Black economic empowerment (BEE) is all-pervasive, say many - mostly white - businessmen. But is it really? Not according to the final draft of the BEE Codes of Good Practice finally released in February this year.
According to the codes, companies with annual revenue of less than R5m are completely exempt from the regulations, while those turning over between R5m and R35m are judged by a separate and more lenient scorecard.
Figures contained in the department of trade & industry's (DTI) 2003 Small Business Monitor show that more than 85% of all SA companies have sub-R5m revenue and are thus considered instantaneously compliant with the scorecard.
The subsequent medium-sized level of companies accounts for a further 10% of total corporations. They can choose four out of the seven BEE criteria in the scorecard - ownership, management & control, employment equity, skills development, procurement, enterprise development and socioeconomic factors - to make up their 100-point empowerment level, a significant concession from earlier drafts of the code.
This leaves only the top 5% of corporate SA - though these have an output equivalent to 60% of SA's gross domestic product (GDP) - to carry most of the BEE burden.
Given that multinationals have also received exemption from the ownership criteria of the codes, it leaves precious little to empower, says Chia-Chao Wu of research group Empowerdex. "We are concerned about the level of exemptions. They may have gone a bit too far," he says.
The fact that small and medium-sized enterprises (SMEs) won significant concessions is testament to the bitter cabinet infighting that preceded the release of the final code.
A faction, led by the national treasury, was concerned that a heavily interventionist BEE approach would scare away investment and thus undermine SA's economic growth strategy.
The DTI, backed by big black business, favoured a far more legalistic strategy, which would have created an extensive bureaucracy and a more stringent BEE code, to ensure greater black ownership of the economy. National treasury won most of the battles; significant concessions have resulted, particularly for SMEs.
Treasury believes that SMEs are crucial to job creation. It points to international economic precedents showing that on average, 80%-85% of all new jobs are created by entrepreneurs.
SA on the other hand is dropping further down the global entrepreneurial ranking, with the latest Global Entrepreneurship Monitor (GEM) placing SA a mere 25th out of a total of 35 states.
Lack of jobs is the Achilles heel of government 's growth strategy, so it was decided not to burden SMEs with excessive regulation.
Government is also actively trying to strengthen the regime that helps foster SMEs and provides them with financial backing. In the actual codes, for example, companies that support enterprise development can claim 15% of the BEE code's points, up from 10% previously.
Bruce Hunt of consultancy Ownership Solutions wrote in a recent article for the FM: "Entrepreneurs are creating jobs and government has realised that it cannot afford to hamstring this entrepreneurial class."
In addition, the scorecard is offering companies significant incentives to bolster their support for entrepreneurs and SMEs. The SME portion of the scorecard gives businesses up to 25 points (out of a maximum 100) for contributing to socioeconomic development and backing black-owned SMEs.
Explains Hunt: "The contributions need not just be in cash; they can involve financing, loans or services in kind. The smart businesses can see that this is not just another tax but an investment, and are looking at ways to factor this component into their business strategies.
"The 3% profit cost in attaining the 50 points available for socioeconomic development may start off as a small number but certainly can become quite large," Hunt adds.
Another step government is taking is to fine-tune its SME development regime and the institutions and agencies set up to bankroll them.
"We realised that enterprise development is key to the objectives of the BEE policy," said DTI chief director of BEE Polo Radebe when launching the codes. "It is a policy which promotes the creation of sustainable enterprises owned by black people. It is not a poverty alleviation strategy."
The network of SME-support agencies includes the National Empowerment Fund (NEF), Khula Enterprise Finance, the SA Micro Finance Apex Fund (Samaf) and the Small Enterprise Development Agency (Seda). Taken together with the Industrial Development Corporation and the Umsobomvu Youth Fund (which reports to the labour ministry), the institutions represent a revamped structure of state funding that recorded few successes in the first 10 years of democracy. (See graphic on previous page.)
