Staff Photographer
Here’s one for local conspiracy-theory aficionados: to retain control of the post-apartheid economy, white capital designed a system that ostensibly gives preference to businesses that support black advancement. But the system is so wickedly complicated that only the most organised and well-resourced businesses can comply. So white privilege is extended for another few decades.
Of course, the origin of South Africa’s unique broad-based black economic empowerment edifice is much more mundane: designed by a committee, it has the sticky fingerprints of well-meaning government technocrats and chartered accountants all over it.
But wouldn’t it be ironic if the effect is the same as the conspiracy theory suggests: instead of helping black advancement, the Byzantine BEE codes and scorecards throw up such a barrier to entry that only the most formal, and therefore white, businesses get past it.
Even ardent defenders of the BEE system agree that it requires the most detailed record-keeping — not only of financials, but an entire parallel accounting system based on top of it. What gets measured gets done, they say.
So a business has to keep books not only on what it spends, but also of the BEE profile of all the businesses it buys from. It then has to calculate the deemed BEE spend on each of the suppliers according to a percentage based on the particular BEE profile of each. The business then scores points for BEE procurement according to the ratio of BEE spend to total spend.
That’s just procurement. There are six other measures, or three, depending on whether a business uses the “generic scorecard” or the “qualifying small enterprise” scorecard.
The shareholders, management and workforce have to be racially and gender profiled and records must be kept of training spent on the members of designated groups. Even customers and beneficiaries of a business are profiled to analyse discounts and charity spend.
To audit all of this annually, at thousands of rands per business, a new industry of BEE verification agencies has sprung up.
It’s bad enough for corporates that employ professionals to analyse trends and spend anyway. No doubt the BEE codes were designed with them in mind. But what about businesses that do not have access to chartered accountants and analysts, where records are barely kept just to keep the taxman happy and all remaining energy is spent solely on the immense effort of making a business survive and grow out of nothing?
One such business is Sizwe Fashion Boards, a 10-worker operation based in Soweto. It is owned by 57-year-old Molefe Gwatyu.
In the early 1990s he found himself frustrated in the human resources department of building-materials giant PG Bison. “In those years, prior to 1994, if you were a black person and working in the HR department you were not trusted by your colleagues and your bosses. So I had to do something else,” he says.
PG Bison, probably hoping to win a share of government tenders, agreed to help set him up in return for 40% of his business. Not much came of the promised help. “They’re a big company. I’m just a minute particle of their business,” he says.
He describes a typical start-up experience: “I’ve learned the hard way. I burned my fingers along the way till I got settled. But obviously in the beginning I didn’t have any skills to run a business. So I learned through mistakes.”
He says he struggled most with business regulation. “If you look at VAT, UIF, PAYE — I had to learn those things from scratch. These are things that I do myself nowadays, but initially I had to contract people to do them for me and they were charging exorbitant fees.”
Gwatyu found a lucrative clientele in small carpenters who fit cupboards and kitchen units for the emerging middle class in Soweto. His expansion was rapid and disastrous. Growing to five branches in three years, the business spun way beyond Gwatyu’s control; he was still learning the ropes as an owner-manager.
In 1999 he had to scale down and decided to continue with two of his branches, which have an annual turnover of about R8-million today.
This pushes him over the threshold of R5-million turnover a year, below which businesses are considered “exempt micro-enterprises” by the BEE codes. They are not really exempt, but are deemed to be “level three” or “level four BEE contributors”, depending on whether they are white- or black-owned. The thinking is that a business with a turnover of more than R5-million a year must be able to master BEE paperwork without too much pain.
But Gwatyu’s experience shows that the R5-million cut-off is a crude instrument. As a board retailer his volumes are high, but his margins extremely low. “I’m operating in a hostile environment. There are too many people selling boards,” he says. He reached the R5-million turnover mark long before his business was mature enough to set up the precise measurement system BEE scoring requires.
This year he finally took a stab at tendering for a government contract at Transnet, only to find that he had to submit a BEE scorecard with his tender to stand any chance of winning.
He approached his auditors, who explained to him that drawing up a scorecard is no quick exercise. Some arrangements were made to get a consultant and verification agency in, but these were put on hold as the deadline for the tender passed and Gwatyu returned to the myriad urgent matters to which any emerging owner-manager has to attend. The system that was designed to give his business preference kept him from having a shot at the tender.
Proponents of the BEE codes could argue that, as a small trader with no economy of scale, the only chance Gwatyu had to win at all is the very existence of BEE preference. To say that the codes kept him from tendering is therefore false. If a business is to receive preference for its BEE credentials, the least it can do is prove them.
But the problem with the BEE codes is that they give preference only to those BEE businesses that have exact measurement systems in place. At the same time it allows white businesses — which often have such systems — to score BEE points for measures other than black ownership. The codes discriminate against businesses the owners of which are still struggling to delegate and set up their management systems.
It may be argued that the business world punishes bad management anyway, but the BEE codes add an edge to it, making precise, meticulous management even more urgent for survival. It is hardly a way of welcoming an entire generation of first-time entrepreneurs into the formal economy. As with the South African Revenue Service, with its simplified systems and tax breaks for small businesses, the whole of South Africa should tolerate and give preference to business owners who are still finding their feet.
Besides the danger of collapsing under its own weight, the BEE system also faces a legitimacy crisis as perceptions of corruption in government and corporate procurement increase. Why incur the expense of BEE measurement and auditing if all that really counts in winning contracts are connections and inside info?
“There are a lot of people who have connections and there is a lot of corruption taking place,” says Gwatyu.
“So it’s difficult to say [the BEE codes] are a good system. It’s not. Theoretically, BEE is a good concept, but when it comes to implementation — that’s where the problem is. It might not be the government itself that is doing wrong, but the guys that are doing the implementation.”
Nothing on the scale and complexity of South Africa’s BEE codes has been tried before in the world. The outcomes are therefore uncertain, apart from two predictable ones that come standard with all bureaucratic systems. First, it will have unintended consequences. Second, it will gain a life of its own as vested interests, such as those of the BEE-verification agencies, become entrenched.
They will vociferously defend their lucrative income streams, even in the face of evidence that the BEE codes do more harm than good, which could give rise to another conspiracy theory of sorts.