Marketing and communications codes will fail to empower SMMEs

In an effort to drive meaningful participation among black South Africans in the marketing, advertising and communications (MAC) sector, the department of trade, industry & competition recently proposed updates to the broad-based black economic empowerment (BBBEE) sector code.

The intent behind the updated legislation is to accelerate the rate of transformation and address social injustice in the sector by improving ownership, management control, skills development, enterprise development and supplier development initiatives, while contributing to socioeconomic development in SA. However, we believe the amendments fall woefully short of the code’s mandate to drive “meaningful participation” and may, in fact, have the opposite effect.

The MAC sector code applies to organisations that derive more than 50% of their profit from advertising, public relations and marketing communication across all media, including digital platforms. The updated code will, among other things, require sector companies to boost the BEE contribution to ownership and procurement from 50% to 70%.

With these proposed amendments the sector has a unique opportunity to drive meaningful reform and contribute positively to socioeconomic upliftment, as small, medium and micro-sized enterprises (SMMEs) are the vital drivers of economic growth and development. The National

Development Plan forecasts that SMMEs will generate more than 90% of all new jobs by 2030.

However, the proposed sector code updates will simply perpetuate the narrow enrichment that creates industry fat cats. While the intent of the proposed changes is laudable in principle, the reality is that the BEE model in SA is defunct, and the codes do not work to support grassroots development, especially with regard to enterprise development and supplier development initiatives.

FRONTING STRUCTURES

Little or no money generated from the BEE codes through ownership and preferential procurement reaches sectors that need it most — the two lowest-income categories comprising the informal and microbusiness sectors. Unsurprisingly, the proposed changes for the MAC sector will also fail to reach the grassroots level to empower more people, particularly among microenterprises, independent contractors and the informal sector.

The proposed changes to the terms of ownership that apply more rigid criteria for a larger proportion of black ownership will most likely lead to more opportunities for unscrupulous businesspeople to create fronting structures.

The amended legislation makes little provision to create a broader ownership base by allocating only three points to genuine broad-based grassroots participation in companies. Applying heavier weightings to this ownership category is vital to broaden the financial effect of this legislation and drive meaningful change through a transfer of ownership in the sector.

Regarding procurement, there is nothing in the updated legislation that pushes companies in the sector to preferentially use small businesses, microenterprises or informal sector businesses. In its current guise the legislation awards points for procuring goods and services from businesses from qualifying small enterprises — 51% black-owned businesses that generate less than R50m in annual turnover — and exempted microenterprises with annual revenues of less than R10m.

These criteria in effect discourage companies from working with the most important yet largely marginalised sector of the economy — small businesses generating less than R1m per annum in revenue and informal sector businesses, including all traders or service providers that are not in full-time, secure or stable employment and generate less than R200,000 in annual revenue.

The issue is that companies can simply accumulate the required points by procuring from a few qualifying small enterprises and exempted microenterprises rather than distributing procurement budgets across hundreds or even thousands of smaller enterprises or individuals.

As such, money remains trapped at the top of the funnel and none filters down to those operating at the bottom end, which is what is needed to drive meaningful enterprise development and provide genuine support to economically vulnerable individuals, while bringing new entrants from the informal sector into the industry.

If the department of trade, industry & competition is serious about driving transformation in the sector it will award procurement bonus points to any business contracting with microenterprises and informal traders. It will also mandate that companies incrementally increase the proportion of spend to these categories over time to remain compliant.

Some large corporates and fund managers may argue that the administrative burden of administering procurement spend or empowerment funds across thousands of enterprises is onerous, impractical and fails to meet corporate governance requirements. However, technologybased solutions exist that create the economies of scale needed to administer and distribute procurement budgets effectively and at low cost.

Estimates suggest there are already more than 1.5-million informal service providers registered on on-demand platforms such as Uber, Bolt, Mr Delivery, Sweep South and

Money 4 Jam, which provides access to 1-million members who possess smartphones and are available at short notice to perform work for corporates, from promotions to quantitative research or market surveys.

Allocating at least some budget to digital platforms and aggregators can provide access to tens of thousands of informal businesses and microenterprises at scale without the complexity and administrative burden. Yet the broader industry and the government continue to hide behind their straw man argument that this level of grassroots empowerment is not feasible. The reality is that we have access to a broad array of enabling digital platforms in SA that effectively and efficiently aggregate microservices.

These platforms can give the corporate market access to microenterprises and informal sector business at scale, creating opportunities for companies to leverage the multiplier effect for greater impact while aligning their BEE and environmental, social and governance efforts to craft-shared value solutions.

If the government is unwilling to mandate this level of transformation, then it is incumbent on the sector to lead the way with a discretionary approach to true grassroots enterprise and supplier development that will finally achieve meaningful transformation in the sector.

THE PROPOSED AMENDMENTS FALL SHORT OF THE MANDATE TO DRIVE MEANINGFUL PARTICIPATION AND MAY EVEN HAVE THE OPPOSITE EFFECT