Government doubles down on enforcing BEE rules in South Africa

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Trade and industry minister Ebrahim Patel says that South Africa continues to face problems with the implementation of Black Economic Empowerment (BEE) policies, despite their importance to the country’s growth plans.

In an address to the annual Black Business Council this week, Patel said that this includes the use of fronting arrangements and gaming of the empowerment rules by firms to either evade the BEE requirements or artificially inflate the true extent of transformation.

“Where data and claims by firms are not adequately quality-controlled, or the rules are imprecisely formulated to enable the system to be ‘played’ different to the spirit of transformation, they result in legitimate public scepticism on the real impact of BEE,” he said.

The funding mechanisms, particularly the use of certain vendor funding structures, in many cases limits the real benefit in BEE transactions, he said.

“Many of these deals have been structured using what one can only call ‘heroic’ assumptions about asset price growth.”

Patel said that many of these deals are now ‘underwater’ – meaning the beneficiaries have not been able to realise the value they were promised, leaving the established firms with the BEE scorecard benefits without providing apparent beneficiaries with any real gain.

The minister said that these and other issues require review and that a panel will be established to consider the challenges and identify measures to ensure that the policy benefits a wide number of South Africans.

“(There is) deep concern among communities and workers that the benefits of BEE are in many cases too narrowly captured by a few individuals, that workers and their collective vehicles are left out of gains in such instances.

“Where worker-ownership schemes are in place, they in many cases do not provide for one of the key elements of ownership, namely the right to nominate and appoint board members,” he said.

Changes made to Competition Act 

Patel said that changes have also been made to South Africa’s Competition Act, with transformation placed at the centre of competition policy.

This includes:

  • Measures to address price discrimination against smaller businesses and firms owned by black South Africans;
  • New curbs on abuse of power by dominant firm;
  • New powers to the regulators to deal with economic concentration that results in exclusion of black South Africans in the economy.

These competition rules were in play this week when the Competition Commission blocked the acquisition of Burger King SA by private equity fund, ECP Africa, on the grounds that the deal would result in black ownership of the company dropping from 68% to 0%.

The commission prohibited the acquisition purely on BEE grounds, having otherwise found that the deal was unlikely to result in a substantial prevention or lessening of competition in any relevant markets.

Patel said that the recent actions against exclusive lease agreements in shopping malls and the opening up of car repair and panel beating markets to township players, also illustrate what is needed

“Strengthening the economy in a society with significant legacy challenges and deep levels of inequality, requires extraordinary measures.

“Growth requires deeper inclusion so that our base of enterprise is widened. If we are to develop the national consensus on growth that we urgently need, and the sense that we are in this together, it needs to be based on communities, the unemployed, workers, black entrepreneurs, women, young people and the rural poor seeing a path to jobs and prosperity,” Patel said.

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