WILLIAM GUMEDE: Ideologically bankrupt ANC persists with BEE

South Africa is facing its biggest economic crisis since the end of apartheid — perhaps bigger even than the Covid-induced economic crisis — despite glowing reports of economic green shoots by the government and some business leaders.

The country is contending with US tariffs, the reduction of development aid and a flood of state-subsidised Chinese manufacturing. That’s on top of years of low growth, de-industrialisation, state and infrastructure collapse, fuelled by outdated ideological policies, runaway corruption, ANC cadre-deployment, state incompetence and the capture of state BEE procurement.

South Africa’s present model of BEE will compound the economic crisis, rather than alleviating it since it largely involves giving shareholding of existing white-owned companies to black political capitalists, which does not expand the economy, create new industries or new markets.

BEE reinforces concentration of the economy. It has decimated the productive capacity of the economy as many local businesses and foreign investors do not want to make new investments, which has contributed to the continuing de-industrialisation of the economy.

But instead of instead of seeking alternatives, the ANC and President Cyril Ramaphosa have doubled down on BEE even as it is fiercely resisted in some influential circles. That means there is no realistic chance that BEE in its current form will ever be successfully implemented. Those who argue that BEE as a policy is correct and that it’s implementation is the problem are wrong. BEE is now opposed by significant numbers among both white and previously disadvantaged communities. It is also opposed, not only by the US President Donald Trump’s Republican administration but also by foreign investors, from Western countries to China.

Misallocated capital

The opportunity costs and the huge loss of development benefits should more broad-based alternative empowerment strategies be added to the ANC’s BEE model is simply too high, given South Africa’s rampant unemployment, poverty and inequality.

Opportunity cost is the value of alternative policies to the ones pursued. There are many such policies that could generate higher returns, have a greater development impact, and would create more jobs and less societal, political and investor opposition.

The current model of BEE is a perfect example of the misallocation of capital — be it shares for the ordinary black public or for ANC-connected BEE oligarchs — that could have led to far greater societal development had that capital been invested in public infrastructure, world-class education, technology, SMEs, or housing for the poor.

The misallocation of capital in African and developing countries occurs when resources are not directed to their most productive uses, either through outdated ideological, populist and captured policies, leading to lower overall productivity and economic growth. The Asian “tiger economies” were able to allocate scarce capital better, which led to a greater development impact on their economies, greater industrialisation, growth-generating infrastructure and more employment.

Creating and encouraging new industries spurs more broad-based development, more inclusive growth, more sustainable transformation, redress and new opportunities for historically disadvantage communities, while also spurring economic growth.

‘Political captalists’

South Africa’s existing BEE model is based on an African empowerment programme that seek to create “political capitalists”. It aims to turn liberation movement politicians into capitalists by giving them shares in mainstream businesses or farms. These African-style empowerment programmes have resulted in the collapse of many economies, leading to failed states such as Zimbabwe.

The failure of such empowerment programmes lies in handing over shares of working companies to politicians, some of whom have never run a business — not even a spaza shop — simply by dint of their connections and affiliations.

A better solution would have been to give such scarce resources to entrepreneurs with proven business experience — backing already proven winners, which reduces the risk of precious resources being wasted.

In South Africa and other African countries run by former liberation movements, the state is regarded as the sole provider of development. A private sector independent of the liberation movement is seen as a challenge to the liberation movement’s power. Thus, the government seeks to capture the private sector by deploying political leaders to become political capitalists.

South Africa must reset its BEE programmes, by cancelling the current version, which has enriched only a handful of people politically connected to the ANC — the political capitalists — some of whom set up “companies” simply to secure a state contract or resource licence and secure BEE shareholding in the private sector.

BEE should be cancelled in state departments, state-owned infrastructure and state institutions key to public service delivery, economic growth and infrastructure development. It also should be cancelled in “catalytic economic growth” industries — think renewable energy, agro-processing, technology, and tourism/hospitality in the private sector.

Alternatives to BEE

Another solution is that instead of BEE, companies contribute to a development or wealth fund, which would be run by the private sector, not the government to avoid it failing just like other state-owned enterprises, development finance institutions and development funds. Such a fund would invest in merit-based growth, industrialisation and infrastructure programmes, free of party politics and ideology.

Foreign investors, particularly those seeking to establish businesses in sectors that are lacking locally yet are critical to the domestic and global economy, must be exempted from BEE and given options to provide alternatives. That could involve providing jobs for the youth, supporting manufacturing small and medium-sized enterprises or developing mass science, technology, engineering and mathematics and technical skills.

Local and foreign companies should be sought as alternatives to BEE, to provide investment in targeted catalytic economic sectors: technology, science, mathematics education; low-income housing; critical public infrastructure; manufacturing and SMEs, sport and so on.

Creating employment for youth, economy-relevant technical skills and supporting industrially competitive start-ups and SMEs should be seen as alternatives to BEE. South Africa’s 60% youth unemployment is one of the biggest risks to the country’s economic, political and social stability.

Strengthening democratic institutions, capacity building initiatives including support for civil society, anti-corruption activities and independent media, should be an integral part of a new BEE. At present very few companies involve civil society organisations in their BEE deals unless it is a trust linked to the ANC.

Cultural shift

The government would also do well to away with its BEE policy of creating “big” black industrialists. Big black industrialists should be treated like their white couterparts and be left to pursue funding like any mainstream company. There has to be a cultural shift away from seeing political capitalists, deal facilitators, go-betweens and tenderpreneurs as genuine entrepreneurs.

Already empowered BEE companies should have BEE requirements too. After one BEE transaction, BEE individuals and companies should not be allowed to participate in endless empowerment deals — they should be treated as fully empowered.

It must be compulsory for BEE companies to have BEE tenders, contracts, support skills development and contract SMEs like mainstream companies. BEE companies should provide their employees with shares, housing and education. They must focus on supporting small and medium-sized black businesses and social enterprises, employ young people, build infrastructure and support new technology.

They should also operate as good corporate citizens — look after the environment and treat their contractors, employees and stakeholders ethically.

BEE companies should be compelled to support and strengthen non-public democratic institutions, democracy capacity building initiatives including supporting civil society.

White companies, particularly those which operated during the colonial and apartheid eras, should provide shares in their sompanies to current and past previously disadvantaged employees and their families. Former employees who lost out on benefits during the apartheid era should be given priority in getting shares as BEE beneficiaries.

Legacy resource companies, for example, should give shares in their companies to local communities at neighbouring mines. Surrounding communities could form social enterprises and co-operatives — similar to Afrikaner communities in the early 1900s — where each community member has a shareholding. Such community social and co-operative enterprises would then become the BEE shareholders in those white-owned companies.

Companies must provide industrially relevant vocational and technical training to both current and former employees and their families. They must provide housing, funding for education and health insurance to their employees. Companies must bring genuine black small and medium-sized businesses into their supply chains, to provide goods and services, but also support manufacturing SMEs.

Legacy companies must compensate former employees or their surviving families’ for employee contributions not given during apartheid. Many black employees died or suffered disability from illnesses such as tuberculosis, asbestosis and work accidents, but neither they nor their families were ever compensated.

• Prof Gumede is Associate Professor, School of Governance, University of the Witwatersrand and author of South Africa in BRICS (Tafelberg)

This is an extract of his recent address, "Remodeling Black Economic Empowerment", to the Black Management Forum.