Why Sakeliga opposes BEE and what we will do next

26 May 2022

On 14 February 2022, almost five years after the initial litigation, Sakeliga achieved what was the first significant roll-back of a BEE-type law in South Africa in the Constitutional Court. The Court confirmed that the 2017 public procurement regulations, which disqualified companies from tendering based on the race of their owners, were unlawful and should be set aside.

Important as it was, the judgment was nevertheless limited in scope and merely established the first exception to what has hitherto been BEE’s uninterrupted statutory expansion. At the Black Business Council dinner last night and the conference today, I was surprised to hear a different view, namely that there is already a massive roll-back of BEE going on. To this concern I must reply that, Sakeliga’s court victory notwithstanding, BEE as a policy is still going strong in this country. We hope to change that, of course.

Today, after this one court case, companies who were prohibited from tendering for state contracts based on their owners’ race have a prospect once again of offering their goods and services for public benefit, and members of the public likewise have that to look forward to. In consequence, the public had to suffer procurement of goods and services from an artificially and greatly diminished pool of suppliers.

Even among this audience here at the Black Business Council conference some would have been excluded because of pre-qualifications. For example, in the Supreme Court of Appeal our case benefitted much from the testimony of a black lady, who owned 51% of her real estate company but who were disqualified from tendering because the state insisted on companies with 100% black ownership.

The judgment caused quite a stir and is, I suspect, the reason I have been invited to participate in this panel. The judgment was not welcomed by the Black Business Council. Indeed, even many of my fellow panellists have expressed concern and criticism. President Ramaphosa’s reference last night to organisations that undertake what he called ‘lawfare’ on BEE was surely in reference Sakeliga and its litigation.

Clearly, Sakeliga’s take on the State of Economic Transformation and Procurement, the topic of this panel, differs from many in the room today. Given how different our views on the matter are, I extend my and Sakeliga’s appreciation to Mr. Kganki Matabane and the Black Business Council for the invitation to participate. I was invited to offer my views forthright, so let me honour that invitation.

I shall speak on the current state of affairs, and along the way try to explain why Sakeliga has decided that it must oppose the policy of BEE.

Common ground

One thing on which there seems to common ground, it that BEE as a policy is not working. The consensus extends to both proponents and opponents of BEE.

Since there are already many proponents of BEE as we know it here today – and we heard from both President of the BBC Elias Monage and President of South Africa Cyril Ramaphosa on that last night – I shall also mention some critics. They range – usually on different grounds – from political analyst Moeletsi Mbeki to former public protector Thuli Madonsela to renowned economist Daron Acemoglu, from businessperson Johann Rupert to the late Richard Maponya, from research reports commissioned by the EU to a range of local business and lobby groups. There is indeed widespread dissatisfaction with BEE, even if it is for different reasons.

One more thing on which there might be common ground – but I am not sure – is on the purpose of BEE. I hear different versions of it every time I listen to a speech or read an article after events like this conference. But let met venture a proposal, and let it stand to be corrected, if necessary. I wish to propose that BEE – by whatever name it goes (eg. economic transformation, procurement, SMME development) – is only a means to an end, not an end itself. If the end, toward which BEE is aimed, is the flourishing of black communities and black people in South Africa, then this is a legitimate aim, a laudable aspiration, and worthy of support.

Uncommon ground

So far for common ground. Let us explore the differences.

Where I think paths diverge is on the evaluation of BEE as the appropriate means to the end. How so?

Increasingly, a swell of criticism against BEE as a policy – as a means – has been building. Not because people do not want the aim achieved, but because of their practical experience of BEE: both personally and at a social level. Some of this criticism is well-founded, others possibly not – not all of them concern us today.

The concern with BEE that I want to put to you here, and the one that takes primacy in Sakeliga’s evaluation and strategy, is our view that it is fundamentally impossible for the policy of BEE as we know it to achieve the aim of a flourishing black community and – with that – a flourishing society. We do not wish this to be so, it is not a matter of preference – it is an assessment: BEE is not empowering, but disempowering.

By what mechanism to we think BEE disempowers?

