Landmark court ruling rips up Pravin Gordhan’s BEE rule book

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Mr Piet le Roux is the CEO of Sakeliga, which is an organisation devoted to working with business. Mr le Roux, perhaps you could just sketch out what your organisation does first, before we discuss the details of this very exciting court case that you just won.

An organisation that represents business has succeeded in getting some BEE rules declared invalid – a development that opens the door to business opportunities at state entities. In this interview Piet le Roux of Sakeliga sets out the battle to challenge Black Economic Empowerment rules that allowed government contracts to be awarded on political grounds and helped to create an environment in which corruption and state capture can flourish. – Jackie Cameron

Sakeliga – in English it simply means business league – is a community of business people who are mostly small and medium sized enterprises. Just over 12,000 people countrywide in South Africa, across sectors and so on. So it’s something between a chamber of commerce and a business community. Naturally, one of the things that we are active in – it’s on the policy front – is engaging with the government. Sometimes these engagements also lead to court cases, in cases like this, where Broad-Based Black Economic Empowerment was at 

So just take us through that court case. When did you start following this line of action?

This current action has been going on for about four years already. Back in 2016, the Minister of Finance, who was then Minister Pravin Gordhan, published regulations under the so-called Public Procurement Framework Act. The Public Procurement Framework Act is legislation that determines and provides guidelines in how state-owned entities and the state itself should procure.

The minister is empowered to publish regulations to explain in more detail how this should be done. Now, how that worked before 2016, was that there was a point system and depending on the value proposition of the company tendering, it would be awarded, let’s say, 100 points. But then between 10-20% of that could be extra points depending on your Black Economic Empowerment status, which is basically the race of the owners of the company and so on.

But the minister then introduced new regulations, which seemed small at the time, but which we understood would have very significant implications. This was to provide discretionary powers to state-owned entities to set minimum entry level standards. That is to provide pre-emptive or pre-qualification criteria. Since 2017, it has become practice with major companies – state-owned entities such as the power supplier, Eskom, and others – to say that a company has to be 51% or more black owned. Otherwise, it won’t be allowed to tender.

That, of course, led to major disruptions. But we engaged right from the policy formulation point. When this was promulgated in 2017 – when it came into effect – we started litigation and we were eventually successful now, in saying – and the court agreeing with us – that this is unlawful, invalid and unconstitutional. 

So what does it mean for people doing business now? Do you still need to have a black owner involved in your business?

For the next 12 months, the court gave the government, the new Minister of Finance, Tito Mboweni, time to rectify the regulations. So for the next 12 months, I think it is a question of moral and certainly legal prudence for state-owned entities not to apply these pre-qualification criteria. But technically there is still a gap in the law. I think we will see this rectified and becoming less and less common now.

So it means that after these 12 months – and certainly in the run up to this – companies now for the first time, have the door open to them again. Doors that were shut for the past three years are again open now. It doesn’t mean that once you are admitted that the government will not consider and possibly deduct points and so on for your black empowerment status.

But it’s not a question of opening or shutting the door now. It’s a question probably of losing a few points. So this is important not only for companies tendering to government, because at least the value proposition will be considered again, but it is very important for the country as a whole and for the consumers and the public who now again can know that companies who deliver services to them and to state-owned entities were actually chosen on a value proposition and not only on the race of the owners.

Do you think that this law that has now changed will have an impact on reducing corruption?

It certainly will. Business Day referred to some of the terrible examples of how this regulation led to the so-called state capture scenario, which severely limited the scope of competitive bidding for government and opened the door, as it always does – these kinds of regulations – to special favours and so on. I think that we can look forward to a much more competitive bidding environment under these new regulations.

Do you think this is just a temporary pause while they close some loopholes?

The unfortunate and very damaging situation in South Africa is that this policy called Black Economic Empowerment – notwithstanding how good it may sound – is a very destructive policy. It has cost the country and the public millions of rands in lost goods and services, inefficiencies and enabled corruption and so on. So it’s a policy that needs urgent review, but unfortunately, it still is government policy.

Now, what we – and what other organisations – do is to address this through legal courses of action such as these. And then we roll back some of the excesses. Unfortunately, it remains government policy and I think it’s very important that businesses – and we will certainly continue to do this as a business organisation – point to the problems with this with a policy and also attack the other legislative provisions for Black Economic Empowerment. This is very important, because it opens the door where a door was closed, but it does not remove all the Black Economic Empowerment problems in South Africa.

This door that’s been opened – how.many of your members will benefit? Do you have any indication of how much money is going to be unlocked for businesses that was perhaps not accessible to them?

I think it would be fair to say this is in the billions of rands. The government sector in South Africa is disproportionately large. It is one of the reasons we don’t have such good economic growth in South Africa is because the government is disproportionately influential in economic affairs. But that also means that by reopening this door, certainly to the tune of billions of rands, companies big and small can now be considered more on the basis of their value proposition than on the basis of their race. 

Most importantly, I want to stress, of course, this is important for business and for our members and business in general. But I think it’s even more important for the country, for the civilian population and for the public. That the state-owned entities will now be allowed and in many cases will reconsider the proper and wide ranging scope of expertise and value for money that is available in the private sector that was closed. So even more important for business. This is important for the country, for the fiscal position of the country and for its success in delivering infrastructure services, et cetera. 

