Ido Lekota attended the Frank Dialogue on the Future of B-BBEE in South Africa hosted by Leadership Magazine Editor Professor JJ Tabane in partnership with TimesLive and shares the main talking points from the event
South Africa must continue with its Black Economic Empowerment (BEE) policy driven by supportive roles played by the banking sector, development funding institutions (DFIs), and the non-banking sector.
To ensure the policy’s success there is also a need to close whatever existing legislative gaps to strengthen the Broad-Based Black Economic Empowerment Commissioner’s mandate. There must also be an element of activism from all sectors of society to ensure active participation in the transformation of the South African economy for the benefit of all South Africans—which is the historical mission of BEE.
This view was captured at the recently held Frank Dialogue on the Future of B-BBEE in South Africa hosted by Leadership Magazine Editor Professor JJ Tabane in partnership with TimesLive. The event is part of the Frank Dialogue forum of engagement conducting dialogues on topical issues such as National Health.
The Dialogue—which included representatives of various sectors of society including business, the government, civil society, professionals, researchers, academics, and political commentators—comes on the back of the currently raging debate about the future of BEE in South Africa. The Dialogue’s objective was to examine the state of BEE, its successes, failures as well as its future.
Originally conceived to address the glaring economic inequalities entrenched by apartheid BEE has generated profound divisions in the South Africa society, polarising views between proponents and critics.
One example of the proponents’ views is the recently released report published Tusker.co.za challenging common narratives that BEE ownership benefits only a small elite. It presents an extensive analysis of a proprietary database covering about 45% of relevant businesses in South Africa, showing that BEE ownership policies have directly benefited at least 873 000 black individuals through ownership deals, with actual impact likely larger.
The report highlights how businesses have responded strongly to BEE ownership and procurement requirements across different business sizes, debunking misconceptions about the policy’s reach and effectiveness. It also explains nuances such as unofficial effective BEE ownership targets influenced by procurement scorecards and special dispensations for smaller black-owned businesses.
Speaking at the Dialogue, Broad-Based Black Economic Empowerment (B-BBEE) Commissioner Tshediso Matona captured how the policy has been engulfed in “all sorts of criticisms, not all of which have good faith and validity”.
Driving his point home, Matona used the example of the recently released report by the Free Market Foundation (FMF) and Solidarity, which suggests that BEE imposes an unreasonable compliance cost on companies. Among its claims is a finding that annual compliance costs amount to between R145 billion and R290 billion, which is the equivalent of 2% to 4% of South Africa’s GDP, valued at about R7 trillion.
“To fabricate the so-called ‘BEE costs’, the authors ascribe financial values to companies’ implementation of BEE, while not factoring the fact that many companies voluntarily comply out of goodwill and conscientiousness, which are not measurable in financial terms alone. It appears that the report seeks to fuel hostility around the policy, without delving into the economic logic of B-BBEE as well as the moral and constitutional imperative of transformation.”
Matona went on to say that it was important for any analysis of BEE appreciates that the core of B-BBEE is a recognition that its objectives would be delivered through economic principles and mechanisms that support growth, for example, from increased participation in the economy by citizens and entrepreneurs, as well as enhanced skills, among other objectives of B-BBEE Codes of Good Practice and Scorecard. The intent, Matona averred, was to redress racially skewed patterns of ownership in the economy in which inequality in South Africa was rooted, which required promoting ownership of productive assets by black people, equipping them with skills and entrepreneurial capability.
“B-BBEE is designed to allow for various pathways to contribute to transformation, whether through ownership, skills development, or supporting suppliers. This flexibility allows businesses to play to their strengths while still helping to grow a more inclusive economy. It is therefore incorrect to evaluate initiatives undertaken by B-BBEE compliant companies as ‘costs’, as misleadingly punted by FMF and Solidarity, and ignoring that these count as investments.
“B-BBEE policy also encourages investments wherein black people can acquire assets through transactions. These assets are not the forced release of ownership rights. Shares acquired by black shareholders are paid for, and returns are earned relative to business performance, just like any other investment. This aspect of BEE is about extending ownership to a broader based, opening networks, and giving black South Africans the chance to build generational assets and financial resilience long denied under apartheid.”
Matona’s input was part of the Dialogue’s participants engagement around issues such as the state of the economy and its impact on BEE implementation, the role of the banking sector, Development Funding Institutions (DFI) and non-banking institutions in the capitalisation of BEE deals, the strengthening of regulatory mechanisms, leadership on transformation and diversity etc.
For example, the Dialogue highlighted how—with the advent of COVID-19—South Africa fell off the economic cliff in 2020 hitting rock bottom with its economic growth dipping to -6%, while its contemporaries in sub-Saharan Africa as well as other emerging markets and developing economic dropped to -4%.
By the first quarter of 2022, 2.2 million jobs were lost with real unemployment rising to 42%. This led to an economic activity shut down by 51% quarter by quarter, a 75% drop in manufacturing, 76,6% in construction, 67,6% in trade, 67.6% in industry forcing gold mining to drop by 59%, platinum and iron ore by 62% and global trade by 68% percent leading to 55% drop in exports.
The consequence thereof is tax revenue fell by R300 billion, Vat revenue by R300 billion leading to budget deficit of 14.6%. Hardly an environment to support BEE.
Then there was R200 billion relief package to reduce the negative economic impact which unfortunately did not do much to foster BEE—due to the reluctance of banks to play ball.
In terms of the relief package the treasury promised guarantees to banks to encourage them to lend, intending to backstop bank loans to business affected by COVID-19. This was means to reduce banks’ risk in extending credit.
