There is now a growing and broad criticism that black economic empowerment (BEE), a central tenet of ANC policy, has failed to create a self-sustaining black entrepreneurial class. Instead, it has enriched a few, meant higher prices paid by the government to empowerment suppliers, fostered corruption, and become a hurdle to investment in the country.
In the face of this, the ANC might be open to finding ways to change aspects of the system which creates racial preference for hiring and ownership, but still leaves the basics in place?
There is pressure from business and from some close to government for a revamp. A proposal for change is on the table. It is not a revamp that advocates the scrapping of the entire policy that imposes racial hiring quotas and procurement preferences. It is instead one that leaves the system of public procurement and hiring largely in place, but would make it easier for big corporates to navigate the system, at a cost.
It is unlikely to satisfy anyone, including voters who see the BEE system as benefiting a narrow elite.
The latest proposal comes from Kuben Naidoo, a former senior official at the Reserve Bank, who has also worked at the National Treasury, and is now at Investec. He sits on President Cyril Ramaphosa’s Presidential Economic Advisory Council. Clearly, Naidoo is an insider and someone to whom the ANC might listen.
The basics of Naidoo’s proposal, revealed last week by Business Day, are that companies could pay a voluntary five percent surcharge on their corporate tax bill every year in order not to be bound by BEE restrictions. The companies that pay the surcharge would receive a BEE compliance certificate. Revenue raised by the tax surcharge would then be spent by government bodies and the private banks on financing black and women-owned businesses.
According to Business Day last week, the proposal was part of the briefing pack for the Presidential Economic Advisory Council meeting in January. Now that Naidoo has raised the issue, it might point to a rethink at some stage, particularly as it does not amount to a scrapping of the policy.
Earlier, entrepreneur Alan Knott Craig Jnr proposed a three percent surcharge of gross revenue in exchange for being granted Level 3 BEE status, which allows a company to claim 110 percent of its purchasing as coming from black suppliers.
Under Naidoo’s proposal, half of the estimated R5 billion raised from the five percent surcharge would go to the government development finance institutions. Bodies like the Development Bank and the Industrial Development Corporation would lend half of what is raised to black and women-owned businesses. The other half would be loaned out by the commercial banks to the same borrower categories.
Naidoo’s proposal tries to offer a compromise between the pressures to scrap red tape for business on the one hand, with the ANC’s need to satisfy its cadres and justify its ideology, on the other. It just won’t work even as a start, as it would leave much of the policy in place. And it would not reduce the negative side effects of upward cost pressures on government buying and the small number of beneficiaries.
Lending out around R5 billion annually for this purpose would be a gigantic and risky task unless some mega loans are extended. And the largest of the loans are most likely to go to those who have already hit the empowerment jackpot. Making multiple micro-loans is not a viable option for SA’s banks.
Leaving this to the state-owned development finance could be risky. And paying the commercial banks to lend out the money looks like a subsidy and makes the proposal self-serving.
As it is, the Department of Trade, Industry, and Competition has a plan for a R100 billion “Transformation Fund” to finance broad-based black economic empowerment. The government does not have a sound record on this sort of activity.
A fundamental problem with the Naidoo proposal is that it would raise our corporate income tax rate from the present 27 percent, which is about average for emerging markets, to 32 percent. That 32 percent is way above the average emerging market and world tax rate on corporate income.
Start-ups and smaller corporates which pay lower or no corporate income tax would be exempt, but if they grow, they would pay the punitive 32 percent.
Naidoo defends BEE as necessary to social stability in SA and argues that even if the policy was scrapped, there would not be a growth boom. More likely, he says, the result would be “populism, rising social fragmentation and strife.”
Behind Naidoo’s idea is that a black capitalist class, created by the state, will yield wider benefits. This has been tried and, so far, our record is one of low growth and high unemployment. What could change now in pursuing a similar policy?
It is really fast economic growth that could deliver the hoped-for benefits of broad-based BEE. Adding a five percent tax penalty is likely to further undermine investment, growth, and our competitiveness.
The basic assumption of BEE is that using race as a proxy for disadvantage remains valid.
The DA suggests empowerment policies be scrapped and replaced by an “economic inclusion for all model” which uses a preference system based on poverty as a proxy for disadvantage. For public procurement, it advocates a “value for money approach” balanced by recognition of contributions to poverty goals.
The best substitute for BEE is to go for super-fast growth by ensuring, at the least, sound management at the state-owned enterprises, cutting red tape, and a sound education and technical training system.
As the ANC faces its demise, it is likely that the clamour for patronage among its supporters is becoming a lot more intense. The Employment Equity Amendment Act, which came into effect last year, allows ministerial discretion in imposing sectoral racial hiring targets on the basis of national and provincial demographics.
Because it has been discredited and good mainly for comrades, BEE is no longer a vote winner. Disillusionment with BEE is not confined to think tanks like the South African Institute of Race Relations.
Business Leadership South Africa, the group that represents more than 150 of the country’s largest corporations, has voiced concerns about new empowerment rules and increasingly complicated regulation. The Congress of South African Trade Unions argues BEE mainly serves to create a small, well-connected black elite and fails to create a black middle class. The Zondo Commission heard how the government tender system promotes cronyism and “fronting” for white-owned companies.
For those who have not benefited from BEE, the question they must ask themselves is why so few have benefited from the big deals and why the same groups seem to repeatedly benefit.
The proposal for a voluntary tax will just extend the BEE damage on the economy, at a time when the policy is no longer a vote winner.
[Image: https://www.pexels.com/photo/assorted-banknotes-and-round-silver-colored-coins-210574/]
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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