Cosatu's submission on the Broad-based Black economic Empowerment (BEE)bill and comments on the Department of Trade and Industry's Broad-based BEE Strategy Document Submitted to the Portfolio Committee on Trade and Industry 25 June 2003

Table of Content

1. Introduction and context

COSATU welcomes the opportunity to make this Submission on the Broad-based Black Economic Empowerment (BEE) Bill (hereafter referred to as the Bill).

Our submission requires us to comment, where appropriate, on the Department of Trade and Industry (DTI)’s Strategy Document for Broad-based Black Economic Empowerment, since the legislative framework and objects of the Bill are underscored by the strategy document.

We are unclear as to why the process of finalising a White Paper on this important issue has not been completed and would like to raise our concern regarding this omission. It not only adversely affects public input and participation, but disrupts the correct sequencing of policy and legislation, namely that legislation should only be processed once the relevant policy has been finalised.

There also appears to be two versions of the Bill, namely the Government Gazette B27-2003 and a Bill entitled “Broad Based Black Economic Empowerment Bill, 2003,” on the DTI website. It is on the former that we make specific comments.

The commitment by government to ‘broad based’ BEE, when counterposed to narrower definitions of BEE, appears on the face of it, to be a welcome step forward. However, close inspection of the discussion document and the Bill reveal that there is little consistency in pursuing this laudable objective, which is in fact directly contradicted by the pursuit of a narrow empowerment agenda in certain respects.  If these defects in the draft policy and Bill are not addressed, the strategy being pursued will be fatally flawed.  

2         Executive Summary

·        A more stratum-specific approach, whereby BEE could have proposed strategically focused policy instruments, including financing and monitoring mechanisms relevant to particular sectors and socio-economic groups would have shown that, without an active and interventionist state role, BEE as it pertains to the lower-income stratum, particularly the rural poor, will invariably disproportionately benefit the established formal and urban and male-owned black businesses. The BEE espoused in this strategy document does not adequately take forward the RDP perspective of in the first instance empowering the mass of ordinary people who have been excluded from the economic mainstream by apartheid.

·        Instead of strengthening the role of the state in addressing the historic marginalisation of the majority, the strategy document attempts to justify the sale of state assets in the name of BEE. The democratic state, whose government is largely elected by the poor is endowed and holds in trust strategic economic assets for sustainable empowerment in the medium to long-term, and delivery of affordable services to the majority. The divesting of these assets into the hands of a relatively small number of private individuals, no matter who they are, undermines this historic mandate. This is one of the glaring shortcomings of the BEE perspective espoused in the strategy document, which almost entirely ignores the need to strengthen social capital.

·        In order to do much more to address poverty and inequality, COSATU proposes initiatives for ensuring broader overall ownership, reflected in more equitable access to assets. There is scope within the objectives of the Bill to include this concern.

·        COSATU is of the view that the weighting of the BEE scorecard should be restructured to ensure a broader approach, rewarding substantial points for areas such as employment creation and support for co-operatives.

·        A serious omission is that none of the criteria outlined for the BEE scorecard are outlined in the Bill. We maintain that Parliament cannot be expected to endorse a legislative framework which amounts to a shell, where substantive issues are to be contained in regulations, themselves based on a draft strategy document.

·        There needs to be further debate on the composition of the BEE Advisory Council, which should be fully representative of the community whose interests it is supposed to advance, rather than just black business.

·        The process for drawing up Charters should specify stakeholders involved, and draw on input from organised business, labour and civil society.

·        A narrow understanding of BEE creates a conflict of interest between those who want to use the state to profit themselves and their allies, and the majority of poor communities who are desperate for affordable services and job creation.

·        To ensure a meaningful BEE for all, it will be necessary that some clear guidelines are established for managing the trade-offs between empowerment for the majority and advantages for black business. In other words, rigorously consider and balance the implications of empowerment on both labour and business.

3         COSATU’s view on BEE

A defining characteristic of South African society is the historically- accumulated and worsening race, gender and geographic inequalities. These are concretely expressed in the extreme levels of chronic poverty and underdevelopment in the areas where the majority of the population reside.

