The third wave of BEE: what it is and why it must be stopped

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The ANC’s policy of black economic empowerment (BEE) is 30 years old this year.

At the recent Black Business Council Gala Dinner, President Cyril Ramaphosa said that BEE has been a success.

On the contrary, BEE has done far-reaching and lasting harm.

BEE adds layer upon layer of structural cost to the South African economy. Countless businesses lose bids that would otherwise provide better goods and services for public enjoyment at lower prices. Others who have no hope of complying or baulk at the prospect of having to racially re-engineer their enterprises steer clear. Predictably, this ever-smaller pool of suppliers leads to rising prices and deteriorating quality.

For over two decades now, state entities in South Africa have been paying anything between 10% and 1000% extra for goods and services. One must confront this fact to understand state failure in South Africa, from the collapse of municipalities, metros, and provinces to the distress of Eskom and the litany of problems in other state-owned entities.

BEE’s harms might be less pronounced in the private sector, where the discipline of profit-seeking contains the fallout. Still, there, too, it is a burdensome drag on performance that reverberates through value chains. The replacement of value-directed with politically-directed business inevitably comes at a heavy price.

But BEE’s political proponents appear undeterred. Last week, the President even personally undertook to intensify rather than relax BEE.

At Sakeliga, we view this intensification as a third wave of BEE.

It is hard to think of a more pernicious regulatory risk to businesses and the customers and employees who depend on them than third-wave BEE. But one should understand this wave as part of a stepwise escalation of BEE over 30 years as the state has sought to bring all economic activity under racialised regulatory control.

Sakeliga's Mission: Building Scalable Solutions to State Failure

First Wave BEE: political manoeuvring as markets open up (Since 1994)

The first wave of BEE began in 1994. It was a non-statutory phase characterised by special-interest political pressure at a time when markets were opening up internationally and internally.

By the time of the 1994 elections, almost all race-based legal restrictions in South Africa had been removed. Freer markets meant businesses from the smallest self-proprietorships to the largest corporations could begin participating in unprecedented opportunities to do business, create value, and profit across racial and community lines.

But if the 1990s saw a breakdown of racial economic barriers, it also saw a new political manoeuvring in the corporate sector as the ANC began articulating its designs for a new race-based economic policy.

Contrary to common assumptions, the term Black Economic Empowerment does not appear in the South African Constitution. As far as we can determine, its origin lies with ANC policy documents developed in the run-up to the 1994 election. By the end of that year, at its 49th national conference and under the secretary-generalship of none other than Cyril Ramaphosa, the ANC accepted the firm resolution: “That Black economic empowerment is central to reconstruction and development, and should be aimed at empowering communities rather than being directed at a limited number of individuals.”

Of “empowering communities rather than a limited number of individuals,” there came rather little. Even by the admission of influential ANC members, the big empowerment deals of the 1990s mainly massively enriched small groups of politically connected people—one of them being the current president of South Africa.

The 1990s, therefore, was a rather complex period. There was general economic improvement for black and other communities in South Africa because of freer and less racialised trade conditions. But these gains would begin to be undermined almost immediately by the emerging political and racial requirements of BEE.

Second Wave BEE: the statutory phase (Since 2004)

In late 2003, the ANC-dominated Parliament adopted the Broad-Based Black Economic Empowerment Act, laying the cornerstone for BEE as a statutory instrument. From then on, whoever wanted to do business with the state had to have a BEE certificate with a BEE score, and the higher, the better. As President Thabo Mbeki put it in 2003: “Certainly in any dealing of significance with the public sector, this will be expected of an enterprise.”

This second wave was the culmination of a very deliberate, years-long process.

By 1998, the Johannesburg Stock Exchange alone had seen more than 200 BEE deals amounting to around R40b, equivalent in relative economic terms to about R300b today. It was popular to gear these deals, so falling share prices in the Asian Crisis contagion brought the attractiveness of this deal structuring into question. Times were tight, and BEE deals began to dry up.

For the Black Business Council – an ANC-connected lobby group for BEE – the answer to the economic squeeze was a political counter-squeeze, and in May 1998, it made its move with the formation of the BEE Commission.

Its purpose? An “accelerated national BEE strategy.”

Its chairman? Cyril Ramaphosa.

When the BEE Commission finally produced its report in 2001, the Mbeki government seized on the opportunity. In his State of the Nation address in early 2003, he announced that the “Government concurs with the view of the BEE Commission that it is now necessary to make our policies on black economic empowerment more explicit.”

The ‘scorecard’ system enabled by the B-BBEE Act insidiously ensured that a company’s BEE points depend not only on itself but also on the score of its service providers. The result was a toxic chain reaction, in which companies wishing to acquire state business or that had political risk exposure were incentivised to shift part of the political pressure for BEE onto their suppliers, even though those suppliers did not themselves deal with the state.

