are regarded as “level 4 BEE contributors” if they are white-owned. This means that any company that buys something from them could write up 100% of that spending as BEE procurement, which in turn contributes to that company’s BEE score.
If the small business is black-owned, it is regarded as a “level 3 BEE contributor” which means 110% of a client company’s spending on it may be regarded as BEE procurement.
Baffled? It becomes even more complicated. How does a small business prove it is black-owned? How black-owned should it be? How should it prove that its turnover is less than R5-million? What if it wins a contract that pushes it over this mark? These are just a few of the questions small businesses operating in a BEE-sensitive environment have to ask. Far from being exempt, small businesses are in the thick of it.
Enterprise development
But the proponents of South Africa’s unique BEE experiment have another weapon in their arsenal — enterprise development. This is an aspect of the broad-based codes that they say will not only counteract the negative effects of BEE bureaucracy, but will unleash unprecedented funds and support for small black-owned businesses.
The codes say that a business can score up to 15 BEE points out of 100 if the money it spends on helping other black-owned businesses equals 3% of its net profit after tax.
With this ratio, if money spent on enterprise development during the year equals, for example, just 1% of its net profit after tax, it will score five BEE points out of 100. But it is capped at 15 points and 3% of net profit after tax. Investec, for example, recently claimed an enterprise development spend equal to 92% of its net profit for the past year — R2,5-billion for financing BEE deals and R6-million on its chain of Business Place small business development centres — but gets only the maximum of 15 points for enterprise development.
The total weighting of enterprise development on the overall BEE scorecard looks like a healthy incentive. At 15 points it is almost equal to the maximum 20 points that a company can score for black ownership. It equals the appointment of black staff as well as developing their skills, both of which can earn a company a maximum of 15 points out of 100.
Stephen Hawes, researcher at BEE verification agency Empowerdex, says if all JSE-listed companies spent enough in the last financial year to earn the maximum 15 points for enterprise development, it would have amounted to more than R11-billion. This dwarfs the few hundred million that national, provincial and municipal government budgets for small business development. It is roughly equal to the total amount that banks lend to small businesses every year, says Hawes.
In 2006, when profits were slightly lower, the same effort by JSE companies would have elicited about R9-billion.
Beyond targets
But Hawes admits that the business community has some way to go before coming close to full enterprise development scores or full marks for any of the BEE measurements. He says surveys of unverified claims by companies show that industries with empowerment charters, such as mining and finance, are closest to reaching their targets.
The question is how difficult businesses will find it to score enterprise development points. If most businesses find it unnatural to help other businesses, they may ignore it en masse and concentrate on the other line items of the BEE scorecard.
Grey areas
Far more likely but just as damaging to the BEE system is if it were too easy to score Enterprise Development points. What if a business were to take its usual business activities and give it a BEE spin just to earn points? What if a buyer becomes slightly more talkative during his site visits and writes them up as hours spent giving advice to small businesses?
SABMiller’s much touted owner-driver scheme, where delivery drivers are helped with finance and contracts to acquire the trucks they drive, will certainly qualify as enterprise development. But is someone driving his own truck really running a business or is he just a glorified employee without labour rights?
Companies offering business-to-business services will be tempted to turn normal marketing efforts into enterprise development. An advice or “value-add” component to a marketing drive aimed at small businesses is not uncommon, such as “training seminars” on a new product, and could be tweaked to earn BEE points.
“It’s a bit of a grey area,” says Hawes. “Is it a marketing initiative that they were going to do anyway or is it done specifically to give preferential treatment to small black businesses? If it’s just business as usual and you’re trying to get more of the market, I wouldn’t see it as purely an enterprise development.”
The debates raging around these issues in the DTI’s BEE committee machine have so far produced a list of activities that may be counted as enterprise development spend (see table).
If one considers the rules, regulations and laws that a simple compliance system such as tax generates to counter business’s endless efforts to find loopholes, the future complexity of BEE rules seems nightmarish.
An enticing aspect of enterprise development, however, is the possibility that companies supporting small businesses will deliver more sustainable small business development than government.
The incentive for companies to kill two birds with one stone — develop their supply chain or customer base and score BEE points — almost ensures sustainable small business development. In the case of banks, which have to get back the money they lend to small businesses, sustainability is an imperative.
Government continues to focus on informal, survivalist businesses despite overwhelming evidence that it fails to spur growth or job creation. Hawes says figures so far show that enterprise development money is being spent on micro to medium businesses, but not on survivalists.
Predicting how South African businesses will eventually respond to the enterprise development line item on the BEE scorecard is to venture deep into guessing territory. A system like this has not been tried before anywhere in the world. Its scale is going to make it particularly interesting to watch.
It is destined to become either a bureaucrat’s very expensive misadventure or a revolutionary developmental success for which other countries will be queuing up to study one day.