Whether Jacob Zuma stays or goes, BEE has failed - IRR

Anthea Jeffery says a different policy is needed to kick-start the economy and facilitate upward mobility

Whether Jacob Zuma stays or goes, the empowerment challenge will remain

Whether President Jacob Zuma stays or goes, the empowerment challenge will persist. BEE was supposed to overcome this, but BEE helps only a small elite, as the IRR’s most recent opinion poll has again confirmed. By contrast, the IRR’s ‘economic empowerment for the disadvantaged’ or ‘EED’ proposal will promote investment, growth, and jobs, so generating a rising tide that will help to lift all boats.

EED will also liberate South Africans from poor quality public schooling, health care, and housing by giving them tax-funded vouchers in these key spheres. These vouchers will empower people to buy what they need from mainly private providers competing for their custom. The EED voucher system will help to hold down costs, while increasing quality and efficiency. 

Since BEE has clearly failed, it is time to kick-start the economy, restore the country’s investment rating,  and reignite real hopes of upward mobility by shifting to EED instead, writes Anthea Jeffery, Head of Policy Research at the IRR.

Below is a Synopsis of the IRR’s most recent report, EED IS FOR REAL EMPOWERMENT, whereas BEE has failed. This report has been published today.

BEE continues to fail and cannot be ‘reformed’

Most South Africans have little faith in the capacity of BEE or other transformation policies to help improve their lives. A comprehensive opinion poll commissioned by the IRR and carried out in September 2016 (as a follow-up to a similar field survey carried out a year earlier) shows that only 3% of black South Africans see ‘more BEE and affirmative action in employment’ as the best way to improve their lives. Even fewer, a scant 1%, see ‘more land reform’ as helping in this way.

In addition, few black people derive any benefit from these policies. As the IRR’s 2016 field survey shows, only 13% of blacks have been personally helped by employment equity rules, while 14% have benefited from BEE ownership deals and 9% have been awarded BEE tenders. Close on 15% say they have benefited from land reform, but many may have been thinking of the substantial sums the government has paid out in recent years to successful land claimants who preferred to take cash instead.

BEE in all its aspects thus helps only some 14% of blacks. It brings no benefits to the remaining 86%. Worse still, BEE harms the great majority by eroding public service efficiency, adding to fraud and inflated prices in public procurement, and helping to reduce investment, growth and employment.

Many BEE proponents claim that the solution lies in tightening up the relevant rules and ensuring their stricter enforcement. But no matter how much this is done, the millions of  people still living in poverty – most of them poorly skilled and many of them unemployed – will never gain access to BEE deals, management posts, preferential tenders, or new small businesses to run.  At the same time, the more unrealistic BEE obligations are ratcheted up, the more this will reduce the economic growth essential to upward mobility.

What then is to be done?

Most ordinary South Africans are well aware of what they need to get ahead, as the IRR’s field survey also shows. Almost 70% of black South Africans see unemployment and poor education as the key reasons for persistent inequality. In addition – in stark contrast to the ANC’s rhetoric around land reform – 84% of blacks would prefer a political party which focuses on faster growth and more jobs to one that focuses on land expropriation to redress past wrongs.

However, even if growth can be accelerated and many more jobs can be generated, most disadvantaged South Africans will still find it difficult to get ahead without much better education, housing, and health care. On the surface, the government is already committed to meeting these core needs and puts large amounts of tax revenue into doing so every year. But outcomes have long been dismal, while repeated promises to improve the state’s performance have borne little fruit.

In the current financial year, South Africa plans to spend some R680bn on education, public health care, and housing (plus related community development). However, the country will again get little bang for the taxpayers’ buck. Some 80% of public schools are dysfunctional, while between 84% and 94% of public hospitals and clinics are unable to comply with basic health care standards on such key essentials as infection controls and the availability of medicines.  

In addition, despite massive spending and the construction of some 3 million homes, the housing backlog has increased substantially since 1994, rather than diminished. Moreover, many of the houses provided by the state are so small, badly built and poorly located that the ANC itself describes them as ‘incubators of poverty’ that do more to entrench disadvantage than to overcome it.

What ordinary people think about a ‘voucher’ option

In the housing sphere, ordinary people have long been urging the state to transfer its housing subsidy directly to households, saying they could build better homes for themselves if they had access to this money. However, for the state to transfer cash in this way would be risky, as monies intended for housing could then easily be diverted to other purposes. By contrast, dedicated housing vouchers – funded out of tax revenues and redeemable solely for housing-related expenditure – would avoid the diversion problem.

