Two civil society organisations have come out in strong opposition to draft amendments to the broad-based BEE codes of good practice, calling for trade, industry & competition minister Parks Tau to withdraw them.
The proposed changes will fundamentally affect the B-BBEE scores that companies can achieve, which are crucial in particular for gaining government contracts, and could potentially upend supply chains based on the existing codes.
Think-tank the Centre for Development and Enterprise (CDE) and the Institute for Race Relations (IRR) Legal believe the proposed amendments are fatally flawed. The draft changes were gazetted in late January with an end-March deadline for public comment.
The major proposal is the recognition of contributions to the planned Transformation Fund for points for enterprise and supplier development (ESD) with a target of 3% of net profit after tax, which would equal 20 points for ESD, compared to the 15 points under the existing regime.
Trade, industry & competition minister Parks Tau believes the aggregation of ESD contributions in the Transformation Fund will have a greater impact and that the fund will increase the participation of black-owned businesses in the mainstream economy.
In addition, the proposals, if adopted, will give enhanced weighting to procurement under the codes from 100% black-owned enterprises and 100% black women-owned enterprises.
This would replace the existing provision in the codes requiring procurement from majority black-owned companies. Points earned for procurement spend from doing business with a 51% black-owned firm would fall from 11 points (out of 27) to three points (out of 29), while the points scored from doing business with a firm that is 100% black-owned will rise from zero to 16 out of 29.
“CDE believes the proposed changes are reckless. They amount to a massive bet on the idea of the Transformation Fund, a proposal whose details have not even been made public,” said CDE executive director Ann Bernstein.
“They will destabilise the structure of existing empowerment policies, impose significant new costs on businesses that have already adapted to current rules, and reduce investment by increasing policy uncertainty.
“The proposed changes will narrow the beneficiaries of B-BBEE in ways that may undermine important gains in economic integration.”
Bernstein said the shift in incentives away from firms with majority black ownership towards those that are wholly black-owned would significantly alter the structure of existing supply chains. The beneficiaries of preferential procurement spending would be narrowed to an exceptionally small group of companies in which 100% of the shares are owned by black people.
In its submission to the department of trade, industry & competition on the draft proposals, the CDE referred to an analysis by the B-BBEE ratings firm Tusker, which showed that of the nearly 54,000 businesses that had applied for B-BBEE certificates on their database, only about 10,000 were 100% black-owned, and around 90% of these were small firms.
The CDE said these findings raised serious questions about a sufficient number of 100% black-owned firms in a wide enough range of sectors for preferential procurement targets to be met under the revised system.
“The likely result is that many firms will be unable to achieve high B-BBEE contributor status through procurement alone,” the think-tank said.
On the Transformation Fund proposal, Bernstein noted that its parameters, mandate, governance and institutional architecture had not been disclosed.
The CDE called for the proposals to be shelved pending the outcome of an independent review of South Africa’s transformation policies to assess their effectiveness and costs.
IRR Legal said the draft amendments are “procedurally defective, legally uninterpretable, substantively unlawful, and highly vulnerable to judicial review under the Promotion of Administrative Justice Act [PAJA]”.
“The proposed amendments introduce a massive policy shift aimed at dismantling private ESD programmes,” it said.
“By adding further administrative and investment burdens, the codes threaten to depress overall economic activity, exacerbate South Africa’s severe unemployment rate, and disincentivise domestic and foreign investment.”
“IRR Legal submits that the only lawful remedy to avoiding administrative action that is ultra vires the BEE Act is for minister Tau to begin afresh. The department must withdraw the current drafts, fix the errors, resolve the material contradictions, and republish the corrected text for a new 60-day public commentary period," its statement said.
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