Why is that? Are you suggesting that the current companies that have benefited from the contracts have not been efficient? 

Well, it stands to reason that if the government and state-owned entities institute a policy where it says we will eliminate half or more of the companies in the country from the tender process, we will only select from those companies who pass the political criteria before a value proposition criteria. 

It is inevitable that there will be a loss in value for the public. So, no company will be excluded under the new system that this judgment brings. So I’m confident that any company who is successful on the basis of its value proposition – whether its owners are black or white – will be in just as good a position. But because the scope for tenders have been widened, the public will benefit because it’s more competitive.

Can this ruling be challenged at a higher court?

Yes, it can still be challenged in the constitutional court in South Africa. We’ve studied the judgment and our preliminary indications from our legal team is that it’s a very strong judgment. It was also awarded to Sakeliga with costs, which tells you something about how the judges also feel about this. 

The judge and the concurring judges, they were very stringent and they had strong words for the excesses of then Minister of Finance, Pravin Gordhan, saying that he attempted to legislate, when he should have been regulating and that he was actually abrogating the powers that should properly vest in parliament, by doing what he did. So the judgment is strongly in our favour. It’s possible that there might be an appeal. But we will not accept that appeal and we will oppose it. 

What’s next for you in terms of continuing to fight BEE legislation?

We are involved in the policymaking processes on a number of fronts. For example, the Public Procurement Framework Act itself is being redrawn. So we’re involved in that and we’ve submitted comments and we will continue to do so. 

Then the unfortunate situation is that the major piece of legislation in South Africa called the Black Economic Empowerment Act, it seems to be morphing. There’s a certain direction in the policy, in that the policy is not confined to the act itself anymore. But you see in the Competition Act coming, a Black Economic Empowerment consideration being inserted directly there. 

You see it directly inserted in the new finance bill that’s being drawn, you see it directly inserted in the new transport bill. Our strategy right now is to find where there’s sort of transposition or growth revolution of BEE comes to the fore, address it in the policy making process. If it passes that, then we will consider litigation because it’s neither a prudent way to legislate, nor is it acceptable, as it’s currently taking form – in our view – from a constitutional point of view.

So we’re working on a policy level. We’re working on a litigation level – if policy intervention fails – and then we’re also working at a public relations level, because we think not only is the judgment important, but the debate that judgments like these open up is also very important. Because not only Sakeliga or I am speaking about the problems with Black Economic Empowerment. 

It is widely acknowledged in South Africa, across the political spectrum, across communities – with black people, Indian people, all the people, from all the racial categories that this country is unfortunately accustomed to – are speaking out and saying this is not a policy that has succeeded in the idea of making people more successful in the country, making people more wealthy and distributing wealth.

 This is a policy that is concentrating wealth in a few hands and that is to the detriment of the public interest. so this is our third avenue, is to debate this in public. Difficult as it is, because it’s not helping. 

So still a lot of obstacles to overcome then with BEE?

It’s not something that’s going to be stopped overnight or changed course overnight. But it is something that has to be done. It is certainly something that is very difficult. It’s something that is politically touchy. But I think as this judgment shows, it is something that if you proceed cautiously and judiciously for a number of years and you make sure about your case and you proceed in a professional manner – as difficult as it is – then there can be success.

I can tell you one thing. If we continue on the Black Economic Empowerment path, as we’ve seen it develop over the last 20 years, this will be to the detriment of the public in South Africa. It will be very harmful for the fiscus in South Africa. We do not have a choice. We have to face this. We have to debate this. From our side, we’re going to continue pointing this out and thankfully to the support of our members and other benefactors, we’re able to do this. It has to be done.

Before we close off, what is the alternative to BEE to help uplift people from poverty and fix the disadvantages created from Apartheid?

The most important thing to understand is that economic growth comes from the private sector. Solving the problem of poverty in South Africa is not solving the problem of BEE itself. It is changing course from putting governments central to job creation, putting governments central to employment, and economic growth in the country and say, we need to take a step back. We’ve tried this now for 25-30 years almost.

We need to put more faith in the private sector to create wealth. That’s the way for this country to be stable and prosperous. Certainly, if Black Economic Empowerment was limited to a small consideration in the economy, we would not have been having this debate because even though I disagree that that is actually helping, I would say, well, it’s not so negative. But because this is so harmful, just stopping BEE and just returning to a policy of economic growth opportunities and so on, that would be much more beneficial to the country.

Do you think BEE is actually the major problem holding back the South African economy?

I think that BEE is one of the – if not the most – harmful policies in the country. There are certainly many problems in the country, but BEE is one of the largest. It’s not because it has the word ‘black’ in it. It is because it is a political allocation of capital. It is what Acemoglu and Robinson and others – when they consulted former President Thabo Mbeki in 2007 – called an open ended tax on capital.

This is the way international investors and local investors look at BEE. It says we now have to consider politics in deciding who our business partners are, instead of deciding on return on capital. If you introduce that from a business perspective, it’s a tax. 

If you introduce this as a tax and if you interfere in the decision making of capital allocation, you’re going to weaken the capital structure of the country and you’re going to lessen investment. You’re going to pay a premium and so BEE has such a bad reputation in South Africa and internationally. It’s certainly one of the major obstacles to growth in the country.

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