The eradication of extreme forms of poverty and entrenched inequality is a precondition for a successful BEE strategy. On the one hand, there is an inseparable link between a BEE initiative geared towards engendering different forms of economic assets and activities, whilst on the other, there is an active interventionist state role in addressing the prevalent poor socio-economic infrastructure. Further challenges include a poor and expensive transport system; poor access to the market; sources of raw materials, and lack of access to technical support, finance etc.

Although there seem to have been an attempt to appropriately broaden the meaning of BEE, the definition of BEE in the strategy document and the inferred definition in the Bill, is vague.

There has been a failure to rigorously capture the socio-economic demographic, gender and geographic disparities among black people, as a factor determining;

1.      Their differentiated access to assets, resources and opportunities.

2.      Their differentiated experience of entrenched structural impediments to meaningful economic participation.

In part, this shortcoming can be attributed to the fact that the strategy has been dislocated from the Reconstruction and Development Programme (RDP) perspective, in contrast to the earlier approach adopted in the BEE Commission’s report and the preceding 2002 Discussion Document.

Hence, there is invariably a disproportionate emphasis on big business, particularly in the formulation of policy instruments and monitoring mechanisms through which it is envisaged that BEE is to be implemented.

The definition of BEE adopted at the Growth and Development Summit (GDS), is one that COSATU supports.

 

Definition of BEE adopted at the Growth and Development Summit (GDS)

The definition includes strategies to:

·         ensure the broadest ownership of productive assets and resources;

·         increase levels of employment in the formal economy;

·         increase household incomes;

·         expanding literacy and skills development; and

extend basic services to those who do not currently have them.

·          

These strategies comprehensively address the factors that disempower the majority of South Africans. Furthermore, our view is that the promotion of BEE should benefit women, workers, youth, people with disabilities and those living in rural areas.[1]

From this perspective, a strategy to support black enterprise by increasing the representivity of business, is a necessary element for BEE. It is not, however, as high a priority as measures that will improve conditions for the majority of the black population.

COSATU’s concern with the Bill, as influenced by the strategy document, is it’s focus on defining BEE primarily as a process that ‘brings about significant increases in the numbers of black people that manage, own and control the country’s economy…[2]’. In the Bill, the five objectives of the Act seem to have a more balanced approach, in that it raises issues that include empowerment of rural and local communities, promotion of economic transformation, and increased ownership and management by communities, workers and co-operatives. It is not clear, however what the weighting and prioritisation of these objectives are.

The one-sided focus on procurement, promotion of small enterprises and the restructuring of state owned enterprises (SOE’s) for the realisation of BEE, is problematic. It is well documented that small enterprises can often provide worse conditions for (mostly black) workers than large ones. There is ample international evidence that privatisation of state assets [in this case, to empower black owners] can lead to worse services for the poor.

It is also reasonable to deduce that procurement from black companies that import goods or services may undercut jobs for (again, mostly black) workers in companies that produce locally.

If government uses its power and capacity to push black ownership in sector strategies, it may put less effort into ensuring employment creation and production to meet the needs of the poor.

An emphasis on ownership and control may take place by insisting on increased representivity within existing market structures. Given the concentration of ownership in South Africa, this approach will effectively only enrich a small black elite. 

Finally, a strategy that would do much more to address poverty and inequality, would be to ensure broader overall ownership, reflected in more equitable access to assets. There is scope within the objectives of the Bill to include this concern.

3         Specific recommendations for the Broad-based BEE Bill [B27-2003]:

Objective and Preamble

The objective and preamble are welcome. It aptly encapsulates the context within which the Bill is being formulated. However, COSATU proposes that the second paragraph of the Preamble be changed to ‘ownership of productive assets[3]’, instead of ‘ownership of fixed assets’. As will be shown later in this submission, the Bill and Strategy document has a tendency to target fixed assets for BEE, rather than a more-inclusive approach which would allow black economic empowerment in sectors of the economy that are linked to services, and labour-intensive in nature. COSATU also has concerns regarding black economic empowerment initiatives that appear to be inextricably linked to the restructuring of state assets.

Objectives of Act

2(a) ‘[insert] Encourage broader overall ownership and promote economic transformation in order to enable meaningful participation of black people in the economy.’

