Today’s blog post is an unedited version of a Business Day article in which we argue that proposed amendments to broad-based BEE framework will achieve opposite of intended goals.
Measuring the firm costs and benefits of B-BBEE
South Africa’s economic transformation policies have not delivered inclusive economic growth, despite being part of South Africa’s legislation for decades. The country’s post-2009 growth trajectory — persistently below 2% annually — has intensified debate about whether transformation and growth are being advanced together or are increasingly in tension. Despite the enormous resources spent on compliance and accreditation, very little is known about the impact of Broad-based Black Economic Empowerment (B-BBEE) over the last 23 years because compliance data are not publicly available. Government’s unwillingness to publish data means there is no authoritative research that quantifies compliance costs or assesses the firm and macroeconomic impacts of these requirements. So, we ran a survey to understand how firms view the costs and benefits of B-BBEE regulations.
Our sample covers 126 firms, covering both small, single owner businesses, and large enterprises with revenue exceeding a billion rand. Over a third of these firms chose to be noncompliant or level 8, because owners disagreed with B-BBEE regulations, the policy was not applicable to them or that their firm was too small, or the policy either was costly to comply with or would hold no benefits.
The costs firms bear to establish their initial B-BBEE strategy and structures varies greatly across firms. Some firms face no compliance costs. For example, if the firm’s founders are black, and the firm is small, then there may be no set-up, advisory and initial accreditation fees payable. But our survey shows that the initial setup costs that the median firm in each compliance category in our sample report range between R160 000 and R650 000 in 2025-rand terms, with an ongoing annual cost thereafter of between R225 000 and R2.5 million a year, depending on firm turnover and specific compliance choices.
These costs are very large. In terms of setup costs, the median ratio of these costs to annual turnover range between 0.4% and 4%.
Annual compliance costs also vary a lot across firms. The median firm in our survey that faced compliance costs reported annual scorecard (things like skills development, enterprise and supplier development, socio-economic development, or vendor financing) and accreditation costs (including internal administration and staff time, systems and software, external verification and accreditation fees, legal and valuation fees, any other B-BEE advisory or accreditation costs) of over R2.5 million at level 1, R225 000 at Level 2, R600 000 a year for Levels 3 and 4 and almost a million rand a year for levels 5 and 6. This ranges between 1% and 1.5% of annual turnover and 6.25% and 32% of net profit after tax across firms of different levels of accreditation that face these compliance costs by seeking accreditation.
When considering the impact of regulations, it is important to consider not only their costs, but also their potential benefits. It is possible that the B-BBEE regulations create growth opportunities for compliant firms, and support job creation and investment. However, a high proportion of firms that responded to our survey do not report such benefits. When asked if it would be commercially beneficial to raise their company’s B-BBEE level, more than two thirds of firms did not see benefit from improving their scores. We also asked firms what they thought would happen if their scores fell one level, and only 25% of firms expected revenue to fall, while less than one-in-five firms expected any revenue benefits from a one level increase in the score.
Do firms think that the B-BBEE regulations support employment? No. Only 4% of firms report that it has increased net employment, and 35% report lower net employment.
What about investment? Almost 50% of firms report reduced reinvestment and over 40% report having reduced new investment as a consequence of B-BBEE regulations, compared to 4% reporting increased reinvestment and less than 2% reporting increased new investments.
The survey shows that these compliance costs act as stealth taxes that strongly disincentivise firm start-up or growth if the firm is small and the founders are not black. The microeconomic costs of these regulations are particularly high for firms that approach the R10 million revenue or 50 employee thresholds. Our estimates suggest that compliance costs are so large as to make compliance either infeasible or economically irrational if firm shareholders are not black. While phased share allocations or staged B-BBEE investments could provide some offset, these regulations have ongoing impacts on firm cash positions and ability to accumulate retained earnings for growth.
We observe this in the data: the average formal business in South Africa has declined in size by more than 80% since democracy. Discouraging firm growth weighs on productivity and efficiency by reducing economies of scale and inhibiting job creation. This is the opposite of what South Africa needs to drive faster and more inclusive economic growth.
It is also no surprise that there has been an 87% decline in the value of B-BBEE transactions over the last six years. If these transactions yielded ongoing value to shareholders, we would see an increase in B-BBEE transactions over time. Instead, we show that several high-profile JSE empowerment share schemes trade at discounts exceeding 50%. This represent a direct and measurable transfer of wealth away from the black South Africans the policy is designed to benefit.
The amendments to the B-BBEE framework that are currently moving through the legislative pipeline assume that further raising the effective tax that compliance implies and forcing compliance will see firms and invest and employ more. South Africa’s experience to date suggests that these amendments will achieve the opposite.
MacKay is CEO of XA Global Trade Advisors. Dr Steenkamp is CEO of Codera Analytics and a research fellow with the Economics Department at Stellenbosch University. XA and Codera’s report is available here.
