The Rob Davies incentive scheme for segregation

The ANC loves to say one thing, and then do another. Professing non-racialism, they encourage segregation. Pretending to empower black people, they disempower them. The latest counterproductive step is from trade and industry minister Rob Davies, who's so determined to encourage segregation, he's going to penalise blacks who participate in integration.

On 5 October 2012, Davies published new Broad-Based Black Economic Empowerment (BBBEE) codes for comment. Under the 2003 BBBEE Act, he determines these codes, which stipulate how companies get scored for BBBEE purposes. In the new codes, he's changed the formula for how companies' socio-economic development (SED) contributions are to be rewarded. From now on, being anything other than "non-whites only" is going to cost charities even more than before.

The basic mechanism works thus: depending on how much of a companies' SED contributions go to black recipients, a company can earn anything from 0 to 5 BBBEE points. The fewer white and non-resident beneficiaries, the more BBBEE points. We'll get into the equations below.

The main reason why companies want BBBEE points is to avoid missing out on business. Key to the influence of the Broad-Based Black Economic Empowerment Act is the chain reaction process it has forced upon the South African economy, whereby everyone wants to avoid doing business with a non-BBBEE company because it would, in turn, affect their own BBBEE rating negatively.

SED spending is one of the easier ways to increase BBBEE points. Other ways of earning BBBEE points, such as giving away partial company ownership or finding affordable, qualified black candidates for management positions is much more tricky. Since those 5 points earned with SED could mean the difference between a profitable and a clientless business, getting them is important.

Under the existing codes, companies' SED contributions earn BBBEE points relative to a 75% black beneficiary threshold. If the beneficiaries are between 75% and 100% black, the company can earn the full 5 points. If black beneficiaries make up less than 75% of the total, the company is awarded a pro rata number of points.

Under the new codes, the penalisation is much more strict. The threshold is raised from 75% to 100% and the pro rata provision is thrown out. This means that if there is but one white or one non-resident beneficiary, the donor will earn 0 points. Only if the beneficiaries are 100% black, will the donor earn any points, that is, 5 points. It is either 0 or 5 points.

However, in two press releases since the publication of the new codes, the Department of Trade and Industry (DTI) has denied that this is the case. According to spokesman Sidwell Medupe, "the department has received feedback expressing alarm that some charitable organisations and beneficiaries will lose benefits associated with the current version of the BEE Codes.  This is not true."

"The principle in the proposed BEE SED element still remains the same except the target has been adjusted to 100% as we are cognizant of the intended objectives of BEE.However, if less than 100% of the full value of the SED contributions directly benefits black people, the value of the contribution made multiplied by the percentage that benefits black people, is recognisable. (sic)"

This half-hearted backtracking is anything but convincing. Medupe is either untruthful, or the department is so inept that it doesn't understand the obvious implications of its own numbers game.

On page 56 of the proposed codes, the 75% threshold is unambiguously replaced with the 100% threshold (article 3.2.2) and the pro rata provision (article 3.2.3) is clearly scrapped.

But let us be unduly gracious and yield that the DTI - as well as cabinet, who has put its stamp of approval on the unfortunate document - didn't mean to scrap the pro rata provision. Let us believe that they merely meant to raise the black beneficiary threshold from 75% to 100%, and not to scrap the pro rata stipulation as well. Does this solve the problem? It does not.

In fact, Medupe's only achievement with his press releases is to confirm how little the DTI understands of its own social engineering. In the table below, the effect of the current, new and adjusted new codes are compared.

Even under the adjusted new codes, donations to the 62% black beneficiary organisation will now be worth only 3,1 points, where it was worth 4,1 points previously. Where previously organisations with 75% or more black beneficiaries weren't penalised per white and non-resident beneficiary, this is now going to be the situation from the very first case. Donors simply aren't going to get the same number of BBBEE points for donating to non-racial welfare organisations as they did before.

Contrary to what Medupe wants the public to believe, it is, in fact, true that under the proposed codes "charitable organisations and beneficiaries will lose benefits associated with the current version of the BEE Codes."

More strikingly even, is how Medupe and the DTI doesn't seem to realise, or care, that the very people they allegedly want to assist will actually be made worse off. The 62% black beneficiary organisation isn't going to receive 62% of the donations it normally would for BBBEE points, it is now going to receive 0%.

What is likely to happen, is that all donations for BBBEE points are going to flow to those welfare organisations with close to 100% black beneficiaries. Why would a company donate to a welfare organisation that now earns it only 3,1 points instead of 4,1 - even if the welfare organisation has 62% black beneficiaries - when it can donate to a 95% black beneficiary organisation and earn 4,75 points? There won't be an even spread of donations, because each company will try and optimise its own BBBEE score by donating to blacks-only, or almost black-only, organisations.

The Rob Davies incentive scheme for welfare organisations is clear: lower the percentage of your white and non-resident beneficiaries to as close to zero as possible. Rob Davies intends to penalise all those black, coloured, Indian, white en non-resident persons who benefit from non-segregated welfare organisations.

Piet le Roux is a senior researcher with the Solidarity Research Institute. He's on twitter as @pietleroux.

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