Constitution of Council and appointment of members

5 (1) ‘The Council consists of the President and such other members as may be determined by the Council’s constitution, [insert] including major stakeholders and experts’’. COSATU is of the view that the Constitution of the Council should include the explicit principle that the Council aims to provide the views of key stakeholders in the broader black community. These stakeholders should be listed in the policy document.

Transformation charters

9 (a) ‘has been developed by major stakeholders in that sector;…’ COSATU  would prefer to specify major stakeholders to include, as a minimum, organised business, other representatives of black business and management, and organised labour. Alternatively, the charters should be published for comment.

Memorandum on the objects of the broad-based black economic empowerment bill

It is regrettable that the organisations consulted, as listed in the memorandum on the objects of the Bill, does not include labour or black community leadership as  separate entities for consultation. Even though labour and civil society has representation at NEDLAC, direct consultation with the black community located within unions and civil society organisations would have contributed richly to the content of this Bill. The omission is particularly problematic given the fact that one of the Bill’s objectives is to ‘increase ownership and management by communities, workers and co-operatives’ as well as empower rural and local communities. 

4         Specific elements to realise broad-based BEE

Sections 8 and 9 of the Bill, namely the Status of codes of practice and Transformation charters, gives too much discretion to the ‘organ of state’ and Minister of Trade and Industry regarding the definition and measurement of BEE within a specific sector. 

4.1        The scorecard

The BEE scorecard was developed to facilitate the process of setting measurable targets for BEE. At present, as outlined in the strategy document, the core elements of the scorecard are black ownership and control plus support of black enterprise (a total of 60%) plus human resources development (HRD) and employment equity for another 30%, and 10% for other initiatives. COSATU is of the opinion that this weighting is hardly going to encourage broad-based empowerment, as we understand it.

Specifically, the scorecard provides for 20% each for the share of black people in economic benefits; procurement from black-owned and empowered enterprises; and spending on skills development as a percentage of payroll. 

The scorecard also recommends 10% each for black representation in management and/or boards; investment in black-owned or empowered enterprise; and employment equity – especially for professionals and managers.

COSATU is of the view that the weights should be restructured to ensure a broader approach, rewarding substantial points for employment creation, observance of labour standards,and support for co-operatives.

None of the criteria for the BEE scorecard are outlined in the Bill. COSATU finds this a serious omission. Whilst the DTI’s strategy document has detailed information on the BEE scorecard, the complete absence of these details in the Bill is a serious flaw . Parliament cannot endorse a legislative framework which amounts to a shell, with regulations to be based on an unmandated draft strategy document drafted by the Department.  

4.2        State-owned Enterprises as a policy instrument to achieve BEE

The strategy document argues that, “BEE can be achieved through the transfer or sale of an equity stake in a state-owned enterprise to black enterprises.” [4]

It further suggest ownership as either being individual, community- and broad-based enterprises. A range of other options is also listed. 

COSATU believes that this entirely ignores the fact that privatisation of essential services undermines efforts to empower the majority of our people by ensuring they have access to basic infrastructure, employment and skills. 

The position of organised labour on privatisation and commercialisation is well known. Unions feel that if extended to basic services, these practices will lead to increased costs and cut-offs for poor households, more than offsetting the benefits of support for black business. The record of regressive user fees for water, electricity and education underline these risks.

Similarly, since its commercialisation and partial privatisation, Telkom has increased basic phone costs for the poor faster than fees for business services. Moreover, it has cut some 80% of the new landlines that government required it to extend, mostly because poor households could not afford them.

The trade-offs associated with the new BEE charters are less obvious. The risk is rather one of opportunity cost: that government will focus on increasing representivity within existing structures of ownership, rather than ensuring broader access to capital overall. Given limited government capacity and power, this approach could undercut efforts to take forward broader empowerment programmes.

4.3        BEE Advisory Council

The requirement that government should establish an Advisory Council to monitor, and provide advice, including on sectoral charters and regulations, and promote partnerships, should be carefully managed. According to the strategy document, it will have 19 members, including four Cabinet Ministers and the rest “incorporating a mix of trade unions, academia, business, community-based organisations and other appropriate constituencies, as decided by the President.”[5] The document also emphasises the importance of strengthening the voice of black business in stakeholder forums like NEDLAC and the SETAs.

