Is South African transformation dead?

On 23 May 1990, just months after his dramatic release from Victor Verster prison after decades of incarceration, Nelson Mandela addressed an audience of 300 mostly white business leaders at the commanding heights of South Africa’s apartheid economy in Johannesburg. As he grappled with the transition from white minority rule to black majority rule, Mandela spoke openly about the crucial necessity of economic transformation, the country’s “thorniest issue”.  

“If we are genuinely interested in ending the old social order and bringing in a new one, characterised by notions of justice and equity, it is quite obvious that the economic power relations represented by the reality of the excessive concentration of power in a few white hands have to change.

“We make this demand not as a result of any imperative that might be said to drive from ideological convictions. We make it because we cannot see how it would be possible to pull our country out of the economic crisis, in part caused and exemplified by white control of economic power while, at the same time, we perpetuate this power structure… one of these imperatives is to end white domination in all its forms, to deracialise the exercise of economic power.” 

Thirty years later, as demands for racial justice and economic equality shake the globe in the wake of the Black Lives Matter protests, it is painfully clear how far South Africa remains from Mandela’s vision of a deracialised economy that delivers a greater share of control, ownership and wealth to its black majority.  

According to government statistics, control of the economy remains rigidly racialised in favour of the 7.8% of the population who are white to the exclusion of the 80.8% who are black African. The annual data released by the B-BBEEC in July reveals that black ownership in reporting companies across the economy was just 29% in 2019, compared to 25% in 2018 and 32% in 2016.

No single sector of the economy has more than 50% black ownership in large entities, with entities in historically white-dominated sectors of the South African economy such as finance (25%) and agriculture (12%) particularly resistant to change. Construction (48%), property (42%) and ICT (36%) are deemed to be showing “relatively good” progress. Black women remain particularly marginalised, with their average ownership of large entities just 12.1%.

Control of South Africa’s boardrooms remains similarly racialised. Black representation on JSE-listed boards is just 43%, 20% of whom are black women. According to the government’s Commission for Employment Equity report for 2018-19, 66.5% of top management in reporting employers are white, compared to 15.1% African, 5.3% coloured and 9.7% Indian, with the rest comprised of foreign managers. At senior management level the picture is slightly improved, but white managers still outnumber Africans by 54.4% to 23.2%, compared to 8% coloured and 11.1% Indian, with the remainder foreign. 

Bleak prognosis     

With the business sector reluctant to change and successive ANC governments, including Mandela’s, having done little to force the pace – let alone achieve the 1955 Freedom Charter’s radical demand for the national wealth of the country to be restored to the people – some experts offer a bleak prognosis for the future of transformation in an era of renewed economic turmoil.  

“Most South Africans would agree this has been a deep disappointment, putting it mildly. The transformation project is a disaster,” says Duma Gqubule, an economist and founding director at the Centre for Economic Development and Transformation, who believes that government figures overstate the real pace of change. “With this Covid crisis it’s not a priority right now I don’t think, there’s bigger problems relating to mass unemployment, poverty and inequality… There isn’t the political will under the new president. It’s completely lost momentum. It’s almost the end of the transformation project now.” 

With South Africa’s economy expected by the IMF to shrink by 7.2% this year as a result of the Covid-19 pandemic, President Cyril Ramaphosa’s attention has turned elsewhere and the room for increased participation in the economy is shrinking. But with patience wearing thin with a business community which has long given lip-service to transformation while dragging its heels, there are signs that the government and regulators are shifting to a more forceful approach to compel businesses to quicken the pace of black inclusion. With political voices calling for immediate, radical empowerment, the laissez-faire approach that has characterised government policy may be replaced by a more robust system to compel companies to act.  

“Where the market chooses to do the wrong things there must be consequences for non-compliance. There needs to be enhanced consequence management for private sector and government entities,” says Zodwa Ntuli, commissioner at the B-BBEEC. “If the will to drive transformation was there and fully supported, we should be seeing progress that is more defined than what we’ve seen.” 

Strengthening the empowerment agenda

The importance of transforming the racial makeup of the economy has not always been an afterthought for the ANC. Launched in 2003 under the government of Thabo Mbeki, the flagship Black Economic Empowerment Act was an ambitious attempt to close the gap and improve black participation in the economy.

Effectively a form of affirmative action, the codes grant scores to companies and government entities based on their achievement in the core areas of black ownership, management control, skills development, enterprise and supplier development, and socio-economic development.

In theory, companies must achieve certain scores to earn a certificate which allows them to benefit from government contracts and concessions. Certain industries, including mining, go further, requiring businesses to have a particular percentage of black ownership or a certain black economic empowerment (BEE) level in order to gain a license to operate.  

