We’re frequently asked if B-BBEE is going away. The reality is that it’s here to stay – but likely to be changed/modified along the way. This article is an NB read for those who’d like to believe they can put off BEE until some magical future date – we think (for all the reasons listed below) that this is an unsafe bet. Please read and share. We’d be very interested, as always in constructive comments and suggestions.
The foreign investment imperative:
Zimbabwe recently abolished indigenisation ownership requirements in its mining sector, allowing for 100% foreign ownership. This follows a similar move in Namibia at the end of 2018 – where BEE was scrapped because it wasn’t benefitting the majority. Both countries found that foreign investment had dropped off and attributed this to their laws comparable to our BBBEE laws. Envoys of President Ramaphosa on his drive to drum up investments in South Africa have been told that investment is less appealing because of, amongst other factors, the BEE Act.
Foreigners are not alone in questioning this Act, which is central to South Africa’s transformation agenda. South Africans also question the future of this Act. The questioners range from those waiting for economic transformation and losing faith in the Act’s ability to deliver this, to those who consider the Act racist legislation to blame for corruption and economic decline. They believe, for completely different reasons, that the Act should be scrapped, following the Namibian and Zimbabwean examples.
Policy uncertainty breeds risk:
Many investments have structured around BEE and were the Act to be scrapped, some of these investments would be relooked at. Resentment may be created where the investment is then considered a waste. But, even if it’s not, it’s certain that the investors would see more policy uncertainty. Investors only need to know what the rules of the game are to be able to plan their affairs.
The rules themselves are less important than knowing that they are what they are. The negative investor sentiment around BEE stems from the fact that rules appear to be changed often. Consider the uncertainty around the Mining Charter and the impact on investment, for example. The B-BBEE Commission does not help by making rulings/directives that are non-binding – compared to those by SARS which set clear guidelines for everyone on tax matters. This means that the Commission never introduces certainty, even when issuing practice notes or interpretation guidelines. Nobody can, therefore, every be fully certain that the BEE rules are whatever one thinks them to be.
Change is inevitable:
We have to expect that the Act (and Codes) will change. This is partially an admission of some of the failings in the Act, but it also reflects what a radical idea BEE is. This is a social experiment, never attempted anywhere else in the world. An idea to redress the past without reparations.
Normally, the idea is for the “victor” (the side on the right side of history) to make the other side pay. This happened throughout history and after each war, the loser was made to pay. This was meant to hurt. Germany, for example, made its final instalment ($94 million) on its WWI debt in 2010, almost a century after the Armistice.
The problem with reparations is that the “loser” often feels they are unfair and often this causes significant resentment. The WWI reparations led the economic hardship of the Weimar Republic and the rise of the Nazis. We all know how that worked out. Beware the shallow victory.
South Africa is a massive compromise (AKA negotiated settlement) with a powerful Bill of Rights:
Our Rainbow Nation chose not to exact revenge and reparations in this way. But did demand the restoration of some equity and justice. This included many compromises, which were intended to be just, without being unjust. This was to balance the competing interest groups’ needs, without destroying value for everyone. As with any compromise, this meant that nobody is entirely satisfied with what they got.
The compromises included the establishment of a Government of National Unity, the Truth and Reconciliation Committee, our anthem and most significantly the Constitution of the Republic.
Chapter 2 of the Constitution introduces a Bill of Rights, which is the complete antithesis of what existed under apartheid. The Bill of Rights includes the right to equality, as the very first right, prohibiting unfair discrimination on the basis of, amongst other things, race. Clearly, this marked a complete break with South Africa’s past and echoed what Mandela referred to in his inauguration when he said this beautiful land would never again experience the oppression of one group by another. It’s the same section many refer to when criticizing the BEE Act.
The right to equality is a basic human right. Basic human rights are often called first-generation rights, which are political and civil rights such as the right to be freedom of religion, speech and movement and rights to fair trials and votes and so on. First-generation rights protect citizens from the state, and, although basic was missing for most of South Africa’s history. After the second world war, second-generation human rights developed. These are economic, social and cultural such as the rights to education, housing, health and food.
These are more progressive and also sorely needed in South Africa. But there is a third generation of human rights such as the rights to a healthy environment, group rights and intergenerational rights. These are much more aspirational and largely unofficial. But, South Africa, sought to compensate for previous lack of human rights and included these too its constitution. This is what makes our constitution so different. One-third generation right is the right to economic and social development.
B-BBEE and the constitution:
So how BEE fits into South Africa’s constitutional framework is an important consideration: Clearly if it does not, it would not be allowed and the Constitutional Court would strike the statute down. This has not happened and should give those who say the BEE Act should be scrapped pause because in one way it would be easier to scrap through the Courts than through parliament.
So, we need to consider how an Act such as the BEE Act which clearly is discriminatory and does not treat everyone equally can be upheld when it immediately looks like a contravention of the first human right.