As noted above, the Advisory Council should ensure domination by the broader black community, including unions, women and youth. Proposals for membership of the initial task team effectively gives business the dominant voice.  In the event, most charter processes have included labour and community organisations only as an afterthought. The establishment of a BEE Advisory Council provides an opportunity to correct this tendency.

5         Summary and recommendations

The Bill and current strategy on broad-based BEE are important initiatives by government to empower the majority of South Africans. However, in the final analysis, it reverts to specific measures that largely supports black businesses.

A significant shortcoming of the strategy document on broad-based BEE is that it chose to define BEE in a vague manner which did not describe the scope of its application.

A significant failure of the strategy is that it fails to look at how government can manage the trade-offs between support for black employers and the conditions of workers and poor households. There are also no concrete measures to favour new and community-based enterprise.

With the understanding that the strategy document shapes the formulation of regulations and underscores the principles of BEE, it should, as a minimum, introduce guidelines on how to ensure that support for black enterprise does not come at the cost of the majority of black households.

COSATU therefore recommends that an appropriate policy on BEE should:

·        In the Strategy Document, include measures to empower black workers and the poor such as sustainable job creation, skills development, the extension of infrastructure and support for small producers.

·        In the Strategy Document, have guidelines to ensure that programmes to support black capital do not come at the cost of broader BEE aims.

·        Have regulations drafted by the Minister tabled at NEDLAC and in Parliament for consideration by stakeholders.

·        The Bill should explicitly spell out the composition of the Advisory Council. We recommend that it provide for a fully inclusive list of the black community rather than just black business.

·        The process for drawing up Charters should specify stakeholders involved, and preference would be for organised business, labour and civil society. The Bill could have given guidance on this.

·        Have a preference for the White Paper process to be completed before the Bill is finalised.

6 Conclusion

In recent years, government departments have sometimes seemed to reduce the term “black economic empowerment” to support for black capital, without challenging overall inequality and concentration. This runs contrary to the ANC’s explicit policy, expressed primarily through the definition of BEE. In December 2002, the ANC’s 51^st National Conference resolved that,

“BEE is defined in its broadest sense as an integrated and coherent socio-economic process located in the context of the RDP. Its benefits must be shared across society and impact as widely as possible.

“The indicators for success are overall equity in incomes, wealth, increasing levels of black participation – including black women and youth - in ownership, the extent to which there is operational participation and control of the economy and the extent to which there has been transfer and possession of skills and a retention of assets by the BEE beneficiaries.”

BEE, like economic growth is unsustainable unless it is shared. BEE should therefore be seen as an important element of far-reaching restructuring of the economy to accelerate growth, redistribution and employment creation. Promotion of a narrow approach to BEE will ultimately create a conflict of interest between those who want to use the state to profit themselves and their allies, and the majority of poor communities who are desperate for affordable services and job creation.

To ensure a meaningful BEE for all, it will be necessary to formulate clear guidelines to ensure that measures to increase the representivity of capital do not come at the cost of poor communities, users of government services, or of workers. Otherwise, efforts to empower black people by supporting black business can only prove self-defeating.[6]

 

Footnotes

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[1] Growth and Development Summit Agreement 7 June 2003, Section 4 

[2] South Africa’s Economic Transformation: A Strategy for Broad-based Black Economic Empowerment -

March 2003, Department of Trade and Industry, p.12, Section 3.2

[3] A “productive asset” is something of value that is likely to return substantial long-term benefits to its owner-

  benefits like security, stability and opportunities for more income. Examples vary from a fixed asset such

as a home to a post-secondary education. www.idanetwork.org – Corporation for Enterprise Development,

  Washington D.C.

[4] South Africa’s Economic Transformation: A Strategy for Broad-based Black Economic Empowerment – 

  March 2003, Department of Trade and Industry, p.12, Section 3.5.4

[5] Ibid, p.26

[6] This submission draws heavily upon documents prepared by COSATU Head Office staff in preparation for submissions to DTI and NEDLAC on the Broad-based BEE strategy document.