A compliance industry has emerged to guide companies through BEE policies and structure deals and transactions to transfer stakes to black shareholders. Yet the overall success of BEE has been wildly inconsistent. After years of slow progress, the B-BBEEC, a new government regulator, was launched in 2016 and charged with monitoring and accelerating progress. Commissioner Ntuli says that in too many firms and sectors, there is still an obvious reluctance to transform.    

“The one thing we’re concerned about is the pace, we don’t believe the measured entities are actually paying the right attention to economic transformation and driving it to increase inclusivity much quicker… You have some progress but it’s not consistent, you’re not able to say this particular sector is doing well and consistently so. Overall, the pace is not good, we’re not seeing a real drive to go beyond the bare minimum.”  

Progress reversed

On many of the regulator’s metrics, progress reversed between 2018 and 2019. Black management control in reporting entities slid from 45% to 39%, skills development stalled, enterprise and supplier development fell to 51% from 60%, and socio-economic development slipped from 71% to 68%. Only 53% of JSE-listed entities and 39% of government entities achieved the priority elements of the scheme, compared to 60% and 50% in 2018 respectively. Only construction, transport and property showed consistent improvement of black ownership over a three-year period, according to comparative data of certificates uploaded to the B-BBEEC portal. In 2019, the agriculture sector showed the biggest improvement, increasing by 13%, but ICT and tourism registered marginal declines.  

“The outcome of the compliance analysis for the 2019 period shows a slow pace in transformation with priority elements barely being achieved,” reads the downbeat National Status and Trends in the B-BBEEC 2020 report. “Interventions are required to increase compliance levels to stimulate the pace of transformation. Compliance with reporting requirements remains inadequate.” 

Alarmingly, many entities did not even report on their progress. Just 42% of listed entities and 15% of state organs and public entities reported in compliance with the legislation, while 69% delivered late submissions. The lack of reporting suggests that some companies are registering no progress whatsoever, says Ntuli. Even where companies have seemingly complied, says Gqubule, the reality of transformation can be exaggerated far beyond the actual reality.  

“I used to work with a lot of companies on transformation. Most companies aim to be a level 4 contributor and you go into the canteen and there’s no black people, and the few black people come to you and say how did you get this company to be level 4? The companies got very expert in gaming the system and getting good scores. It’s become a whole industry.” 

A series of illegal tactics have emerged – notably “fronting”, where black people are given the appearance of management control and ownership without wielding genuine power – that seek to subvert the legislation while appearing to comply with its requirements.  

“There has historically been resistance to change,” says Ntuli. “And that in itself presents a serious challenge around compliance. When there is an underlying resistance to change you see unscrupulous practices of trying to comply without doing the correct things. That’s brought to the fore fronting practices, which focus on a tick-box exercise which seeks to make entities look like something is happening when nothing is happening. When you don’t believe in something you put in place a structure and unit to just look at it for compliance reasons and it’s not part of your overall strategy. There isn’t much of a strategic focus on implementing transformation initiatives.” 

After delivering four annual reports that show a consistently slow pace of transformation alongside the offer of support and advice to companies, Ntuli says that the regulator is ready to move to an enforcement footing with companies that have proved unable or unwilling to reform.  

“In the beginning we adopted a compliance-driven strategy where we help and give an opportunity to correct that. We’re here to assist. That’s what we’ve done for three years, now we’re in year four and the compliance strategy needs to move to an enforcement strategy. We’ll be implementing legislation to make sure there are consequences for those who don’t do what is necessary. You can’t sit on a compliance strategy when there are indications there is resistance.” 

Those consequences could include aggressively excluding entities which are not transforming from government contracts and incentive schemes. The B-BBEEC has a strategic relationship with the JSE which makes BEE compliance a listing requirement, and the government may move to closely integrate BEE requirements into sector masterplans. Fronting, which is already illegal, will continue to be prosecuted. 

Education and economic failures

But critics say that an outsized focus on the BEE failures of the business sector risks drawing the wrong conclusions about why the policy has largely failed. Haroon Bhorat, professor of economics and director of the Development Policy Research Unit at the University of Cape Town, says that the failure of BEE is a reflection of the wider failure of government education policies to equip black graduates with the right skills to enter the workforce.

“Structural inequality in South Africa has actually risen since 1994,” he explains. “We haven’t had sufficient jobs-intensive growth. You’ve got a schooling and higher education system that has struggled to produce the quality and type of graduates required by firms – there’s a massive shortage of STEM qualifications. All that does in a scarce skills environment is place a premium on those with those skills at high levels and exacerbates inequality.