However, these guarantees were considered inadequate because banks did not trust that government involvement would be neutral and risk free, fearing political factors might affect the process or terms. The banks also doubted the financial strength or enforceability of these guarantees, questioning whether the government would stand fully behind them.
Instead banks demanded that they themselves should also bear some risk (i.e keep a portion of the loan exposure on their books), which limited their willing ness to lend beyond certain extent. As a result the banks stuck to their conservative lending standards and were reluctant to loosen credit. This unfortunately had a negative impact pact—especially on black-owned business who did not meet the criteria.
The Dialogue pointed out that the banks’ behaviour was contrary to international norm where financial institutions threw in their lot with whatever relief package their governments came up to mediate the impact of the economic COVID-19.
As one of the Dialogue participants Development Economist Dr Nthabiseng Moleko has aptly captured the banks posture: “Banks enforced strict credit criteria, priced and screened more tightly, favoured larger corporates vs SMMEs. Banks remained risk averse and simply put—in the context of the worst shutdown ever known to post-democratic South Africa.”
That behaviour Dr Moleko showed was in contrast with the Mckinsey Global Trends in terms of which there is a need for resilient policies (from all sectors) that address issues such as socio-economic. She went on to show how South Africa is falling short in this regard by comparing the local banks behaviour with that of their international counterparts. As seen below:
Contrast McKinsey Global trends—Spain Euros 116bill (88%),France 317bill (95%), UK 452 billion (84%), Italy 550 (96%), and Germany 1 105 fiscal response of which 69-95% loan guarantees, Germans 69% GL and 9% loans, 9% equity injections to ensure RECOVERY, rebounding.
To redress the situation Dr Moleko came up with a multi-pronged plan involving various sectors of society including government, business and civil society. The plan includes an approach to improving Access to Credit and Loans. Such an approach includes:
- Reforming the financial system structure—by revising and improving how the financial ecosystem is organised to better support inclusive access.
- Unlock Working Capital beyond banks—by creating working capital facilities outside the major banks to better align with cash flow cycles of small, medium, and micro enterprises (SMMEs).
- Strengthening the Role of the National Empowerment Fund (NEF)—by increasing the institution’s capacity to provide first loss protection and mezzanine financing through a dedicated Transformation Fund aligned with empowerment objectives. This includes the government underwriting the higher risk portion of SMME funding for black-owned businesses with no collateral, absorbing the initial losses so that private investors feel confident to invest afterward.
- NEF currently uses convertible equity and quasi-equity instruments, which are costly and require capitalisation. The risk for commercial banks entering after NEF needs to be reduced upfront to encourage greater participation.
- Developing a strong political commitment from the Economic Cluster and Education sector.
- Restructuring financial systems for better efficiency and inclusiveness.
- Increased investment in productive industries and infrastructure development.
- Acceleration of the implementation of open finance to allow lenders for SMMEs to securely shared data.
- Enforcement of the Public Procurement Act—especially the provision reserving contracts for SMMEs and black-owned businesses, to improve their cash-flow and stability quickly.
- National Treasury leading policy efforts to align the Procurement Act with broader economic development goals.
- South African Reserve Bank and the Prudential Authority facilitating access to alternative financial service providers and non-ban payment options offering SMMEs credit, ensuring balance with traditional banking sector.
These initiatives, as Dr Moleko avers, are driven by the conviction that increasing the participation of black-owned companies in the economy through BEE contributes to economic growth in several ways:
- Expanding the Entrepreneurial base: Greater inclusion of black-owned businesses broadens the pool of entrepreneurs and companies actively engaging in the economy. This is fundamental for sustained economic growth because it taps into the majority population’s potential, creating more jobs and opportunities.
- Driving Inclusive Growth: Economic growth that includes previously marginalised groups promote social stability and expands the domestic market.
- When black businesses grow, they generate income and employment in communities that historically faced exclusion, boosting overall demand and consumption.
- Enhancing Productivity and Competitiveness: BEE encourages black ownership, management, and employment, which can improve company behaviour, innovation and productivity. This creates a more dynamic and competitive economy.
- BEE policies use tools like preferential procurement where government and private sectors support Black-owned businesses through contracts. This stimulates business growth and helps integrate these firms into key economic sectors and value chains.
- Addressing Inequality as an Economic Priority: By reducing economic exclusion and narrowing income gaps, BEE contributes to a more equitable economy. This equality fosters economic stability and broadens participation, sustaining long-term growth.
In summary, the Dialogue participants agreed that increasing black-owned company participation through BEE fuels economic growth by expanding inclusive entrepreneurship, creating jobs, improving firm competitiveness, and building a more just and balance economy. This aligns growth with social transformation objectives essential for South Africa’s development.
Overall, what came out of the Dialogue is a view that B-BBEE must be retained with targeted reforms to ensure its success. Such success depends on an optimal framework designed to overcome structural economic barriers and stimulate growth, especially in job creation.
This can be achieve through enabling factors including, affordable, targeted interest rates to encourage investment, cheaper capital availability reducing financial burdens on businesses, effective and management of funds by FDIs, exemplified by the National Empowerment Fund’s growth supporting SMMES and job-rich sectors; involvement of pension funds to unlock large capital pools for development, strong cooperation among National Treasury, SARB<FSCA, Public Auditor and Competition Commission for policy coherence and market fairness; as well as balanced competition and industrial policies supported by development finance.
This proposed solution to enhance BEE’s effectiveness integrates financial tools, institutional cooperation, and strategic policies to sustain the policy’s objectives by enabling investment that deliver jobs and inclusive growth—driven by an ethical leadership.
Ido Lekota is a media practitioner and an independent socio-political commentator.