As obvious as the harmful effect of BEE may seem today, criticising BEE in its early days was not easy. Objections to BEE by white people were often misunderstood or twisted to suggest apprehension to doing business with black people rather than seen as the scepticism explicitly aimed at the political policy of BEE and the draconian state control and top-down racial engineering over the economy that it implied. And with the ANC firmly in power, raising the party’s ire could mean exposing one’s company to ruinous levels of political victimisation.

Indeed, when petrochemical giant Sasol listed BEE as a potential risk in its 2003 filings for a secondary listing on the New York Stock Exchange, President Mbeki publicly attacked the company. Sasol quickly changed its tune, and the whole episode sent a chilling signal to the rest of corporate South Africa.

Regrettably, respected black people who spoke out against BEE over the years were brushed aside for political convenience. To this day, proponents of BEE refuse to acknowledge that Richard Maponya and Sam Motsuenyane – arguably the most respected black businessmen in South Africa – disapproved of BEE. It is a mystery how Small Business Minister Stella Ndabeni-Abrahams squares her remarks last week at the passing of Motsuenyane that “the best tribute we can pay to him in honour of his memory” is “to intensify broad-based black economic empowerment” with Motsuenyane’s own statements in 2012 that “BEE killed self-reliance” and “fostered a culture of entitlement.”

Warning signs

Officially, the second wave only obligated BEE where the state was somehow part of the transaction. A business could voluntarily opt out of trading with the state or with businesses requiring BEE for supply chain purposes, however costly the decision.

Nevertheless, wave two was an enormous policy overreach accompanied by ominous and undeniable signs of the state’s desire to keep extending and intensifying BEE. In the Mining Charter, with fishing quotas, and in a limited number of other cases where the state had already heavily regulated the industry, BEE became an explicit requirement for doing business, whether with the state or not.

Finance Minister Pravin Gordhan’s 2017 regulations on government procurement dramatically intensified second-wave BEE. The regulations stated that henceforth, state entities may decide to set minimum BEE criteria for tenders as high as they want. This was a sharp change from the regulations for the Preferential Procurement Policy Framework Act of 2001, under which businesses would only lose a maximum of 10 or 20 per cent of their tender score if they had insufficient BEE points.

By 2022, Sakeliga was able to reverse the 2017 regulations through litigation and bring crucial relief to municipalities and state entities that wanted to conduct value-for-money procurement. But this court battle revealed a new and determined resolve under the Ramaphosa administration to entrench BEE as deeply into the commercial sphere as possible.

This brings us to the third wave of BEE.

Third Wave BEE: access control (Since ~2018)

The third wave of BEE is a more recent and far more dangerous phenomenon. Here, for the first time, it is now about access control to the economy – about the direct enforcement of BEE in private transactions and over private assets that have nothing to do with the state.

Unlike the previous waves, the third wave does not draw on a single policy or law but involves a comprehensive reorientation of the state to make BEE mandatory everywhere.

The cleverness of this wave resides in its two-step approach: First, it attempts to expand the scope of the state by finding ways to subject previously free economic activity to regulatory approval or explicit licencing. After that, it seeks to make that very approval subject to BEE.

Here are just three recent salient examples of third-wave BEE.

The same trend can be seen in a host of other industries, including medicine and medical equipment, aviation, telecommunications, financial services, and more. Sakeliga is currently investigating ten government departments and fourteen other state entities for attempts to make BEE participation a mandatory requirement for legally operating a business—and there are doubtless more.

Sakeliga's Mission: Building Scalable Solutions to State Failure

To stop the new BEE

Responsible businesspeople cannot allow BEE to become a requirement for participating in the economy. A successful strategy to stop this requires at least three things.

First, business owners should treat BEE requirements as unethical directives because of the harm they do to individual businesses and the common good. Sakeliga calls this an approach of maximum achievable non-compliance. Where one judges non-compliance unfeasible, complying with BEE would be acceptable, but wherever feasible, ethics require non-compliance. Businesses would be wise to obtain sound legal advice on this, as both non-compliance and compliance with BEE carry their own risks.

The second is to litigate on an unprecedented scale. As many of the new expansions of BEE as possible should be challenged in court as quickly as possible. In some cases, this will succeed; in others, it will only buy (valuable) time; in yet others, it may fail.

From experience, we can attest that success is indeed possible, and this possibility should be seized to the fullest extent available.

The third is for business communities to become strong and influential enough to say “no”; to be involved in the politics of the day, but at the same time also look beyond elections and governments; to establish and build organisations that seek to create a favourable business environment, without waiting for solutions from the state that may never materialise; to remember that the role of any state in the economy may increase or diminish depending partly on how organised business communities seek to define that role and assert their independence.

The next ten years in South Africa will be challenging.

Success is achievable.

A significant part of that success requires us to say a firm and resounding “no” to the third wave of BEE.

Argiewe