Legislators need to consider ways BEE laws can be misused
by Deon Oberholzer,
2015-11-27 12:39:51.0
OUR legislators often have the best of intentions when addressing issues that demand urgent attention. Unfortunately, worthy objectives don’t guarantee positive results.
A recent example is the imposition of stringent visa controls to combat child trafficking. Regrettably, the short-term effect was lost tourism revenue and jobs.
Controversy surrounding these controls and the subsequent policy rethink were a clear signal to legislators that they have to be alert for unintended consequences.
This raises important questions in the realm of black economic empowerment (BEE).
Most people who care about our country’s future would agree that mechanisms have to be found to tap the talents of all South Africans and that special attention must be paid to securing the full participation of black South Africans in our economy.
These worthy objectives motivated policy makers when framing empowerment law. But could unintended consequences blight BEE and what unintended outcomes might occur?
Media coverage tends to focus on tenderpreneurs and corruption, but at least six additional unintended consequences might occur:
• BEE abandonment by small and medium-sized white business: Some white owners may see higher compliance hurdles as a no-win situation and not even try to boost black training, promote blacks, support black suppliers and help communities. Instead, they may drive down costs and sell to black businesses or white corporates on price, leaving their business-to-business (B2B) customers to absorb empowerment costs. These white companies would then regress to the dark days of worker exploitation and make no contribution to our transformation agenda
• A cap on black growth potential: black-owned businesses with less than R50m in turnover are BEE-exempt. Black businesses can avoid compliance expenses by keeping below this ceiling (white business owners tempted to ditch BEE see this as an unfair competitive advantage). To ensure no operation tops the ceiling, black owners might fragment a growing business, denting government’s vision of a big black challenge to established firms in the listed space. Meanwhile, black workers at black firms may lose out on BEE benefits as there would be no obligation or incentive to develop them as prescribed by the codes.
• BEE abandonment by small black business: The BEE definition of "black" applies to black Africans, Indians, the Chinese and Coloureds. Small business owners from these groups are well aware of the BEE exemption that applies up to annual revenue of R50m. Some may deny workers empowerment opportunities, save costs and protect margins by operating under the BEE radar.
• Other toxic effects on black entrepreneurship: Human Settlements Minister Lindiwe Sisulu recently warned small black contractors and developers to stop on-selling government housing tenders to big firms for easy money. It’s "money for nothing". Instead of building a business and creating employment, the contractor stays in "the bakkie brigade". These practices could thwart efforts to build a black entrepreneurial jobs engine.
• Massively increased "fronting": The amended codes of good practice will trigger a search for "solutions" by companies at risk of losing empowerment points. Some BEE laggards may be tempted to engage in fronting or adopt structures that offend the spirit of empowerment laws. We could see an upsurge in black intermediaries whose sole function is to channel volumes to a white business "partner". Their commission and referral fees boost inflation (hurting the poor most of all) while reducing national competitiveness. Already, we see some business advisory firms are offering to set up such sham empowerment structures for white-owned firms, perhaps using powerless employee share-ownership programmes (ESOPs) and the modified flow-through provisions to create the illusion of 100% black ownership while white owners retain full control.
• Cross-border migration of white business: Some firms may move their head offices and company registrations to neighbouring states to dodge BEE. This could affect the tax-take when government is desperate for revenue and may lead to the "export" of some jobs.
The above list is not exhaustive. Other unintended consequences may emerge as the amended codes take effect.
Legislators are aware of the challenge, as indicated by past amendments to BEE statutes.
When BEE laws were first enacted, fronting was not mentioned. The omission was soon apparent and subsequent laws provided a definition and penalties.
The spirit of societal transformation should not be a tick-the-box exercise, but without clear and unambiguous legislation, the spirit will almost always lose out to financial considerations.
Some believe BEE-dodging could become a permanent part of our business landscape — like tax-dodging — with lawyers and smart operators exploiting loopholes until legislators close the gaps, only for new chinks to appear, when the process starts all over again.
Ducking and diving like this hardly qualifies as productive use of business sector intellectual property (IP) in pursuit of worthwhile national objectives.
One of the concerns of the verification industry is that it has no oversight role in the exempt, "sworn affidavit" provisions of the codes. Previously, the industry could govern rogue agencies that might miss or allow fronting practices, but such oversight is removed completely, given the self-governing nature of affidavits.
The newly appointed BEE commissioner will have her job cut out for her.
In the long haul, the creation of a growing economy in which we all have a stake is the best guarantee of prosperity and stability. It would be a tragedy if these aims were thwarted by the short-term pursuit of narrowly defined self-interest.
It is therefore in everyone’s interest that we stay alert for the curse of unintended consequences.
