Has BEE Worked?

Has BEE Worked?

BEE, the abbreviation for B-BBEE stands for broad-based black economic empowerment. To know if it has worked, and to understand its effectiveness we should look at its objective, history and evolution.

The B-BBEE Act was passed by parliament in 2003 and signed into law by President Mbeki in 2004. The preamble to the act is quite instructive:

” WHEREAS under apartheid race was used to control access to South Africa`s productive resources and access to skills;

WHEREAS South Africa’s economy still excludes the vast majority of its people from ownership of productive assets and the possession of advanced skills;

WHEREAS South Africa’s economy performs below its potential because of the low level of income earned and generated by the majority of its people;

AND WHEREAS, unless further steps are taken to increase the effective participation of the majority of South Africans in the economy, the stability and prosperity of the economy in the future may be undermined to the detriment of all South Africans, irrespective of race:”

The act is interesting in that it sets no legal requirements to become BEE compliant and sets no legislative penalty for not being compliant. Section 10 of the act states:

10. Every organ of state and public entity must take into account and, as far as is reasonably possible, apply any relevant code of good practice issued in terms of this Act in-

(a) determining qualification criteria for the issuing of licences, concessions or other authorisations in terms of any law;

(b) developing and implementing a preferential procurement policy:

(c) determining qualification criteria for the sale of state-owned enterprises; and

(d) developing criteria for entering into partnerships with the private sector

This states that government MUST take into account, and as far is reasonably possible, APPLY the act and codes. It does not state how this should be done, and it does not emphasise the importance of applying the act.

The question to be answered in this article is “Has BEE worked?” The emphasis is on the past tense – “worked”.  A good analogy to use is an engineer develops a new synthetic oil for your car and needs to know if it works. The first step would be to use the oil in your engine. We could never know if the oil works if it remains in the tin. The engineers theory shows it works, but if it is not poured into the engine, and used regularly, and evaluated six months later, it would be impossible to know if the oil is any good. The same goes with BEE.

Let us break broad-based black economic empowerment down to its component parts. The important aspect is B-BBEE is an economic policy. Its aim is empowerment and growing the economy. It primarily is to support black people – those who were disadvantaged by the apartheid system. Most important it is broad-based – it covers multiple aspects of the economy, business and society.

The act of 2003 created the concept of Codes, or regulations explaining how BEE is to be implemented. The codes took quite some time to be finalized. There were various drafts, issued in 2004, 2005 and 2006 before the final regulations were officially issued in 2007. Until then, it was impossible to implement BEE or judge its effectiveness – not unlike the engineers putting their new synthetic oil into a tin ready for marketing.

Once the codes were issued some companies – the early adopters – did indeed begin the process of following the codes (complying). The codes defined various levels of compliancy, and initially most companies who chose to comply achieved a low level of compliancy. Over time the levels of compliancy have increased. Some companies have now measured their compliance via a rating five years in a row.

The problem has been that there are still a small number of companies who have complied. Certain industries tend to be excluded from BEE completely. It is like testing the new oil in a small number of cars, and excluding up to 50% of all cars from testing the oil. In BEE terms, the mining industry needs to follow the “Mining Charter”. This similar sounding act to BEE and its charters has nothing to do with BEE. The Mining Charter pre-dates the BEE Act, and lays down regulations in conflict with BEE. It is like using different oil in your engine that cannot be compared to the new synthetic one. All mining houses therefore follow the mining charter because the government insists on compliance to this act before awarding new mining licenses. We cannot expect the mining industry to comply with BEE when the act governing their very existence decides otherwise. It’s impossible to know if BEE has worked in the mining industry since it has never been applied.

Talking of charters, the BEE act also makes allowances, but very different to the mining charter. Charters in the B-BBEE sense are codes or regulations, similar to the standard codes, but tailored to individual industries. Where an industry feels that it can serve empowerment better with slight difference to the existing codes, it can apply to the minister for permission to do so. Over time many industries have worked on their own charters. Once again the problem is the length of time it takes to finalise the charter. The first charters were gazetted in 2009 – two years after the original codes.

Since then more charters have been issued, the most recent being the financial sector code and the agricultural charter at the end of 2012 – nearly five years after the codes were originally issued.

The codes do confirm that until a charter is issued, the standard codes should be used to measure compliancy. In reality a charter is used as an excuse to delay implementing any BEE activities or measuring them. It’s like each car manufacturer wanting a can of synthetic oil to be branded to their own name before they choose to throw the oil into their vehicle. Effectively many companies and industries have “escaped” the BEE net via an excuse that they are awaiting the finalization of their charter.

A major foreign airline, has this to say about their B-BBEE status:

The various stakeholders that make up the aviation sector embarked on negotiations with interested stakeholders and Department of Transport during 2004 to develop a scorecard for our sector. Targets and weightings for international airlines such as ours were agreed in principle in June 2005, and our scorecard, which forms an addendum to the larger Aviation scorecard, has yet to be launched by the Minister of Transport.

