Plan for South African companies to pay 3% of revenue for BEE
The South African government is reportedly considering a new policy that would allow non-listed companies to gain level-3 BEE compliance by paying over 3% of their revenue to a transformation fund.
According to a report by BusinessLive, the plan is under consideration, with details expected to be revealed soon.
The plan was first outlined by businessman Alan Knott-Craig Jnr in May this year, and drew attention from Department of Trade, Industry and Compeititon (DTIC) minister Parks Tau.
Following President Cyril Ramaphosa’s controversial meeting with US President Donald Trump at the White House in May, South Africa’s Black Economic Empowerment (BEE) laws and regulations became a hot topic.
BEE has been consistently flagged by the United States and the Trump administration as an impediment to foreign investment and a point of contention in ongoing trade negotiations.
Other South African delegations to the US have also flagged BEE as a sticking point in their visits to the states, and the DTIC has acknowledged the policy being brought up in its interactions with US counterparts.
At the time of Ramaphosa’s visit, Knott-Craig took to the social media platform LinkedIn to propose an alternative plan, called BEE3, or 3-for-3.
Knott-Craig invited the DTIC to look at and test the plan, which drew a response from DTIC minister Parks Tau, who said “challenge accepted”, giving credence to the government’s reported interest.
The programme proposes that the South African government simplify its BEE policies by allowing private (non-listed) companies to effectively ‘buy’ automatic level-3 BEE compliance by injecting 3% of gross revenue into a transformation fund.
In South Africa’s Broad-Based Black Economic Empowerment (B-BBEE) laws, level-3 compliance is the highest level a company can attain without changing ownership.
In a whitepaper on the scheme, the authors of the plan posit that BEE level-3 is enough to entice businesses to voluntarily take part, while not giving them a free run to full level-1 BEE compliance and shirk transformation goals.
To reach level-1 BEE compliance (the highest level), companies would truly need to transform their businesses in line with the government’s BEE ownership objectives.
But at level 3, a company would still secure full points on the scorecard, except for ownership.
A majority black-owned business could then easily graduate to level 2, and a fully black-owned business to level 1.
In exchange, a private (non-listed) company would then commit 3% of its gross revenue to a ring-fenced transformation fund, which Knott-Craig said would serve the government’s transformation objectives.
Crucially, the plan would not absolve companies of any of their other obligations under the Employment Equity Act—which now also includes numerical targets for workforces based on race, gender and disability.
Revenue not profit
The ‘3-for-3’ scheme broadly aligns with the DTIC’s plans to draw money from private sector businesses into a R100 billion transformation fund over five years.
This fund, announced in March, would aggregate enterprise and supplier development (ESD) funds to support the participation of black-owned enterprises in the economy.
The current B-BBEE policy, through the Codes of Good Practice, requires South African businesses to contribute through ESD, which includes giving 3% of net profit after tax to the development of black suppliers, black industrialists and SMMEs.
Under the DTIC’s fund, businesses would instead voluntarily direct this 3% ESD payment to the transformation fund.
This is where the proposals differ greatly.
Firstly, while the DTIC’s plan targets net profit, the ‘3-for’3’ scheme wants companies to pay based on gross revenue.
This puts businesses in a difficult position, as low-margin operations would immediately lose out. Any company with a profit margin of less than 3% would instantly make a loss.
According to the BEE3 whitepaper, revenue has to be used to keep the scheme simple and free of ‘creative bookkeeping’ gaming the system.
“The fundamental principle of BEE3 is to reduce complexity. Simplicity makes business easier. A simple
regulatory framework is easy to understand and easy to enforce,” it said.
“Although crude, revenue is the simplest metric by wish to measure the Levy.”
The scheme posits that using metrics like net profit introduces the need for audits, creates room for disagreement, and windows for understating in order to underpay the levy.
“From an enforcement perspective, a levy calculated as a percentage of revenue is very simple to collect. SARS already collects a two-monthly revenue levy in the form of VAT,” it said.
The scheme posits that the government could collect R40 billion a year from companies through this process, hitting R120 billion in three years—compared to the R100 billion the DTIC wants to collect over five years.
A second key difference is who manages the funds. Under the DTIC’s plan, the billions collected from companies go into a government fund.
The government has an incredibly poor track record of managing funds, sparking corruption and looting concerns.
Despite guarantees and assurances that the money will be directed to the stated purpose, critics have extreme doubts.
Academics have already noted that the R1 trillion moved through BEE laws since 1994 has likely only gone to around 100 politically-connected people.
There are real and well-founded fears that any government-controlled fund would go the same way.
According to Knott-Craig, the ‘3-for-3’ scheme would mitigate this by turning to private sector, black-owned fund managers as implementation agents for the funds.
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