• Oberholzer is CEO and cofounder of BEE verification and facilitation company Veri-Com
Picture: THINKSTOCK
OUR legislators often have the best of intentions when addressing issues that demand urgent attention. Unfortunately, worthy objectives don’t guarantee positive results.
A recent example is the imposition of stringent visa controls to combat child trafficking. Regrettably, the short-term effect was lost tourism revenue and jobs.
Controversy surrounding these controls and the subsequent policy rethink were a clear signal to legislators that they have to be alert for unintended consequences.
This raises important questions in the realm of black economic empowerment (BEE).
Most people who care about our country’s future would agree that mechanisms have to be found to tap the talents of all South Africans and that special attention must be paid to securing the full participation of black South Africans in our economy.
These worthy objectives motivated policy makers when framing empowerment law. But could unintended consequences blight BEE and what unintended outcomes might occur?
Media coverage tends to focus on tenderpreneurs and corruption, but at least six additional unintended consequences might occur:
• BEE abandonment by small and medium-sized white business: Some white owners may see higher compliance hurdles as a no-win situation and not even try to boost black training, promote blacks, support black suppliers and help communities. Instead, they may drive down costs and sell to black businesses or white corporates on price, leaving their business-to-business (B2B) customers to absorb empowerment costs. These white companies would then regress to the dark days of worker exploitation and make no contribution to our transformation agenda
• A cap on black growth potential: black-owned businesses with less than R50m in turnover are BEE-exempt. Black businesses can avoid compliance expenses by keeping below this ceiling (white business owners tempted to ditch BEE see this as an unfair competitive advantage). To ensure no operation tops the ceiling, black owners might fragment a growing business, denting government’s vision of a big black challenge to established firms in the listed space. Meanwhile, black workers at black firms may lose out on BEE benefits as there would be no obligation or incentive to develop them as prescribed by the codes.
• BEE abandonment by small black business: The BEE definition of "black" applies to black Africans, Indians, the Chinese and Coloureds. Small business owners from these groups are well aware of the BEE exemption that applies up to annual revenue of R50m. Some may deny workers empowerment opportunities, save costs and protect margins by operating under the BEE radar.
• Other toxic effects on black entrepreneurship: Human Settlements Minister Lindiwe Sisulu recently warned small black contractors and developers to stop on-selling government housing tenders to big firms for easy money. It’s "money for nothing". Instead of building a business and creating employment, the contractor stays in "the bakkie brigade". These practices could thwart efforts to build a black entrepreneurial jobs engine.
• Massively increased "fronting": The amended codes of good practice will trigger a search for "solutions" by companies at risk of losing empowerment points. Some BEE laggards may be tempted to engage in fronting or adopt structures that offend the spirit of empowerment laws. We could see an upsurge in black intermediaries whose sole function is to channel volumes to a white business "partner". Their commission and referral fees boost inflation (hurting the poor most of all) while reducing national competitiveness. Already, we see some business advisory firms are offering to set up such sham empowerment structures for white-owned firms, perhaps using powerless employee share-ownership programmes (ESOPs) and the modified flow-through provisions to create the illusion of 100% black ownership while white owners retain full control.
• Cross-border migration of white business: Some firms may move their head offices and company registrations to neighbouring states to dodge BEE. This could affect the tax-take when government is desperate for revenue and may lead to the "export" of some jobs.
The above list is not exhaustive. Other unintended consequences may emerge as the amended codes take effect.
Legislators are aware of the challenge, as indicated by past amendments to BEE statutes.
When BEE laws were first enacted, fronting was not mentioned. The omission was soon apparent and subsequent laws provided a definition and penalties.
The spirit of societal transformation should not be a tick-the-box exercise, but without clear and unambiguous legislation, the spirit will almost always lose out to financial considerations.
Some believe BEE-dodging could become a permanent part of our business landscape — like tax-dodging — with lawyers and smart operators exploiting loopholes until legislators close the gaps, only for new chinks to appear, when the process starts all over again.
Ducking and diving like this hardly qualifies as productive use of business sector intellectual property (IP) in pursuit of worthwhile national objectives.
One of the concerns of the verification industry is that it has no oversight role in the exempt, "sworn affidavit" provisions of the codes. Previously, the industry could govern rogue agencies that might miss or allow fronting practices, but such oversight is removed completely, given the self-governing nature of affidavits.
The newly appointed BEE commissioner will have her job cut out for her.
In the long haul, the creation of a growing economy in which we all have a stake is the best guarantee of prosperity and stability. It would be a tragedy if these aims were thwarted by the short-term pursuit of narrowly defined self-interest.
It is therefore in everyone’s interest that we stay alert for the curse of unintended consequences.
• Oberholzer is CEO and cofounder of BEE verification and facilitation company Veri-Com
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