ROB ROSE: BEE isn’t transformation, says new report

A few weeks back, President Cyril Ramaphosa took aim at those who say BEE has become an impediment to South Africa’s growth.

“It is false, it is lies, and it is just a slogan,” he said in parliament, to giddy applause from ANC backbenchers. Critics, he said, “only want white people to control the economy — we are not going to allow that”.

This, in a nutshell, encapsulates the poverty of the debate over BEE. Everyone has an opinion on BEE today, no matter how uninformed, which has been refracted first through a prism of ideology, then laced with political imperatives or cynicism, and finally seasoned with anecdotes that are either fictional or mean nothing.

What is missing, mostly, are the facts. In part, this is because the data isn’t available, which makes it impossible to stress-test fantastical claims, like that of Wits University professor William Gumede, who says fewer than 100 politically connected individuals benefited from more than R1-trillion in deals.

This week, a new study emerged from Codera Analytics’ Daan Steenkamp (a statistician and research fellow in Stellenbosch University’s economics department) and XA Global Trade Advisors founder Donald MacKay, an ex-Deloitte consultant.

This, MacKay says, is “finally, a BEE study with data”. While the government’s Broad-based Black Economic Empowerment Commission collects a huge amount of data, it releases none of it. “This prohibits evaluation of the costs and benefits of BBBEE policy over the past 23 years, so we decided to run our own survey,” MacKay and Steenkamp say.

Even this new report, while adding empirical texture to the debate, is not statistically representative of the entire business sector. MacKay concedes this, saying Codera and XA spoke to the major business groups, which asked their members to complete the survey.

While 700 companies received the survey, only 126 completed it. But this spanned small firms as well as those with revenue exceeding R1bn, with 25% of them in the top two tiers of BEE compliance and 37% entirely noncompliant.

“Is it a statistically significant sample? No — we’d have had to design it differently for that. But does it represent the views of a large number of companies for whom BEE has impacted their investment decisions? Then, yes,” he says.

This creates something of a selection bias, as those firms which completed the survey would have likely felt strongly about BEE. But, as MacKay says, “we did our best to also include beneficiaries of BEE deals too, many of whom weren’t interested”.

The report begins with a framing principle fundamental to understanding where the debate got derailed. BEE, it argues, has mutated into the goal itself, rather than just one tool to achieve the real goal: transformation, and dismantling apartheid’s economic legacy.

This is important because if BEE is itself transformation, few will question it. “But if [the policy] is merely one possible instrument for achieving transformation, then the question of whether it is working, and whether a different instrument might work better, becomes not only legitimate but necessary,” it says.

Certainly the findings suggest it isn’t working. These 126 companies, for instance, incurred a “set-up” cost for implementing BEE of between R160,000 and R650,000 — equal to a median of between 0.4% and 4% of their annual turnover.

But it is the ongoing annual cost of compliance — between R2.5m and R225,000 — that is most disturbing. Those companies spend between 6.25% and 32% of their post-tax profit to ensure their BEE scorecards are in order, including for paying advisers, lawyers, and for accreditation. (For some, it is crippling: one smaller company paid R1.5m for BEE compliance in one year in which its total net profit was R368,000.)

Still, the report argues that if BEE created “growth opportunities for compliant firms, and supported job creation and investment”, the costs might be worth it. But most don’t see those benefits.

Asked what impact BEE had on net employment, 35% said they had “reduced hiring”, 61% said it had “no impact”, while just 4% said they had “increased hiring”.

Similarly, asked what impact the rules had on investment in their business, 48% said it had “reduced reinvestment”, another 48% said it had “no impact”, and 4% said it had “increased reinvestment”.

However, it is the implications for the wider South African economy — one that is struggling to lure foreign investment, in which one in three people haven’t got a job — that resonates.

“Our survey results suggest compliance costs are so large as to either disincentivise business formation entirely, discourage firm growth, or incentivise offshoring,” the report says. “This is the very opposite of what South Africa needs to drive faster economic growth.”

MacKay says one notable feature was the parlous performance of the JSE’s empowerment segment, where shares in BEE schemes — like those of MTN or Sasol — are traded between black individuals.

In Sasol’s case, black investors were offered the opportunity to buy Khanyisa shares in 2016 for R370, a discount of 23% to Sasol’s ordinary shares. Since then, however, this discount has gaped to 57%, underscoring how black investors are getting the short end of the stick. This discount represents a “measurable transfer of wealth away from the black South Africans the policy is designed to benefit”, the report says.

The report concludes by arguing that a country with dire levels of investment and GDP growth, and sky-high unemployment of 32.1%, cannot afford to treat a failing policy as beyond scrutiny, when that policy was never the end goal anyway. “South Africa does not need to abandon the goal of transformation — it needs the honesty to ask whether its current tools are fit for purpose, and work to find better ones if they are not,” it says.

In other words, to ensure South Africa’s economy works for everyone, Ramaphosa should spend less time defending BEE as if it were the Bible, and more time figuring out what levers to pull to truly transform it.