STUART THEOBALD | Heedless BEE policy shift could hit black entrepreneurs

We are amid a deep shift in policy thinking on black empowerment, but no-one is doing the homework to make it a comfortable one.

Between proposed changes from the department of trade, industry & competition to broad-based BEE (BBBEE) rules and the National Treasury’s proposed changes to the government’s preferential procurement rules, the underlying pressure drivers of transformation in the economy are shifting radically. One primary change stands out: the shift of emphasis to 100% black-owned companies from majority black-owned companies.

These changes have not been debated openly in the public domain. They have instead come as a surprise. The shifts in the BBBEE codes were buried in changes that were ostensibly about the creation of the Transformation Fund — published in the Government Gazette in March as proposed amendments to the Codes of Good Practice.

The changes in preferential procurement have arisen ostensibly because of changes required in response to courts declaring the existing rules invalid — the Supreme Court of Appeal struck down the 2017 Preferential Procurement Regulations in the Afribusiness case, forcing the Treasury to draft new rules, which it published for public comment earlier this year.

We have thus not had a proper discussion about whether and why we want the centre of gravity to shift from majority black controlled businesses to 100% black-owned businesses.

That is a mistake. The original BEE codes emerged from extensive engagement across the body politic. Business, the government and several civil society groups debated at length how we should balance transformation and growth and what measures would be most effective in delivering the primary goal of deracialising the economy.

There were compromises, paradigm shifts and financial innovations that enabled ways of driving change. That meant unintended consequences could be minimised and paths taken that delivered objectives at lower cost. Of course, it was far from perfect. There were still unintended consequences and avoidable costs, as well as failures to achieve objectives. But no-one could say they were not consulted in advance.

The present shift has happened without meaningful prior engagement ― not with established business, not with civil society groups and not with black-owned businesses. While the drafts have been published for formal comment, they arrived without the kind of substantive research and stakeholder engagement that should precede changes of this magnitude.

The proposed preferential procurement rules would require organs of state to set aside tenders of up to R20m for designated categories, including 100% black-owned businesses. That is a radical change. I don’t know how much of the state’s buying is for amounts under R20m, but I would expect logically that it is a lot.

The National Treasury did not provide a thorough analysis of the economic consequences, so information like this is lacking. Imagine at least half of the state’s spending is in this range ― that is about R500bn of procurement, or about 6% of GDP. Larger procurement amounts also have various mechanisms that incentivise allocations to black-owned businesses, but they are less than 100% set-asides.

The proposed preferential procurement rules would require organs of state to set aside tenders of up to R20m for designated categories, including 100% black-owned businesses. That is a radical change. I don’t know how much of the state’s buying is for amounts under R20m, but I would expect logically that it is a lot.

The one response to that is the obvious question of whether it is feasible. In certain concentrated sectors with only a few firms (think technical specialities such as electrical engineering) there are unlikely to be many qualifying firms able to bid. So we will either get tender delays or inflated prices. The Treasury has not published a detailed estimate of what this price tag could be.

But I want to consider a different question: is it desirable that we incentivise 100% black-owned businesses so aggressively relative to majority black-owned businesses? This is also being driven by the proposed BBBEE code amendments, which will now allocate more points to firms for their enterprise and supplier development activities if those are directed at 100% black-owned firms rather than majority black-owned firms.

We want successful, competitive black-owned firms. In evolving, any company has among its tools the ability to sell equity to strategic partners. These can be key individuals such as senior managers, particularly early in a firm’s life when risks are high and sharing equity is a good way of bringing in people you otherwise couldn’t afford.

Slower growth

As a business grows and transitions from medium to large, it is often desirable to bring in strategic investors, particularly institutions that can deliver new governance and market access. Such institutions can be international, enabling firms to grow globally and access worldwide supply chains and intellectual property.

The combined effect of the dramatic shift in empowerment policy is to remove this important lever of growth for black-owned firms. To maintain 100% black ownership firms will need to ensure that equity stays in the hands of black founders, that in attracting other skills to a business they cannot use equity to incentivise white senior hires and that they cannot consider institutional investment unless it is from institutions that qualify as 100% black.

I know as a business founder this constraint would have significantly curtailed my business’s growth. For every black entrepreneur the option of freely using equity as part of their growth strategy is being significantly curtailed. BEE to date has been far more permissive of majority black-owned businesses, and there are therefore many of them ― the most successful enterprise development efforts and black entrepreneur-driven businesses overwhelmingly fall into this category. They will all be prejudiced by this decision. Even 100% black-owned businesses must face a loss in flexibility that they now enjoy to use minority interests as a growth strategy.

This change has happened without any proper research on the impact not only on the economy from a narrower procurement scope, but more worryingly, without any analysis of the impact on black entrepreneurship. White-owned firms will of course be disincentivised through exclusion from certain categories of procurement, but they will maintain maximum flexibility to use equity as a growth lever. Which group will be overall worse off? I don’t think black entrepreneurs have even been asked.

Compared with the BEE debates of the early 2000s that led to a carefully considered approach, these changes have been introduced with almost no assessment of their impact. For the department of trade, industry & competition and the National Treasury this is not a good example of policymaking.

• Dr Theobald is founder and chair of research-led consultancy Krutham.