If I should summarise the objection from business’s side, then I think of the words of the Harvard economist Ricardo Hausmann. He warned against especially the ownership element of BEE in a 2007 report for the Mbeki government. He called it: “An open-ended tax on existing and new capital”.

Hausmann’s concern was prescient. As is often the case with legislation or policies, BEE achieves the opposite of what its name would suggest. Its failure has nothing to do with the black part, but rather everything with the economics part. Or rather, the lack of economics, for BEE is the substitution of economics and politics.

It is a system of political instead of entrepreneurial capital allocation. Instead of goods and services being measured against the yardstick of what it means for consumers and the public – you look at price and quality and you offer the best of that to the public, because that is what matters – we measure it against the yardstick of government prescriptions. Complying with these prescriptions adds layer upon layer of structural cost to doing business in SA, and crowds out real value generation between people of different race groups and communities. Along the way it inevitably sacrifices on price and quality, a burden borne not by those winning the tender, but by the public.

As you listened to me now, you might have noticed that I have not made any appeals to rights, and I do not intend to. I have left by the wayside any arguments about people being forced to dilute shareholding, or tenders differentiating on the basis of race between if someone might tender, etc. Disputes about rights have merit, but are very difficult to resolve, and not my topic for today.

Instead, at Sakeliga, we prefer an approach that considers the common good. For us, the ultimate end of economics, of business, is not the enrichment of owners, or workers, or managers, but the production of wealth for end-users in society.

Our argument that the policy of BEE adds structural cost to the economy, to the detriment of the quality and quantity of goods and services available to the public, is the core of our objection. I often hear government speaking about BEE as if it carries no cost, but this is misguided. If the government’s interventions were cheap to comply with, businesses would not have gone to such lengths to avoid it, and government would not have kept expanding its range of statutory instruments. If BEE had no structural effect on cost, why would it be necessary to introduce pre-qualifications in tenders, or a points system that discounts price, or a Competition Authority that blocks mergers and acquisitions based on BEE criteria?

Alternative

“But what is the alternative?” one might ask. Ironically, the future of real empowerment probably lies in something identified, but rejected, by the architects of BEE 20 years ago in the 2001 report by the Black Economic Empowerment Commission. It was chaired, notably, by now President Cyril Ramaphosa and was the basis for the Broad-Based BEE Act of two years later.

Reflecting on about 300 major BEE deals in the 1990s, the report identified and sought to curtail what it saw as a threatening development at the time. “The new trend is to fund [BEE deals] using a private equity model that: a) insists on own contributions, sector focus and operational involvement by the BEE company; and b) passes some of the risks to the target company.”

In other words, the BEE Commission – on the eve of the B-BBEE act – was concerned not that companies were unwilling to do business with black people, but on the conditions attached. These conditions were basic business requirements: companies insisted on a) the partner adding real value; and b) having skin in the game.

Sakeliga’s future approach to BEE

For those who are proponents of BEE because they want it to serve different ends, or disagree with me about its economic problems, I have good news: BEE is not going to disappear overnight. While Sakeliga will do its best, the policy has found a deep foothold over decades and is still currently expanding. However, as much as Sakeliga will seek to hasten the turn-around, in the end BEE will collapse under its own economic contradictions: it is not a suitable means to an appropriate end.

Now, I might be wrong. BEE might actually work differently. Maybe I fundamentally misrepresent economics. That would be the point to challenge Sakeliga: by showing that BEE is increasing and improving the public availability of goods and services in this country.

In the meantime, given our analysis, Sakeliga is duty-bound to oppose BEE. I realise that our opposition to BEE is a contentious point, but we must do what we think right and in the interests of a flourishing economy and society. I would hope that this does not stand in the way of our critics and us finding common ground and cooperating with regard to the many other, also serious, problems facing us in this country.

For the foreseeable future, Sakeliga will remain a sparring partner for BEE proponents. We are expanding our efforts and will launch major challenges publicly and in the courts against the regulatory and legislative quagmire BEE presents. Last night, President Ramaphosa said that we are waging lawfare against BEE, but that is incorrect: Sakeliga’s efforts are simply a legitimate reply, in the public interest, to what is, in fact, lawfare emanating from government.

Issued by Sakeliga, 26 May 2022