But why stop at housing vouchers when the state’s provision of education and health care is also so flawed and inefficient? And when education vouchers, in particular, are already being used in many other countries to give parents a real choice, promote competition, and drive up the quality of schooling?

Against this background, the IRR’s 2016 field survey also asked respondents if they would like to have tax-funded education, health care and housing vouchers so that they could start meeting their own needs in these key spheres. Respondents were also asked if they thought tax-funded vouchers for education, health care and housing would ‘help them get ahead more effectively than current employment equity and BEE policies’.

Enormous support for the voucher option was evident. Some 85% of blacks endorsed the idea of education vouchers, while black support for health care and housing vouchers was similarly high at 83% on each. Almost three-quarters of blacks (74%) said that tax-funded vouchers in these spheres would help them get ahead more effectively than current affirmative action and BEE policies.

How tax-funded vouchers would work

Education vouchers

Tax-funded education vouchers are already being used in both developed and developing countries, including the Netherlands (which introduced them as far back as 1917), Denmark, Chile, Colombia, and Guatemala. Vouchers have also been introduced in various cities in the United States and are particularly popular with black parents who have seen their children’s schooling improve significantly as a result.

Low-fee private schools are already growing fast in South Africa in response to popular demand, but most poor people cannot afford them. Tax-funded education vouchers would change that, giving all parents a choice as to the schools they would like their children to attend. Schools would then have to compete for the custom of voucher-bearing parents, which would give them a real incentive to improve the quality of the education they provide. Few other interventions could have so immediate or comprehensive an impact in driving up the standards of schooling.

Parents armed with vouchers would not necessarily choose private schools, as they would have other options available. Some might choose the fee-paying state schools that presently perform well. Others would opt for the many ‘charter’ schools (state schools run by independent boards) that would be likely to develop. Some would decide to send their children to private schools run for profit. Others might prefer private schools run by religious institutions. Some persistently bad state schools would effectively be abandoned and thus forced to shut down. Their buildings could then be auctioned to private firms or other organisations, which would refurbish them before re-opening them again. Many of the state schools that now perform badly would improve substantially under the pressure to up their game.

Tax-funded vouchers could be provided to parents without increasing the country’s already large education budget. Rather, much of the money the government now spends on paying teachers and running schools – about R243bn in the current financial year – could be redirected to parents in the form of vouchers worth about R20 000 per pupil.

Housing vouchers

Since 1994 the government has provided some 3 million ‘free’ RDP (Reconstruction and Development Programme) houses and roughly 1 million serviced sites. Over this period, the housing backlog has nevertheless increased from 1.5 million to 2.3 million units, while the number of informal settlements has gone up from 300 to 2 225, an increase of 650%.

At the same time, the housing subsidy has shot up from R12 500 per household to some R160 500 today, at which amount it was pegged in 2014. Yet despite this massive increase, the quality of the houses being delivered is often very poor. In addition, the pace of delivery has slowed to the point where it will take at least 20 years to provide homes for all those on the national waiting list, let alone meet new demand.

Housing policy needs a fundamental rethink to empower individuals, provide better value for money, and break the delivery logjam. Housing vouchers provide a way of achieving these key goals. These vouchers would be redeemable solely for housing-related purchases – and would go to some 10m South Africans between the ages of 25 and 35, who earn below a ceiling of, say, R15 000 a month.   

The voucher would be worth, say, R800 a month, or R9 600 a year, and each recipient would continue to receive this voucher for ten years. Each beneficiary would thus receive close on R100 000 over this period.  A couple would be able to pool their money and would thus receive nearly R200 000 over a decade. This amount could be topped up by their own earnings, which means a couple earning R5 000 a month could devote R1 000 of that to housing. Over ten years, this additional amount would boost their housing budget to close on R320 000.  Such sums would help substantially in empowering people to build or improve their own homes, or obtain and pay down mortgage bonds.

The cost to the fiscus for 10m beneficiaries would be R96bn a year, and again this could be met by redirecting much of the current budget for housing and related community development. The voucher system would be much more effective in stimulating housing supply as each individual who receives a voucher will have a personal interest in ensuring its optimal use. Moreover, whereas current policy adds to housing demand by encouraging existing households to split up – so that each new household can qualify for a ‘free’ house – the new vouchers would remove this perverse incentive.

