Tectonic plate shifting in BEE
On 29 March 2018, the Department of Trade & Industry (dti) issued draft amendments to the amended Codes of Good Practice for public comment. One of the stunning proposals is that all black owned companies – of any size – are to be exempt from any obligation in terms of the BEE legislation. This was previously restricted to EME and QSE, meaning companies with revenue of less than R50-million. These companies now all obtain a Level 1 if they are 100% Black owned and Level 2 if 51% or more.
The dti proposes a number of clarifying restrictions that seek to ensure that “real black owned business” would be exempt; and not structured companies that make use of the many alternative allowances that companies could use to amplify their BEE ownership. This includes the modified flow-through principle, sale of assets, mandated investments, Private Equity Funds, BEE facilitators and more.
It’s not rocket science to understand why this happened – to a certain extent it was probably inevitable. The voice of Black Business is getting stronger and the argument is that they are supposed to be the beneficiaries of BEE, even if they are successful and large. It is common cause that the cost of BEE is high and often a serious financial burden on business. If it wasn’t, black business would not have bothered to lobby government for exemption.
As I see it, there is a real possibility that this seemingly simple concession to black-owned companies may cause some tectonic plate shifting, leading to the effective collapse of BEE as we know it. This decision leaves the cost of restorative BEE transformation squarely with white-owned companies – or non-black owned companies, to be more specific.
We all know that government is rightfully claiming huge success with the establishment and growth of black business and the shift in the economy toward black companies. At the same time, white businesses are increasingly excluded from government and SOE business opportunities, meaning this sector will continue to shrink and the cost of BEE will be picked up by a smaller (and shrinking) group of companies.
Fronting for compliance
One of the main drivers for the shift from narrow-based BEE to Broad based BEE (B-BBEE) many years ago was to counter the fronting that was happening – to be “compliant”,companies merely opened a “black version” of their operations and used that if clients asked for it.
While the exemption goes some way in defining “real black ownership”, it does not seek to define what such a newly-exempt black-owned company may do as their business. What, then, is the difference between a legitimate black-owned trading company that has been appointed as product distributor, and an opportunistic intermediary that would be classified, in my mind, as a “front”?
Some years ago, after the Amended Codes came into practice, I predicted that 2016 would be year for fronting – but perhaps 2019 will evolve fronting to its most sophisticated guise yet. Not that I want to put thoughts into anyone’s heads, as this is murky territory with dangerous consequences.
Expect to see a whole generation of sophisticated “intermediaries” that could effectively shield the white-owned business from compliance, using a form of self-structured “exemption”. If BEE compliance cost more than the cost of maintaining this additional business layer, would it not make perfect business sense for companies to consider it?
Here’s how I see it, having had years of dealing with BEE in all its iterations. There are at least three possible outcomes that could be triggered by this exemption of all black companies from BEE compliance:
- It could trigger the collapse of BEE as white-owned businesses increasingly withdraw from any form of BEE compliance and provide their products and services to black owned intermediaries, thereby ensuring nobody is left to comply with the Codes.
- BEE could simply “work itself out of a job” by shrinking the white economy to the point that government decides there is sufficient transformation to no longer being a political imperative. However, it is unlikely that Government will “cancel” the BEE Codes as there may be a fear that the economy might pendulum back to benefit white business.
- It could normalise to where the “BEE tax” on white business stabilises in a sort of “supply versus demand” balance; where the increased cost for white business balances with any structural inefficiencies of black business, similar to the “salary premiums” that were required to attract black talent in the early days of Affirmative Action.
If you believe – as many have said on various media platforms – that government has a more radical agenda and the destruction of the so called “White Monopoly Capital” is a real thing, then this release could simply be the end of the beginning.
The basis of this radical view would be that the current phase of transformation was designed to create sufficient black business so that white business could no longer dictate economic strategy. It would then be reasonable to argue that government will push to get to a point where the destruction of white business will not mean the destruction of the whole economy, therefore reaching critical mass in black business could shift the focus to destroying white capital.
On the other hand, if this radical agenda is nonsense, then a white business that takes transformation seriously and has a great scorecard would be able to compete equally with black business. This, though, does not appear to be the case. Consider the SANRAL announcement (subsequently withdrawn) that it would, in future, only deal with black owned companies, and it becomes clear what the intention of State Owned Enterprises are.
Time for comment on the issue is almost up. I’d suggest a careful look at your particular industry, and how the amendments will affect you and, in turn, the economy as a whole.