Black Empowerment Weakening the South African Muscle

South Africa can be tricky terrain if companies fail to find their way through its black empowerment policy

As Bharti gave up the ghost of merging with MTN, the tricky terrain of South Africa’s regulatory framework became clear. Most of the issues like dual listing got ample airtime. But there was one issue that didn’t: Broad-based Black Economic Empowerment (B-BBEE). This was the subtext of “MTN must remain a South African Company” refrain.

As more and more Indian companies head for South Africa, which they think is a good base from which to spread to rest of the continent, B-BBEE can be the difference between success and failure. 

This is especially true for companies that are thinking of acquiring controlling interests in South African companies.

The idea behind B-BBEE is simple: To significantly increase the number of black people who manage, own and control the South African economy and also reduce income disparities. This should, however, not be confused with affirmative action since this aims to achieve much more than just provide blacks with assured employment. “Although B-BBEE is seeks to empower black people in the same way as Affirmative Action does, B-BBEE is more than an employment equity redress,” says Takalani Tambani, director, B-BBEE, Department of Trade and Industry, South Africa. The process includes not just human resource development and employment equity, but also enterprise development, preferential procurement, investment, ownership and control of enterprises and economic assets.

For years, thanks to the policy of apartheid, the black population in South Africa was marginalised and remained economically and socially downtrodden. Even though the policy of apartheid ended in 1994, the whites still retained control of most of the big businesses in South Africa and the blacks had virtually no participation in the South African economy. B-BBEE aims to correct that and bring blacks to the forefront of South African business. The policy of B-BBEE has been in place since 2003 while the B-BBEE codes were formally launched by the South African government only in 2007.

Here is how B-BBEE works: enterprises are rated on the basis of a generic scorecard. This scorecard has measures such as ownership (weightage of 20 points), management control (10 points), employment equity (15 points), skills development (15 points), preferential procurement (20 points), enterprise development (15 points) and socio-economic development (5 points).

There is a separate scorecard for specialised enterprises such as higher education institutions, non-profit organisations and public entities. A score of less than 30 is considered as being non-compliant.

There are a few exceptions too. The government has exempted companies with an annual turnover of less than 5 million rands from compliance with B-BBEE. Companies whose annual turnover is between 5-35 million rands are required to comply with four of the seven elements of a B-BBEE scorecard. Large companies (with annual turnover of more than 25 million rands have to fully comply with B-BBEE). It is compulsory for all state-owned entities and government departments responsible for specific industries to comply with B-BBEE.

And here is the clincher: Section 10 of the B-BBEE Act makes it compulsory for these organs (state-owned entities and government departments) to consider B-BBEE when disposing state assets, granting licenses and concessions. Also, according to the B-BBEE code of best practices presentation booklet, customers in the public as well as private sector will prefer to interact and procure from companies with higher BEE status for its own recognition. Says Tambani, Had Bharti bought 100 percent of MTN, then MTN becomes foreign-owned and the B-BBEE rules in the “Equity Equivalent” programme become applicable. However, Had Bharti taken only 51 percent of MTN, the South African firm would have become Bharti-owned but still the balance 49 percent would have remained in that country. This means that MTN would have to keep 25 percent shareholding in black hands.

But what about those who violate B-BBEE principles? Says Tambani, Although the legislation does not have a punitive effect, through the multiplier effect principle, it has become a business imperative for South African companies to do B-BBEE. But there is a proposal tabled by Jimmy Manyi, director general of labour and chairman of the commission of employment equity, that aims to impose a fine of 10 percent of turnover on non-compliant firms.

All said and done, there seems to be more. At the heart of this is a controversial demand by Manyi. For a long time, Manyi has been asking for implementing huge penalties for companies that fail to appoint enough blacks. What he is asking for next will queer the pitch for foreign companies operating in South Africa. Manyi is now proposing an idea of proportional representation based on the country’s demographics. Here is the rough break-up of South Africas population: 79 percent Africans, 9.6 percent whites, 8.9 percent coloured people and 2.5 percent Indians.

What Manyi wants is proportional economically active race representations in companies which easily translate into greater numbers of blacks, fewer whites, and even fewer Indians. The controversial commission of employment equity report 2008-09 says that white males continue to dominate the top echelons in the private sector followed by white females and the Indian population. Africans and Coloured people continue to languish at the bottom with a few Africans sprinkling on top.

This report is already seeding a wedge between the native blacks and Indians. The CEO of an Indian company in South Africa says it is hard to fulfill the requirements of B-BBEE.

But Manyi’s group of followers is growing. And other races in South Africa, particularly whites, feel threatened.