BEE is affirmative action for entrepreneurs

 ·30 Jul 2015

The new BEE codes could well be the last nail in the coffin for the South African economy, according to a new report by business rights watchdog, AfriBusiness.

In May 2015, new BEE codes were implemented in the country, putting tighter restrictions on companies looking to gain on compliance levels.

The new codes were met with wide opposition from industry and politicians.

According to analysis done by AfriBusiness, the BEE codes focus on the following:

  • Substantial increased emphasis on black ownership and black management representation.
  • Doubling of skills development targets (applicable to black employees only, but according to national racial demographics).
  • Introduction of a Black Supplier Development Budget (vs previously much wider-defined enterprise development).
  • Substantially stricter Preferential Procurement targets with shifts in procurement required from black-owned and black women-owned businesses, as well as businesses with a turnover below R10 million and R50 million (EMEs and QSEs respectively).
  • Substantially stricter measuring criteria / compliance targets as well as the introduction of penalties if minimum compliance targets are not met.

The graphics below detail the key changes, in terms of the new requirements:

BEE Scorecard changes

BEE Scorecard changes | NPAT = Net Profit After Tax

BEE Status levels changes

BEE Status levels changes

BEE for entrepreneurs

According to the report, BEE is seen as being more than a ‘cost of doing business’ – such as taxes or affirmative action – but rather as the gradual expropriation of the business itself, where entrepreneurs are replaced with political favourites.

“In short, BEE is Affirmative Action for entrepreneurs,” it said.

According to head of the Solidarity Research Institute, Piet le Roux, where Affirmative Action seeks to replace employees, BEE seeks to replace employers.

Further, BEE measures entrepreneurs by political criteria rather than by ability to contribute to economic growth – the main driver of wealth creation.

“Consequently, those advantaged by BEE obtain greater control over resources and capital,” he said.

“Given their political status, such entrepreneurs are less pressured to focus on the interests of consumers and the economy.”

“This means that unsuccessful entrepreneurs remain in their positions for much longer than would have been the case in normal market conditions.”

Le Roux warned that should entrepreneurs continue to be handicapped by BEE, unemployment would rise and poverty would increase.

Read: How many black South Africans benefit from BEE

“Local business persons would move their investments and businesses abroad while foreign business would think twice about South Africa.”

“Suicidal” business logic

Notably, the AfriBusiness report detailed how much companies stood to lose in order to be BEE compliant through the new codes.

Graphs showing how BEE codes push business away

Graphs showing how BEE codes push business away

It argued that the codes effectively disincentivise businesses from investing locally, due to the opportunity cost of doing business in the country.

The report said that compliant investors start off with more than half their capital not in their own hands, and would need to see an “unrealistic” 124% return to make an overall 10% return.

However, if a business took its capital to a free market elsewhere – such as Mauritius and Botswana – only a 10% return would be needed.

Further, the group said that companies also run the risk of having government pull the rug from under them, as it has ability, without peer review, to change investment rules.

“The new legislation is suicidal and stands in direct opposition to all business wisdom,” AfriBusiness said.

The full report, titled BEE vs Your Business, can be downloaded here.

More on BEE

How many black South Africans benefit from BEE

How government plans to legalise corruption: Helen Zille

BEE benefiting only a few

BEE benefits blacks the least

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