Tightening the screws on BEE

TG van Onselen writes on the shift by quasi-judicial agencies towards ever more onerous requirements

Ramaphosa administration must arrest regulatory drift for effective economic reform

Like a wind-up toy, winded before and now released, a number of quasi-judicial agencies are running roughshod over the effective functioning of a free-market economy and commercial freedoms in South Africa.

These agencies have a good degree of independence, which they derive from various legal mandates. Together they shape a well-established network of costly intervention in and curtailment of market action. While the conduct of these agencies may of course be challenged in court, for the most part the majority of their actions aren’t.

Their decisions, none the less, greatly affect the everyday commercial setting and decisions on entrepreneurship, investment and employment. In general, these agencies make value creation more difficult and costly than it needs to be.

For supposed reformers, such as president Ramaphosa, it is the grassroots working of these agencies and the hurdles to value creation they cause, which need to be arrested for effective economic ‘reform’.

Example of the new BEE Codes

The DTI recently published new amendments to the generic B-BBEE Codes. These changes will come into effect in November of this year. The changes in the codes, and recent statements of the B-BBEE Commission, support what organisation’s such as Sakeliga have been saying for some time now, that a stricter enforcement of BEE is on the cards.

According to the law firm Webber Wentzel, which recently outlined noteworthy changes to the codes, the amendments affect the generic scorecards (code series OOO), skills development (300) and supplier development (400).

Stricter ownership requirements are placed on micro (EME) and qualifying small enterprises (QSEs) for recognition as a level one or level two contributors. Level one and two are increasingly important for business with state entities.

Moreover, the measurement of skills development was adjusted and now includes a sub-element for expenditure on bursaries for black students (which is interesting given the drive for free higher education). The requirements for Enterprise and Supplier development have been clarified and are also stricter. These stipulations affect procurement spend by firms, which is a substantial economc activity.

A pre-set path of over-regulation

The direction of the new BEE codes, however, point to a more concerning reality. It shows that much of the present government’s regulatory path is pre-set and evidently staying the course for more economic command – despite the president’s call for business-friendly changes to policy. It poses a question on government’s actual commitment to real market-reform.

Concerningly, it suggest the possibility the Ramaphosa administration’s reforms will remain largely a window-dressing exercise and that the underlying structure of harmful economic command and intervention will not actually be taken on.

What is the form of this structure? Evidently, many of the ANC’s policy ideas, such as BEE, Employment Equity (EE) and its perspective on competition matters have been pre-set and outsourced to a number of quasi-judicial agencies.

Regulation in many areas of the economy is now free-wheeling and held in place by vested interests. Adjusting course will require substantial changes to numerous pieces of legislation and very strong political will.

Quasi-judicial agencies – the face of the regulatory environment

Agencies like the B-BBEE Commission, the Commission on Employment Equity (CEE), the Competition Commission, the new National Minimum Wage Commission, and others, are applying government’s policies and setting numerous ‘rules’ for commerce. They are doing so within generously delegated quasi-judicial authority.

Government have clearly been setting up regulatory ‘franchises’ over many years. The drive to expand is not over yet.

Quasi-judicial agencies set and affect the stage of commerce in South Africa. The new BEE codes are but one example, not to mention numerous industry ‘agreements’, mining charters, wage determinations, merger rulings, and other enforceable stipulations. Many agencies, such as the Estate Agencies Board, set requirements for licensing, registration or approval for commercial activity.  

In practice, the BEE Commission now considers fines for non-compliance. They may also summon and gives rulings on BEE transactions. Their recent statements reveal a plan to clamp down harder on the broadly definable crime of fronting. This was seemingly confirmed in the recent finding by the B-BBEE Commission on MTN’s alleged non-compliance with the B-BBEE act.

All indications are that MTN’s bona fide attempts at empowerment were met with a rather draconian infringement on corporate independence. MTN now has to bend the knee to the Commission or risk prosecution and a recommendation to ICASA, another quasi-judicial entity, to withdraw MTN’s operating license.

In a word though, the B-BBEE Commission acts with a significant degree of quasi-judicial authority, but worse, it oversees and gives meaning to a rather arbitrary set of legislation.

Similarly, the Commission on Employment Equity (CEE), plans to up its assault on the market economy. The CEE’s annual reports on EE compliance have been convincingly criticized, even lambasted, over many years by late Paul Joubert, a former senior researcher at the Solidarity Trade Union. Yet, the CEE now recommends new ways to government to ‘tighten regulation’ on employment equity.

Perhaps more importantly, the CEE sets rules for EE measurement and reporting, which clearly shapes hiring practices across the entire economy – not a trivial economic matter.

The new upstart franchise, the National Minimum Wage Commission, is another entity that now sets binding rules for national wages – also not a trivial influence in the economy.

Of the agencies, arguably, the Competition Commission and Tribunal, have the most expansive legal authority. The CompCom, for example, approves or rejects mergers and may set conditions on mergers.

Now emboldened by a enhanced public interest power-up, deriving from the latest competition amendment act, the entity can directly stipulate conditions on contractual agreements between firms for merger approvals. It can do so when it deems it to be to the benefit of small businesses and black businesses – BEE now applied through competition policy. Government dictating suppliers and even terms of contracts in such a way is not a step toward market freedom.

Self-interest or public-interest?

Curiously, many people who presume with a degree of suspicion an inclination of acting in self-interest by commercial enterprises, won’t show the same suspicion toward government agencies and bodies. These agencies will of course interpret the public interest more or less in line with the ANC’s reasoning.

Furthermore, it is not unreasonable to expect any human entity, including government agencies, to serve their own interests.

What would acting out of self-interest by an quasi-judicial agency look like?

Would such agencies to seek greater or smaller influence, larger or smaller budgets?

When would they ever question their own mandates?

It is rather likely that such agencies will advocate for stronger positions, larger budgets and greater influence. At the very least, one shouldn’t be surprised when such agencies innovate ways to stay their course and to expand their project.

The proposal in the Tourism Amendment Bill is another illustration of the current drift of regulation away from market and commercial freedoms and toward greater command by the bureaucrat class. The bill aims to give the minister of tourism the ability to set ‘thresholds’ for Airbnb home rental, thereby empowering the state’s tourism bodies.

Will the regulatory drift be arrested?

It is the current regulatory drift that a truly reformative administration would have to arrest to build a healthy economy. Given substantial regulatory and ideological inertia, true reform will likely be an uphill battle.  

Truly reforming the South African economy requires more than a mere deckchair shift around of current subsidies, interventions, agencies and legislation.

Reforms that would truly and significantly improve the ease (and cost) of doing business require serious reconsideration of the current drift of regulation, which is pre-programmed for setting greater hurdles on commerce.

Reforms have to go further than merely streamlining the existing bureaucracy and interventions.

It should seriously reconsider the workings of numerous regulatory agencies and downscale the laws that sustain growing hurdles to free commerce and entrepreneurship.

TG van Onselen, Senior Analyst: Sakeliga