The voucher system and the market it would create would encourage the private sector to build many more houses and/or apartment blocks, or to revamp many more existing structures for housing purposes. Beneficiaries would also find it easier to gain mortgage finance, which would further stimulate new housing developments. Beneficiaries who already own their homes would be able to use their housing vouchers to extend or otherwise improve them. Some might choose to use their vouchers to build backyard flats, which they could then rent out to tenants also armed with housing vouchers and so able to afford a reasonable rental. This too would help increase the rental stock available.

People currently living in informal settlements would increasingly have other housing options available to them. Some would move into the new housing complexes and others into new backyard or other flats. Informal settlements would become less crowded, making upgrading easier. Those who choose to remain in them would be able to use their housing vouchers to buy building supplies, hire electricians, plumbers, and other artisans, contribute their own labour or ‘sweat equity’ to reduce costs, and gradually upgrade their homes.

With this voucher system in place, households would be empowered to start meeting their own housing needs, instead of having to wait endlessly on the state to supply them with a small, and probably defective, RDP home. Individual initiative and self-reliance would expand.  The enormous pent-up demand for housing would diminish. With title deeds to homes also made available (as an essential complementary reform), a more normal housing market would develop. Accelerated housing delivery via the voucher system would also stimulate investment, generate jobs, and give the weak economy a vital boost.

Health care vouchers

Spending on public health services is budgeted in 2017/18 at R187bn, which is 12% of the total budget and almost 4% of GDP. However, despite the best efforts of many dedicated health professionals, standards of care are often poor. Reasons range from a shortage of doctors and nurses to bad management, persistent shortages of medicines and other consumables, and a widespread failure to comply with basic norms and standards in public hospitals and clinics.

In 2014, only 16% of the 417 public health facilities inspected by the Office of Health Standards Compliance (OHSC) complied with basic norms on infection control, clinical services, and the like, while 84% did not. More recent data (prised out of the OHSC by journalist Tamar Kahn and published in Business Day in November 2016) shows that only 6% of some 1 430 public facilities inspected over the past year years scored 70% or more on these basic norms: the level identified by the OHSC as ‘a pass’.

By contrast, South Africa’s private health care system has long been rated one of the best in the world. Some 56% of doctors and specialists work in the private sector, as do some 50% of professional nurses. However, relatively few South Africans can afford the costs of private health care. This has much to do with high unemployment and low skills, but health minister Dr Aaron Motsoaledi instead blames the private sector for charging extortionate prices in its determination to put ‘profits before people’. This accusation has little factual foundation. Often, moreover, it is the government’s own regulations which have pushed up the costs of medical scheme membership and made private health care increasingly unaffordable.

Particularly important are rules requiring ‘open’ enrolment and ‘community’ (or non risk-rated) premiums.  Under these provisions, no prospective member may be turned away, irrespective of age or illness, or made to pay a higher premium (though limited ‘late-joiner’ penalties and waiting periods for existing conditions are allowed). Even more important are rules requiring all medical schemes to provide all their members with ‘prescribed minimum benefits’ (PMBs) for some 300 specified conditions.  Every medical scheme member, irrespective of how much cover they have signed on to receive, is entitled to these PMBs, which schemes must pay for ‘in full’. Again, this pushes up medical scheme premiums for everyone.

At the same time, the government refuses to allow the introduction of low-cost medical schemes, which could extend medical aid membership from roughly 9 million to some 15 million people. The state is also busy banning various low-cost health insurance policies. Many of these are ‘combination’ policies which cover both the costs of hospitalisation and various primary health care services provided by general practitioners (GPs) and others.

The underlying purpose of these interventions is to push all South Africans into participating in the ANC’s proposed National Health Insurance (NHI) scheme. The ANC claims that the NHI will provide all South Africans with comprehensive and ‘quality’ health services, which will be free to all patients at the point of delivery. However, the NHI proposal is deeply flawed and is unlikely to succeed in this objective.

The NHI will do little to address poor management in public health care facilities, at least 84% of which fail to comply with basic health care standards and so cannot qualify to take part in the NHI. At the same time, the NHI will put an end to most medical schemes and the private health care system that these schemes make possible. In addition, the NHI will give the state control over every aspect of medical care: from the treatment protocols to be applied to the medicines to be prescribed. It will also empower the state to decide on the fees to be paid to all health professionals, as well as the prices of all medicines, devices, consumables, and the like.