Well, let’s first consider that nothing in the Constitution prohibits discrimination. There is plenty discrimination around that we accept. Pensions, maternity leave, disability parking bays are examples of discrimination, where not everyone is treated equally but which nobody has challenged constitutionally. The simple reason is that the Constitution prohibits unfair discrimination (and not any fair discrimination). So, the first consideration is whether BEE is fair in the context of South Africa. If it is, the Act will not be scrapped in this way.
Most people who think this is unfair have not read the Right to Equality clause in the Bill of Rights which goes to state “to promote the achievement of equality, legislative and other measures designed to protect or advance persons, or categories of persons, disadvantaged by unfair discrimination may be taken.” Therefore, if the BEE Act is intended to promote equality it’s specifically allowed.
The BEE Act has specific objectives in section 2 which include economic transformation for more meaningful participation of black people in the economy. There is no debate that this is designed to advance a category of persons disadvantaged by unfair discrimination. And therefore it’s hard to argue that the BEE Act is unconstitutional by being racist. (This is not intended to be a legal treatise on the Act vis a vis the whole of the Constitution. Rather simply to explain why even though based on racial identity it’s not unconstitutional).
Can B-BBEE be scrapped by a political process?
The only other way for the Act to be scrapped is through the democratic process by the National Assembly repealing it. This could be because the Act has achieved its objectives (and is therefore no longer necessary). The Act’s objectives are not clear – in that it’s unclear what meaningful participation by black people in the economy means or what substantial change in the racial composition of ownership and management is, for example.
There is a quantitative measure of “meaningful” or “substantial”, but it would be hard to argue that the economy is fairly distributed while we have the Gini coefficient of inequality that we do – the worst in the world. We do not believe the objectives have been met, and importantly, no political party would dare to suggest this.
To overturn the Act parliament would have to change policy entirely, coming up with new objectives to better achieve equality. This is quite a specific question and is not to be confused with some of the other perceived problems of the Act, such as corruption which are actually to be dealt with in terms of completely different laws (beyond this scope of this article).
This is a policy decision of the members of parliament to debate and it does not matter whether South Africa has a head of state who is a beneficiary of the Act or not. What do the parties in parliament say?
The 2019 elections in review:
With the results of the 2019 elections now known, it’s worthwhile to reflect on what the manifestos of the ANC/DA/EFF said about BEE:
A third of the 66 page ANC Election Manifesto deals with economic transformation and is the first policy addressed. Nothing suggests that the party is considering scrapping the policy.
The 81 page manifesto of the DA also dedicates a third to the economy, and after public debate the DA agreed that “the approach to Black Economic Empowerment (BEE) as carried out by the ANC, which has only served to enrich a politically connected elite and to dampen economic growth, at the cost of job creation”. They propose instead “Empowerment approaches to provide meaningful redress which eventually realises socioeconomic justice. This approach must codify specific metrics which will signify successful redress (these could include measurables in terms of broader ownership, improved education and skills outcomes, improved entrepreneurial support etc.). As these goals are achieved the need for this approach will fall away.”
This does not sound too dissimilar to the BEE Act other than it that states that the need should fall away. We agree that should be the whole purpose of the Act. But the DA goes on to state “Social protection measures which provide for all currently disadvantaged South Africans regardless of their, or their families’, exposure to past injustice.” This will need to be assessed by the electorate, but in that disadvantages that translate to inequalities are still in the Constitution, how much would really change?
At 166 pages the EFF has the most to say in its manifesto. The EFF seems in this respect to agree with the DA when they state “The few black people who participate in the economy, do so, subject to white approval through a black economic empowerment model that is ostensibly designed to benefit a small number of individuals without ever changing the structural exclusion of the majority.” Theirs is a more aspirational document than the others and seeks the ideal of economic transformation which is more BEE if anything.
Why B-BBEE is here to stay:
Not one of these parties is calling for the BEE Act to be scrapped. But there is an acceptance that BEE has problems. This article is not to explore those. We merely state that the Act is central to our objective of transforming South Africa. Nobody has ever thought this could be achieved without some compromise and cost. BEE is sometimes seen as the cost of transformation (we don’t believe it has to be a cost, contact us to learn how we do things) and even if this is true South Africa should focus on what it’s getting. This goal was spelt in our world-leading Constitution and its third generation rights. This alone separates us from Namibia and Zimbabwe and for as long as it’s the Supreme Law of our land, it will be difficult to completely scrap BEE, but changes should be expected and they might well push harder for BEE rather than make it go away…As for foreign companies looking to invest here – we have a great solution for you too – please contact us.
Given that BEE isn’t going away, the question then is how best to address it in your business…but before we answer that we need to look at the economy overall.
Continue to Part 4 – The SA economy in a nutshell.
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