Unfortunately, delays with finalization have been experienced but we are advised that the scorecard has been presented to Cabinet for acknowledgement. It is envisaged that this acknowledgement will be obtained but no date has been stipulated.

Given that our full charter and related scorecards have yet to be launched by our Minister; in the absence of a promulgated Code of Good Practice for Multi-national businesses such as ours and with the understanding that no rating agency has been accredited by the DTI, we as an industry sector have elected to delay formal ratings until greater clarity has been obtained.

It starts becoming impossible to identify if BEE is working when it has not yet been implemented. If the oil has still not been poured into the engine, how could an engineer know if the oil does its job?

Doing business with government is another reason why it is impossible to answer the question “Has BEE Worked?”

All government procurement is regulated by the Preferential Procurement Policy Framework Act. (PPPFA). This act defines how government, its agencies and state owned enterprises should set up their procurement or tender policies. The PPPFA has always had empowerment as an objective but has never followed BEE principles as mandated by the B-BBEE Act and Codes. In June 2011 the minister of finance issued a notice aimed at reconciling the PPPFA with the BEE act by requiring that tenders take into account the BEE status of businesses wishing to tender for government work. The intention was for this to take effect in December 2011 – nearly 4 years after the original codes were issued. Unfortunately, on the effective date, 7th December 2011, the minister gave an exemption to all state owned enterprises to not follow BEE principles in setting out tenders. Government departments were not given the same exemption. Therefore as from December 2011, some tenders issued by government started requiring government to take into account the BEE status of the tenderer. The exemption to state owned enterprises ended in December 2012 so all tenders issued by government, government agencies and state owned agencies will, from now on start following BEE principles.

Is it a bit difficult to judge if BEE has worked when it effectively only started a month ago. We need a couple of years to see how well it has worked. It is a problem that six years after the codes were first issued, and 9 years after the act was promulgated, BEE has not even been given the opportunity of being properly implemented.

In December 2011 the dti minister issued the B-BBEE Amendment Bill, to replace the B-BBEE act of 2003. This bill was presented to parliament in November 2012 and will probably be passed sometime early in 2013. The amended act will improve on some of the shortcomings of the existing act, but not do much to encourage businesses to figuratively pour the new oil into their engines. In a way the minister has designed a new engine before even knowing if the new oil will work on the old engine. Furthermore the minister issued a draft set of codes in November 2013, again to try to improve on the old codes. These draft codes are not likely to come into effect for another year, but they have caused consternation amongst businesses who would have been prepared to pour the oil into their engines. Even though they are in draft format, they will have the effect of discouraging businesses from complying.

In August 2012, a verification agency, put out the following letter on behalf of its client:

“BROAD-BASED BEE

Our earlier letter on this matter refers. In this we referred to the anticipated new revised BEE Codes as part reason behind the delayed implementation. Unfortunately the BEE Codes have only now been approved by cabinet for public comment. See extract from SAnews.gov.za below.

Pretoria – Cabinet has approved the revised Broad-Based Black Economic Empowerment (B-BBEE) Codes of Good Practice, 2012 for public comment.

“The revised codes will enhance the implementation of B-BBEE in a meaningful and sustainable manner. The revised codes also contain principles and guidelines that will facilitate and accelerate the implementation of B-BBEE,” said Cabinet spokesperson Jimmy Manyi on Wednesday…..

Some of the key areas of refinement of the codes include the reduction of the generic scorecard to five elements, with Employment Equity and Management Control being consolidated, and Preferential Procurement and Enterprise Development merged to form a Supplier Development Element.

Additionally, the points for ownership have been broadened ……Other areas of refinement are that all companies, …. will be required to comply with the five elements of the B-BBEE scorecard, and revised qualification points for awarding of B-BBEE recognition levels status.

Priority elements have been introduced, …. The priority scores of entities that do not comply with sub-minimum requirements in each priority will be discounted. …

Others refinements include the …….. – SAnews.gov.za

Please note the areas highlighted in red. These clearly underpin our earlier concerns raised about BEE implementation before more clarification on certain matters has been obtained. Name withheld is a large enterprise and any shift in implementation requirements heavily impacts, especially from a financial perspective!

We can however still confirm that Name withheld is formally contracted to Name withheld and as an entity they are ready to move on addressing transformation requirements once there is a better understanding of government’s expectations. Please keep above in mind when considering Name withheld‘s BEE status and feel free to contact me directly should it be needed.”

The unintended consequence of the draft codes is that businesses, such as the above will use them as an excuse to not become compliant, giving BEE no opportunity of working.

In general we have to say that the question “Has BEE Worked?” cannot be answered because there has been such low levels of compliance. Many businesses, probably over 100000 have produced a BEE certificate at some time, so they have thrown the oil into their engines. It was and remains voluntary without too much comeback to companies who do not produce a compliant scorecard. BEE HAS worked for a small group of companies that have complied properly. This is too small a sample to clearly say that BEE is working or not working.

Conclusion:

BEE has not been applied and implemented properly to be given a chance to work.

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