What is BEE doing to SMMEs?
The inaugural National Summit on Broad-Based Black Economic Empowerment (B-BBEE) was officially opened by President Jacob Zuma himself. In his keynote address, he tracked the progress of transformation in a nation soon to celebrate its 20th year of democracy, and outlined the importance of continuing to build a "truly inclusive economy" in order to "eliminate poverty and ... inequalit[y] in our society". Against this backdrop, the Summit set forth to "unveil the 'refined' B-BBEE Act and Codes of Good Practice" and to "reflect on what has worked [in B-BBEE] and what has not".
Minister of Trade and Industry Rob Davies best enunciated the perceived shortfalls of current B-BBEE legislation. First, the practice of "fronting" (in which a company or individual attests to a level of B-BBEE compliance they have not actually achieved) has become a scourge in the honest assessment of South Africa's true transformational progress. Second, too few companies are making progress on elements of B-BBEE such as ownership, and those who are making progress often engage in convoluted transactions designed to disguise the passive shareholding of black beneficiaries. Lastly, he explained that it is has been too easy for companies to get points on the B-BBEE scorecard without engaging in real, substantive transformation.
The Department of Trade and Industry's response to these shortfalls is a number of far-reaching reforms to both the B-BBEE Codes of Good Practice (originally gazetted in 2007) as well as the Act governing BEE at a macro level. Fronting is addressed pre-eminently in the B-BBEE Amendment Bill, now before the National Council of Provinces. In this amendment to the B-BBEE Act of 2003, fronting is defined and decisively criminalised, with punishment of up to 10 years' imprisonment, forfeiture of 10% of a company's turnover and a 10-year prohibition on commercial transactions with the State.
The shortfall in ownership is addressed in a number of ways, principally through the Revised Codes of Good Practice's (gazetted October 11) requirement that every company with a turnover of more than R10-million meet a sub-minimum ownership score in order to avoid their BEE status being downgraded (or "discounted') by one level. The sub-minimum prescribes not only the amount of black ownership held in the entity but also the extent to which that ownership is unencumbered by debt to the entity. Other changes (implicitly aimed at the third point enumerated) include the introduction of two other "priority elements" with sub-minimum requirements, the virtually wholesale increase of targets for each element, and the increase in the number of points required for the attainment of each BEE status level.
The sheer scope of these changes, and the huge scale of their potential impact on business, leads on to ask whether they are a genuine "refinement" of previous legislation or whether, as argued by many, they could discourage many businesses from engaging in a process already fraught with controversy and some resentment.
Of particular interest is the effect the changes could have on small businesses. Under the original codes, companies with a turnover of between R10-million and R50-million (deemed "Qualifying Small Enterprises" or "QSEs" for short) were afforded significant concessions in the calculation of their BEE scorecards, the rationale being that entrepreneurs of any demographic group should be nurtured and given as few barriers to entry as possible. Under the "new" codes, a 100% or "51% or more" black-owned QSE now qualifies automatically for level one and two status respectively (the two highest levels awarded by the scorecard), whereas all other QSEs are subject to the same scorecard as the rest of the economy, replete with its steeply raised targets and sub-minimum discounting.
The distinction between these groups lies purely in their ownership status, rendering their respective players in as disparate a position as the scorecard can contrive: one lot enjoys the highest accolades afforded by B-BBEE (regardless of their compliance in other elements of the scorecard), yet the other group is left to compete against the largest corporate structures in the country on a scorecard likely to cause its members to drop at least three to four status levels at once. In essence, the DTI seems to be equating substantive transformation with mere ownership – this in stark violation of the principle of Broad-Based Black Economic Empowerment.
South Africa's National Development Plan is the strategic blueprint of the economic vision espoused by the president in his summit speech. In its introduction to the section on small and expanding firms, the plan highlights a FinScope survey in which it was found that "90 percent of jobs created between 1998 and 2005 were in micro, small and medium firms (SMME)". On the same page, it asserts "a simplified regulatory environment" as one of its key enablers to the growth of this invaluable sector.
In a sector still dominated by white entrepreneurs, it seems short-sighted to weight the deck so heavily against the majority of its participants. After all, B-BBEE is a voluntary process, dependent in part on the private sector's buy-in for its success. The reality is that many self-started small-business owners cannot commercially sustain the dilution of their economic interest in their own businesses. The abdication of the control and financial benefit of their going concerns may make owning their own businesses less attractive than the stability and safety of "working for a boss", thus robbing us of players in that space.
Before the new codes, the demonstration of a serious commitment to the hiring and training of black employees, procurement from and the development of small black-owned businesses, and the development of black individuals in the broader community was enough for the business-owner to be considered a contributor to transformation. Now, by contrast, it would appear that nothing short of black ownership will do.
If so, it is of concern that the erstwhile carrots of BEE compliance which led many a white-owned business into the fold of responsible, sustainable transformation, could well become the stick that alienates them from the same. Instead of mobilising our SMME sector, we may just be paralysing it.
Seth Randall is a black empowerment adviser at Mpowered Business Solutions.