On 19 September 2019, President Cyril Ramaphosa signed into effect the Draft Property Practitioners Bill. This bill replaces the former Estate Agency Affairs Act (112 of 1976, as amended) and gives us greater insight into the future turns, the recipe, if you will, in the application of black economic empowerment (BEE) on highly regulated professions and industries.
The recipe is as follows: Control over the management of a profession or industry is taken away from voluntary professional groups or industry bodies and replaced with national government regulation.
In this kind of regulation, the state, through ministers and other delegates, plays a much bigger, nearly exclusive, role, in determining many of the requirements for participation in a profession or industry. In this way, much of the authority over an industry is explicitly transferred to ministers or government agents.
Where private industry councils or bodies existed, or would have been created, in an attempt to address problems in a profession or industry and to determine requirements for participation in the context of the market process (this is part of creating value in markets), after the intervention, there would then be only one extra-market regulatory body that determines these. In other words, any any other market entities competing with such a body becomes prohibited.
No other direct market solution can emerge to provide an alternative recipe for ‘industry regulation’, and regulation usually takes on a more political character. In such cases, the free market economist Israel Kirzner, among others, feels that market innovation is disrupted. The ‘market’ is allowed no further opportunity to find innovative solutions to problems arising in industries or professions. (Nevertheless, the market will most surely get the blame for so-called ‘market failures’ that are given as the reason for regulation.)
Such central regulation places several, even additional, requirements for participation on a profession or industry. Even if one concludes that government regulation is the only solution, in South Africa we are seeing that regulation now extends further than mere guidelines for behaviour in a profession or industry. In the case of property practitioners, BEE compliance is now set as an additional requirement for market participation.
(Bear in mind that in the past, right or wrong, BEE compliance was actually described as ‘voluntary’ participation.)
Article 50 of the new act determines that the Property Practitioners Regulatory Authority, a continuation of the Estate Agency Affairs Board, needs to issue fidelity fund contribution certificates to property practitioners.
Up to now, it was also the case that no property practitioners were allowed to operate without such a certificate, but Article 50 (a)(x) stipulates that property practitioners without a valid BEE certificate will be excluded from being issued a fidelity fund certificate.
The industry was therefore already centrally regulated, but under the new act, BEE is directly linked to other requirements for the issuing of the fidelity fund certificates. Regulation is therefore now going further than mere oversight over property practitioners. In effect, that means that BEE compliance is now a requirement for practising as a property practitioner.
A valid BEE certificate is still relatively easy to obtain for small and medium enterprises that fall within specified limits. In consequence, this requirement is currently only a proverbial foot in the door.
Nevertheless, we see that the requirements for BEE compliance are not becoming easier over time but instead are intensified continuously. Therefore, there is the distinct possibility of stricter BEE levels being added later on. Under the preferential procurement framework act, we see that Level 1 or Level 2 BEE certificates are regularly required for state tenders.
BEE is often cited as a solution to SA’s problems, but, although its extent is expanded by the political elite, its success is questioned more and more in various circles.
The reality is that this policy undermines the effectivity of the economy. It diverts more and more economic resources for political ends, away from healthy entrepreneurial discernment – and places burdens and additional costs on the business sector and productive enterprises.
Many advocates of BEE tend to justify it with moral arguments, but even those that advocate for BEE surely need to admit that a less efficient economy is not truly broad empowerment.
The expansion of BEE in the manner of the property practitioners act will not support effective business.
Listen to the following discussion about BEE with economist Russell Lamberti.