TIM COHEN: The price of pretending BEE has no price

Political discussion around BEE is in the ascendancy. The DA has at last found its voice on the topic, calling for a nonracial alternative. In partial response, one supposes, President Cyril Ramaphosa said in his state of the nation address (Sona) in February that the government would “refine, realign and strengthen our broad-based BEE framework to ensure that it supports greater transformation and inclusive growth”. Or to put it another way, Houston, we have a problem.

Deputy President Paul Mashatile and trade, industry & competition minister Parks Tau have been asked about BEE prior to and after Sona, and both have spoken about a two-phase review. The short-term phase would focus on subordinate legislation — specifically the regulations, codes of good practice, guidelines and practice notes — rather than immediately reopening the core act itself. Only in the longer-term phase does the process appear broad enough to contemplate deeper structural or legislative reconsideration of the framework.

And all of this work is going to be done by — guess what — a committee that is yet to be established. This signals to me that the political pressure against BEE is increasing, and the reasons are obvious. Almost every tenderpreneur outrage, of which there are now too many to count, involves some notional BEE justification. BEE has metastasised into an enrichment exercise in hundreds of public and quasi-public entities, cities, provinces, towns, you name it. And all of this has grown beyond the government’s ability to police it — even in the police force! — as the Madlanga commission is demonstrating in graphic detail.

There is an additional problem: I suspect the outrage is now spreading beyond the usual ideological refuseniks into the ANC’s own base, because — and one doesn’t want to be less cynical than necessary here — there are few things more maddening than watching someone else cash in on an opportunity you were also theoretically invited to seize but somehow left lying on the kitchen table.

This puts the government in a political pickle, which explains why it is considering “strengthening” the legislation. I presume this means trying desperately to hold onto the essence of the effort, which still has some political support, while reducing the egregious skimming. Personally, I would like to wish them the very best of luck with that.

But here is the broader question which, in 30-or-so years of the implementation of this landmark policy initiative, nobody seems to have been able to answer: how much does BEE actually cost — or boost — the economy as a proportion of total economic growth?

Many academics and economists have given it a shot over the years but have struggled with the obvious problem: it’s a very difficult thing to calculate because how do you distinguish the costs or benefits of BEE from all the other stuff happening simultaneously in the economy, including the load-shedding crisis, regulatory burdens outside BEE, cadre deployment, and so on, that we have been enduring for the past 15 years.

If South Africa had grown 3% faster annually since 2007, nominal GDP would be R12.3-trillion instead of R7.3-trillion, a claimed sacrifice of R5-trillion

There has in fact been one heroic attempt at measuring the actual GDP cost, and that was co-authored by the Solidarity Research Institute (SRI) and the Free Market Foundation (FMF) and released in June last year. It argues BEE acts as a “race law penalty”, essentially taxing the economy to the point of stagnation.

There is plenty to critique in the report — both Solidarity and the FMF are ideologically opposed to BEE — but, in its defence, it is at least data-driven and convincing enough to be directionally accurate. The report’s methodology is essentially two-fold. First, it takes the reported compliance cost and extrapolates it across listed and unlisted businesses in South Africa and deducts that figure from the value of GDP growth. It calculates the compliance cost at R145bn–R290bn, equal to 2%–4% of 2024 GDP, and that these costs may reduce GDP growth by 1.5%–3%.

The second approach is to take countries with similar GDPs to South Africa’s and compare their longer-term trajectories. Attribute the deficit to BEE, and the result is about the same. It then goes on to calculate that if South Africa had grown 3% faster annually since 2007, nominal GDP would be R12.3-trillion instead of R7.3-trillion, a claimed sacrifice of R5-trillion, or 69% of GDP growth since 2007. Wowzer.

The main problem is that the report tends to treat gross compliance-related expenditure as if it were net GDP loss. That is not how GDP works. If a firm spends on training, consultants, auditors, software, supplier development, bursaries or local service providers, that is a private cost to the firm, but much of it is still somebody else’s income and part of GDP.

The true economic loss is the deadweight loss: misallocation, reduced productivity, delays, reduced competition, inflated procurement premiums, or capital being pushed into lower-return uses. But gross spend and deadweight loss are not the same thing. This is especially problematic for skills development, enterprise and supplier development, and socioeconomic development, where some of the “cost” is better thought of as investment or transfer, not pure wastage.

There is also no treatment of the counterfactual cost of inequality. South Africa’s Gini coefficient is among the highest globally. High inequality suppresses domestic demand, increases crime, reduces human capital formation and creates fiscal drag through social grant expenditure.

But that doesn’t mean the macroeconomic cost suggested is not plausible. After all, Namibia, which also experienced apartheid but which imposed a much lighter version of BEE post-democracy, has tripled its GDP since 1994, compared to South Africa, which has doubled its GDP. Everybody knows BEE likely imposes substantial private compliance and allocative costs. It’s just not yet credibly quantified.

Get to it, economists of the country. We need to know.