Furthermore, the DTI last November launched the National Small Business Advisory Council (NSBAC) to promote the interests of SMEs and also to monitor the effectiveness of programmes and institutions meant to develop the sector.
Government clearly hopes that the restructuring of these organisations over the past two years will pay off. The NEF and Khula have been recapitalised and given new leadership. Seda was launched recently after Ntsika, the National Manufacturing Advisory Centre, and smaller municipal bureaus were collapsed into a single entity.
Samaf was introduced in April last year to focus on microloans of no more than R10 000 each. It's partly a poverty alleviation initiative aimed at households with less than R1 500 monthly income and entrepreneurs ranging from hawkers to informal builders.
The DTI believes the reorientation will avoid the overlap of previous years, as each institution is now geared towards a different market segment.
The agencies - with the exception of the R40bn IDC - were given further fire-power in this year's budget when finance minister Trevor Manuel allocated an additional R1,7bn to "agencies and entities falling under the DTI... to promote industrial development, BEE and small business development".
Manuel singled out the NEF, which over the current and next fiscal year will be funded by R2,8bn. The NEF has had its fair share of problems, but there are signs of a turnaround with the installation of CEO Philisiwe Buthelezi. Its mandate is to fund small black entrepreneurs and medium-sized BEE equity transactions - and the NEF's loan disbursement has improved by about 90% since she took over in 2004.
The NEF has also put in place a plan to launch a retail investment scheme for small-scale investors. This was confirmed in the 2007 Budget Review: "The asset management division of the NEF is set to release its first retail product this year."
Other agencies are also starting to make an impression. Khula has grown disbursements by 60% over the past three years, while Samaf, which was launched last year, had already distributed R8,2m, benefiting more than 10 000 people.
Seda, whose role is to set up support programmes for small entrepreneurs, has also established a national operating network of more than 20 enterprise information centres in the Eastern Cape, 15 in Gauteng and about 10 in the Free State. The numbers of outlets are also growing exponentially in other parts SA.
Finally, the IDC, while still focusing on large industrial projects, has made SME support a key part of its lending policy. In the 2005/2006 financial year, 69% of the R4,2bn in loan approvals went to SMEs, the vast majority of whom are black-owned. Black businesses, whether SME or large, received 68% of approvals.
The 2007 budget confirmed that, for Manuel at least, BEE equates to SME support, rather than an environment that favours big-ticket BEE deals Euro la Mvelaphanda or Shanduka.
Manuel's emphasis on SME development could also be seen in his mention of a tax amnesty for small business. "Entrepreneurship remains a vital ingredient in the growth of our economy. In this regard, we have previously announced measures to assist small businesses, including a tax amnesty," he said in his budget speech.
The amnesty, which ends in May this year, offers those outside the system a fresh opportunity to become compliant and thus fall within the support network offered by the DTI institutions.
While the latest codes and institutional restructuring are giving SMEs a big helping hand, they don't have it all their own way when it comes to empowerment. The codes as applied to them are technically voluntary, but in effect compulsory for almost all businesses. They will be voluntary in the sense that companies need comply only if they want to do business with government.
But in practice most parastatals and large private-sector corporations also require their suppliers to show a more meaningful measure of empowerment. And while they may be technically empowered if their turnover is below R5m/year, that alone won't sit with most of corporate SA.
Eskom, for example, is increasingly stipulating that its procurement should not just be directed at BEE companies, but also at black- and women-owned SMEs. In the financial year to end-March 2006 the group spent two-thirds of its R18bn procurement budget with BEE companies, which includes its coal procurement. However, women- owned companies are already allocated 17% of this budget as Eskom tries to encourage the formation of smaller suppliers.
BEE has gone too far down the road for window-dressing to be acceptable. For a large company to sign a contract it needs to be assured that if black entrepreneurs or investors don't own a large share of the company, management at least should have significant black representation.
Blackness clearly matters beyond the technicalities of a code.
