South Africa Aims to Revamp Struggling Black Empowerment System, Reports Reuters

JOHANNESBURG (Reuters) – The leader of South Africa’s premier Black economic empowerment program has announced plans to introduce new incentives and possible penalties to boost corporate engagement and prevent misuse of the system aimed at addressing the nation’s severe income inequality.

The African National Congress (ANC), which ruled without opposition for 30 years until losing its parliamentary majority in the recent elections, faces mounting pressure to improve the conditions for Black South Africans who have remained marginalized following decades of oppression by the white minority.

Established in 2003, the empowerment law introduced a scorecard system that encourages businesses to employ and advance Black individuals by providing tax incentives and access to government contracts. However, two decades later, unemployment rates for Black individuals remain five times higher than those of their white counterparts, and income inequality stands as the highest globally, as per World Bank data. Critics argue that the empowerment initiatives have failed to achieve their intended purpose.

“There’s no society that can sustain this level of inequality,” said Tshediso Matona, head of the Broad-based Black Economic Empowerment Commission.

The voluntary program allows companies to accumulate points in areas including Black ownership, management control, and skills development. However, Matona pointed out that some companies artificially inflate their scores by misrepresenting Black individuals in managerial positions—a practice known as "fronting," which is illegal.

The commission has submitted 1,348 reports of fronting since 2017 but none have resulted in convictions, mainly due to the criminal justice system’s struggles to adapt to the existing regulations.

Publicly traded companies must reveal their Black empowerment status in annual reports, yet compliance has dwindled; only 141 out of approximately 400 listed firms submitted the required reports in 2022.

Matona expressed his intention to enhance compliance incentives while considering "naming and shaming" companies that fail to report, alongside potential fines.

President Cyril Ramaphosa has emphasized the necessity of demonstrating the benefits of Black empowerment to companies, but he has also signaled that penalties may be necessary for noncompliance. “On this issue, we are unequivocal,” he declared, identifying racial inequality as an “existential challenge” for the nation. “It must be addressed, and it will be addressed.”

While details of his proposals remain under wraps, Matona indicated that incentives could prioritize recognition for companies investing in skills and enterprise development rather than focusing solely on ownership stakes.

He hopes to present legislative amendments in parliament within a year. However, any proposed penalties might lead to tensions with the Democratic Alliance, the pro-business coalition partner, which has expressed opposition to such measures.

Critics of the affirmative action system note that it has enriched a small cadre of political insiders through shareholding arrangements, particularly in its early years. Economist Duma Gqubule’s analysis revealed that Black ownership among the top 50 firms on the Johannesburg stock exchange is less than 1%, significantly below the official average of around 30%. This discrepancy arises from legal loopholes allowing firms to count Black shareholders who no longer own their stakes or to create ownership structures that distort real Black ownership, a tactic described as "Blackwashing."

Matona attributed the problem to insufficient oversight of the agencies providing Black empowerment scorecards, asserting the need for regulation. His push to shift the focus from ownership to skills development has also been criticized for loopholes, as companies can pay for training Black individuals without guaranteeing employment. Some have even resorted to targeting disabled trainees for added points, perpetuating a cycle of training without job creation.

“They keep promising that they will hire us, but they never do,” lamented Nonhle Mnguni, a 22-year-old from Soweto with courses in various fields but no job offers.

Giles Von Broembsen, CEO of Pretor Group, recognized the challenge, stating that while his company trains a workforce that is predominantly Black, he can only earn points for placing them in external training programs.

While some analysts support Matona’s aims for stricter compliance, others advocate for the repeal of the law, arguing that it imposes unnecessary burdens on businesses and hinders foreign investment.

“I believe the entire system should be abolished,” remarked political analyst Moeletsi Mbeki, suggesting that support should focus on fostering entrepreneurship regardless of race.