Is this the end of broad-based BEE?

It is five years since the introduction of the amended B-BBEE codes in 2013 and it felt right when, in late March, the minister of trade and industry issued a notice detailing amendments to some elements of the codes and invited comments on the proposed changes.

I took some time to read through the amendments and have noted some noteworthy changes.

Key ones include the introduction and BBBEE recognition of the Youth Employment Service (YES) initiative; further clarification around exempted micro-enterprises and qualifying small enterprises; and my personal bug bear: the enhanced B-BBEE recognition level for generic enterprises.

Due to the high cost of compliance and the need to stimulate black-owned small businesses, the codes now allow for all businesses turning over less than R10million to simply sign an affidavit declaring their black ownership to qualify as a contributor to B-BBEE.

For this, businesses 100% owned by black people automatically become level one contributors, and those with anything more than 51% black ownership get level two contributor status.

Given the cost of B-BBEE ratings and the administration of procurement tracking, skills development spend and the affordability of corporate social investment , it makes perfect sense to exempt small businesses from such compliance and zone in on the core issue at this level of economic activity: ownership.

Due to the scale of small business, it makes no sense to impose all elements of the B-BBEE scorecard on such enterprises. Yet the codes go further and allow the same regime for businesses with turnover greater than R10million and even enterprises with turnover higher than R50million.

This means that if a large company is 51% black owned it can automatically claim a level two contributor status without measuring its contribution to management control, skills, socio-economic and enterprise and supplier development. How can this possibly make any sense? Surely this is taking us back to the days when ownership was the only relevant measure of whether or not, and to what extent, South African corporates were contributing to economic participation by black people. This amendment essentially means that a white-owned company that procures from other white-owned companies, turning over billions of rand, with only white males as executives, and thousands of black unskilled employees, can sell a 51% equity stake to Andile Khumalo and “BOOM!” just like that the company is a level two contributor.

According to the amendment, corporates will only be required to get their ownership right, and that will be all the transformation they need to do. We are essentially back to pre-2007, when BEE was all about giving shares to a few high-profile black individuals and doing nothing about the inequalities that permeate every aspect of South African society.

I am struggling to understand what the department is trying to achieve here, or if it has really thought through the consequences of its proposed amendment. It seems to me this change spells the end of “broad-based” empowerment and implies a reversal of all the difficult progress that has been made, against tremendous resistance.

The broad-based element was introduced in recognition of the problem not just being ownership of companies, but the lack of meaningful participation in the economy by the black majority.

It thus set skills development as a priority. Employment across all levels of a company was also expected to reflect the demographics of our society.

These were difficult but sensible requirements from corporates that benefited the country.

The B-BBEE codes are also about stimulating economic growth. The inclusion of small business development and preferential procurement was a priority element made sense as they were the largest contributors to a company’s BEE score, accounting for nearly 40% of the points.

Instead of potentially eliminating “broadbased” transformation as a requirement, the department should focus on how to improve it and make it more effective.

The government waxes lyrical about the importance of small business for job creation, but it doesn’t seem like a lot of thought and policy consideration is being given to growing small businesses.

There is currently a campaign called #BEE4SMEs under way to petition the department to add an amendment relating to SMEs. The petitioned amendment will encourage corporates to issue large longterm contracts to SMEs. Currently, the B-BBEE codes do the opposite. Corporates lose out on crucial SME development points as soon as the SMEs they are buying from grow past certain turnover thresholds.

A company can support an SME, but once the SME grows beyond a certain level of annual revenue, that company, which is a key customer of the SME, can no longer claim ESD points.

This naturally incentivises corporates to keep SMEs small by procuring only small amounts from them — just enough to keep the SMEs alive but not to grow them.

Our own government is leading in perpetuating the stereotype that black business is small business.

We should not only be focusing on starting small businesses, but more importantly on growing them to sizeable and sustainable operations, because then and only then, can we shift the historical structure and ownership profile of this economy.