“The overlay in South Africa is that a lot of these divisions and cleavages and inequalities are race based… The danger is that you treat this purely as a discriminatory outcome rather than a structural outcome. There may be instances where employers could be discriminatory, possibly there are information asymmetries where they don’t know where to look for those particular skills and that’s definitely an issue. There are structural features which point to a much more urgent medium-term requirement for policymakers and the economy to improve schooling, look at higher education and the graduates and qualifications they have.” 

South Africa’s long-term economic underperformance has also undermined BEE by starving black shareholders of the means to acquire stakes in firms, even at a discount. The B-BBEEC recommends that government should increase funding for BEE transactions and implement flexible funding structures by partnering with banks and financial services companies, but progress is slow.  

“When you look at the last decade you’ve had 0% growth per capita GDP, a lost decade in terms of economic transformation. Unemployment, poverty and inequality have skyrocketed. GDP has been declining for five consecutive years since 2015… the numbers don’t add up. You can’t accumulate capital if the economy isn’t growing, it’s as simple as that,” says Gqubule. Bhorat concurs.

“You’ve had low growth which means lower dividends, lower growth opportunities for companies, and that makes companies less able to structure [BEE] deals. In the last decade you’ve emerged from a period of state capture, so you’ve had corporates looking at this environment and becoming very conservative about who they engage with. They are afraid to do business with government, so they don’t really need the BEE status, which holds back equity deals.” 

Given the lack of black investment consortiums with the capital to complete BEE deals, many time-limited transactions have reverted to white shareholders despite companies continuing to receive BEE credit, Gqubule argues.  

“For a business to claim points another black person should come after [black investors] sold their share after seven years to create liquidity in empowerment finance. But the government created certain rules where companies were allowed to claim ownership by black people even if they didn’t continue to have ownership – lobbying by the banks and the mines bullied the government into agreeing. This is the once empowered, always empowered debate. It killed liquidity in the model, a lot of transactions have now unwound, and there’s no new transactions happening.” 

Accounting for success

And yet despite the continuing tailwinds of the economy and problems in the BEE model, one sector has demonstrated that meaningful transformation can happen with an unbending commitment to change and a properly resourced plan of action. In 2002, just 3% of the membership of the South African Institute of Chartered Accountants (SAICA) under the age of 35 were black Africans, but in 2019 that figure reached 25%, with coloured representation more than doubling to 6% and Indian representation more than doubling to 17%.

The major hurdle that the accounting profession faces, along with other scarce-skills professions, is that just 12% of students pass maths with marks above 60%. But instead of relying on the government to fix the education system, SAICA, under the leadership of executive director for nation building Chantyl Mulder, launched Thuthuka, a schools project which includes academic support programmes, career awareness projects and development camps.

The project nurtures an interest among young people in pursuing chartered accountancy as a career and actively helps students to achieve their goals. There is still a long way to go – there are over 6,000 black chartered accountants today, of whom more than half are female, compared to over 30,000 white chartered accountants – but at a tertiary level, African and coloured students now make up 60% of the annual first year accounting degree intake, according to SAICA.

Transformation is not cheap – R117m ($7.1m) was raised in 2019 alone to support 1,206 underprivileged African and coloured youths – but the programme has been hugely effective.

The efforts made by SAICA, which address both the educational deficit and the professional and cultural barriers to success, offer a positive model of how black transformation could work across the economy in white-dominated industries.

“The takeaway message is not to say we can’t do anything until these structural things are done – companies need to work as hard as possible to close down information asymmetries, to realise they can’t use their old networks to search for black talent. We know networks are old and based on individuals at the executive level that tread water while nothing changes, and those are integral challenges. [But] to really turn the dial we better not forget the structural features,” says UCT’s Bhorat.

The Covid-19 pandemic and subsequent recession may put transformation on the back-burner, but it also offers an opportunity for a new future that is “inclusive, empowering to women, young people and to black people in the main,” says President Cyril Ramaphosa.

But as the example of SAICA shows, if black people are to take their rightful place at the heart of South African business and the economy, it cannot simply be left to the government – progress requires fundamental cultural change in the upper ranks of white businesses as well.

“After many years working in transformation in companies, the penny dropped. We’re actually dealing with residual racism and until you confront that issue you’re never going to make progress on transformation,” says Gqubule. “You can sugarcoat it around trying to sell the economic benefits of diversity, but that doesn’t work if there’s downright racism. There’s residual racism in corporate South Africa they don’t want to talk about. We have to talk about it.”