The NHI will require enormous tax revenues (an estimated additional R210bn at its start) to implement. It will also vest all health care monies in a new NHI Fund, from which all payments will be made. Doctors and specialists are likely to wait months (if not years) to be reimbursed for the treatment they have already provided free of charge to patients. This could cripple them financially. Stock-outs of medicines and other essentials are also likely to worsen under the impact of long payment delays. Hence, though the demand for ‘free’ health services will rapidly expand under the NHI, the supply of such services is likely to diminish. Waiting times for all patients (other than a narrow political elite) will increase sharply. So too will popular anger and frustration at yet another unmet promise from the state.

The NHI proposal should thus be abandoned. Instead, access to high quality health care should be secured through the introduction of health care vouchers, coupled with other reforms. Risk-rating in medical schemes should be restored, while low-cost medical schemes and health insurance should also be allowed.  The mismanagement of public hospitals and clinics must be addressed by appointing people with the necessary experience to run them. Public-private partnerships should also be introduced, with administration outsourced to the private sector within parameters set by the government.

These reforms would meet the health care needs of most of those in formal employment, along with their dependants. But what of the millions who are jobless or earn too little to afford even low-cost medical schemes or health insurance? State-funded health vouchers would give them the chance to take part in the same system too.

These vouchers would be redeemable solely for health care purchases. With their help, recipients would be able to join low-cost medical schemes, at monthly contributions ranging (based on what the Council for Medical Schemes has proposed) from R180 to R240 per adult member per month.  These members might have to use state hospitals but would gain access to a minimum package of primary services in the private sector. Health vouchers would also allow recipients to buy combination and other health insurance policies which (given the size of the risk pool) would have low premiums too.

How much would health vouchers cost? There are currently some 17 million households in South Africa, each with some three members on average. Assuming that 10 million of these households need health vouchers to meet annual costs of R10 000 per household, the overall sum required would be R100bn. Again, this could be funded by diverting some of the current public health care budget to meeting this key need.

State funded vouchers for education, housing, and health care would increase individual choice, promote competition, and drive up quality. They would greatly help to liberate the poor, while bringing a new dynamism into the economy.  To help the economy grow still faster, South Africa also needs to shift away from present damaging BEE policies to a new system of ‘economic empowerment for the disadvantaged’ or ‘EED’, in which the voucher system would play an important part.

A shift from BEE to ‘Economic Empowerment of the Disadvantaged’ or ‘EED’

EED focuses not on outputs in the form of numerical targets, but rather on providing the inputs necessary to empower poor people. Far from overlooking the key barriers to upward mobility, it seeks to overcome these by focusing on all the right ‘Es’. In essence, it aims at rapid economic growth, excellent education, very much more employment, and the promotion of vibrant and successful entrepreneurship.

EED policies aimed at achieving these crucial objectives should be accompanied by a new EED scorecard, to replace the current BEE one. Under this revised scorecard, business would earn voluntary EED points for contributions of various kinds.

Business would primarily earn EED points for the investments it makes, the profits it generates, the jobs it sustains or creates, the goods and services it buys from other suppliers, the innovation it helps to foster, and the contributions it makes to tax revenues, export earnings, and foreign currency inflows. These are by far the most important contributions to upward mobility that the private sector can make.

Jobs and earnings are vital to the dignity and self-reliance of individuals. They also offer people the surest and most sustainable path out of poverty. The tax revenues that business contributes are also vital in meeting infrastructure, education, and other needs.  Hence, it is only when businesses of every kind and every size – from the street vendor to the major corporation – are able to thrive and expand that real opportunity can be generated and full employment achieved.

At the same time, the poor and disadvantaged cannot get ahead without sound schooling, much better living conditions, and (given South Africa’s high burden of disease) effective health care. Tax-funded vouchers for education, housing, and health care would help to give the poor far more bang for the taxpayers’ buck. They are thus a crucial element in the EED proposal. Under an EED system, individuals armed with tax-funded vouchers would be able to pay for the education, housing, and health care of their choice, as earlier described. Business would also earn EED points for topping up those vouchers for the poor and marginalised and for helping to find innovative ways to reduce costs and improve quality.

How EED would work in the mining sector, for example

In the crucial mining sector, where a damaging third iteration of the mining charter is soon to be introduced, an alternative EED scorecard is urgently required. Mining companies would then earn voluntary EED points for their contributions in four categories: economic, labour, environmental, and community or societal.

Economic contributions to production, capital expenditure, innovation, procurement, exports, and tax revenues would count the most.  In the labour sphere, mining companies would also earn EED points for maintaining and expanding jobs and wages, upholding safety standards, and paying dividends to employees participating in employee share ownership programmes (ESOPS).  In the environmental arena, companies would earn further EED points for contributing to rehabilitation funds, reducing water consumption, guarding against pollution, and finding innovative ways to minimise and reprocess waste. In the community or societal sphere, further EED points would be available for topping up education, housing, and health care vouchers for the poor in mining communities, and helping to improve the quality of provision in innovative and environmentally friendly ways.

Similar EED scorecards, which are geared to the needs of other sectors, could readily be drawn up. Most would be simpler than the mining scorecard, as mining poses particular challenges, generally not found in other spheres. Tunnelling (often deeply) under the ground is inevitably dangerous. It also has major environmental ramifications. An EED scorecard for the mining sector must take these factors into account, whereas EED scorecards in other sectors could generally be more straightforward.

EED is for real empowerment, whereas BEE has failed

For the past 23 years, South Africa has been chasing down the wrong policy path on BEE. As the then finance minister, Pravin Gordhan, said in 2010: ‘South Africa’s BEE policies...have not worked... BEE policies have not made South Africa a fairer and more prosperous country. They have led to small elite group benefiting and that is not good enough in terms of benefiting [the remainder].’

Instead of embarking on much-needed reforms to the present rules, the ANC is now using the evident failures of BEE to demand a new emphasis on ‘radical economic transformation’. As President Jacob Zuma told Parliament in his State of the Nation Address (SONA) in February 2017, such transformation requires ‘fundamental change’ in ‘the structure...of the economy’, as well as in its ‘ownership, management and control’.

More recently, both the president and the minister of rural development and land reform, Gugile Nkwinti, have stressed the need to amend the Constitution so as to allow expropriation without compensation. This is being touted as a vital mechanism to speed up land reform and return the land to ‘the people’. Instead, however, it will witness the widespread nationalisation of farming land and many other assets. Any such rape of property rights will in time trigger further disinvestment, mounting job losses, runaway inflation, and ratings downgrades to sub-investment or junk status. It will also tip millions more South Africans into destitution and hunger.

The policy choices are becoming stark. The country can keep on with current transformation policies on employment equity, BEE, and land reform – and reap the bitter harvest that will surely follow as the economy falters even further. Or South Africans can grasp the policy nettle by recognising the failures of BEE and shifting to EED instead.

The benefits of such a shift would be enormous. With the BEE burden lifted, the private sector would once again be able to concentrate primarily on its core business, helping confidence to rebound. Moreover, with property rights restored and other key reforms in place, direct investment would begin to soar. Business and entrepreneurship would thrive, and jobs would rapidly expand. The skills of all South Africans would be used to the full, while new skills would soon be generated to help meet growing demand. With the need for labour increasing, wages would go up as well – not because of government fiat or violent strikes, but in response to market forces.

In this vibrant new environment, there would be very many more opportunities for people to earn their own income and take care of their own needs. They would also have real chances to climb the economic ladder in an economy growing so fast (at 7% of GDP a year) that it would double in size every ten years.

More than anything else, the voucher system and the wider EED approach would help put an end to what Democratic Alliance leader Mmusi Maimane has described as the present ‘insider/outsider’ dichotomy. Wrote Mr Maimane in January 2017:

“At present, 16 million people in our country are dependent on the welfare of the state, and a further 9 million are without a job. That’s 25 million South Africans who are left out. Empowering those individuals economically is true radical transformation. Until we create an economic environment whereby those 25 million South Africans have access to the economy, transformation remains cosmetic and ineffectual.

It is the poor who need help. It is the unemployed, the shack dwellers, the subsistence farmers, the social grant recipients, the single mothers, the child-headed households and the homeless who rely on government for their survival. And they have been let down... Economic transformation which is truly radical would see the economy being opened up to those who have been left out.”

Most South Africans understand and endorse the need to end the current insider/outsider dichotomy and give the disadvantaged a real chance to get ahead. Since BEE offers no tangible prospect of achieving this, it is time to shift to EED instead.

Issued by the IRR, 4 April 2017