Consider communism for a moment. On the face of it, it provides a sharp analytical framework for a critique of capitalism with its attendant dynamics that favour owners of capital at the expense of working people. It also provides a framework for the replacement of capitalist systems with ones that make all of us equal citizens sharing in our wealth. But the experience of most of the 20^th century shows us that communist systems don’t work out and that they shatter lives, communities and cause enormous misery.

Hardcore socialists, despite all evidence that communist systems never achieve actual communism, continue to claim that previous attempts did not implement it properly but the rest of the world – including most of those critical of the type of capitalism we see today – have moved on and motivate instead for other options, say, different versions of social democracy or the “developmental state” and so on.

Almost every day, South Africans wake up to fresh reports of massive unbridled corruption from the media, the SIU, the (previous) public protector and now the various commissions of inquiry. Invariably, what is common to each of them are some rentier BEE companies with personal relationships with corrupt state officials, notably including the former president of the Republic. BEE structures involved in some or other scam are not restricted to activity with the state. The Steinhoff heist, the listed REIT sector and others replete with their own BEE scams.

Advocates of BEE make the point that opponents of the policy are simply opposed to black advancement and want to retain their apartheid privileges and there might even be some truth in that claim. The same advocates would say that what we see is an aberration and with new rules and tinkering, it could all work. It just hasn’t been implemented properly. This is incorrect.

Broad-Based Black Economic Empowerment cannot result in broad-based black economic empowerment because as a policy, it is fundamentally flawed.

The various BEE codes (and the industry-specific codes) which allow a firm to score points disclose the drafter’s own understanding of how they think firms operate. There are distinct codes covering ownership, management, skills development, supplier/enterprise development. A voluntary code covering corporate social responsibility gives up to another 5%. The code measuring ownership has a particular primacy compared to the others. Measured by the number of words, the ownership element has more of them than the rest of the codes combined.

Obviously, the drafter thought that ownership (of the means of production) is what capitalism is all about. This is underlined by the fact that if a firm is majority (50%+1) black-owned, it is automatically rated at least a level 2 contributor and that company doesn’t have to bother complying with any of the other elements in the remainder of the codes. Those obligations only apply to firms with less than 50% black ownership.

On the face of it, ownership gives the shareholder a voice (a shareholder vote) and a share of the profits (paid out via dividends). The actual reality is different.

For large companies, complying with minimum ownership rules (around 25%), legal and financial engineering gets deployed to solve this problem – there are BEE specialists that are more than happy to take their fees doing this. BEE structures are set up and shares are sold to them and they are paid for by a loan, either by the company itself or some third-party funder, typically a bank. These loans have to be serviced and eventually repaid in full.

There are instances where this whole thing works, say the Naspers BEE structures, but for it to work, the company concerned must be profitable (so the BEE shareholder can service the loan via dividends paid on the BEE shares) and increase in value (so once the loan is repaid, there is still some shareholding left in black hands). But for the most part, it doesn’t work this way. It seldom works to borrow money to buy shares nobody in their personal capacity should borrow money to buy shares. For one, the interest charge is not tax deductible, yet dividends are only paid once a slew of taxes is paid first.

The result of the above is endless rounds of the refinancing of these schemes. The banks are happy though – they benefit the most. They get given lending opportunities they would otherwise not have got. Opportunities for mischief abound. One example is where the company generates better returns for itself on the loan it provides to its BEE shareholder than it generates from its core business.

Moreover, shares acquired through borrowing don’t confer the rights of ownership anyway. Lock-up clauses mean shareholders are stuck with the BEE shares and the lender imposes further restrictions on how these shares can be voted. It negates the whole point of being a capitalist – deploying capital on risk where it is likely to produce the best returns. BEE shareholders are nothing more than the wards of the companies they hold their shares in.

In medium and small businesses, the position is often worse. The statistics maintained by SARS show there are approximately 770,000 companies registered for companies’ tax. Of these, a mere 700 large companies with profits of over R100-million per annum (9% of the total number of companies) paid 62% of all company tax collected. VAT payments provide another insight. In 2016, 432,072 active VAT vendors in 2016 paid R320 billion in VAT and around 75% of these receipts came from what we would call the service economy (i.e. not manufacturing, mining, construction or farming).

SARS for its part ensures that much of the joy of share ownership is removed. To be paid a dividend out of profits, a company first has to pay company tax of 28% and then a further 20% of what remains on behalf of the shareholder – an effective tax rate of 42.4%. SARS’ tax tables show that an annual taxable salary of R1,5 million is taxed at the level of 35.5% and at 45% thereafter which means that unless profits paid out to shareholder in the form of dividends are greater than around R5 million per annum, it is best to take profits out as a salary and pay income tax instead. The vast number of mostly small and medium companies registered are not generating profits of R5 million.

A key feature of the service economy is mostly about what Ricardo Hausmann calls “Das Know-How Capital” – a combination of skills, networks and practices. Most commerce is not about what a board of directors or shareholders decide. Companies are mostly formed not so much as to build wealth for its shareholders (although that would be a bonus) but simply to get things done. Commerce is all about the application of Hausmann’s Know-How irrespective of formal ownership whether BEE owned or otherwise.

Moving away from BEE scorecards, let’s look at South Africa’s scorecard. Reliable figures on inequality are hard to get but credible figures show that on average, whites earn five times more than black people. Averages are mostly a bad measure. Average annual income by race and inequality within the racial categories (measured by the income Gini coefficient) looks somewhat as follows:

Whites are the biggest earners but within that demographic, there is the most equality. Blacks are the poorest but also have the highest levels of intra-racial inequality.

The composition of the top 10% of all income earners is quite different. This cohort is 49% white, Indians and coloureds making up 21% and Africans making up blacks 30% of the top 10% income earners. Is it not worth asking what, besides race, links black people in the top 10% of income earners with the vast numbers of poor black people below this cohort?

Writing disapprovingly of what he saw to be the dangers of identity politics in the US, the African American academic and activist Adolph Reed Jr wrote as follows: “A society in which 1% of the population controlled 90% of the resources could be just, provided that roughly 12% of the 1% were black, 12% were Latino, 50% were women, and whatever the appropriate proportions were LGBT people. It would be tough to imagine a normative ideal that expresses more unambiguously the social position of people who consider themselves candidates for inclusion in, or at least significant staff positions in service to, the ruling class.”

It is easy to recognise some of what BEE has become in what Reed writes. The real beneficiaries of BEE are the 1%, for the rest it is out of the question or a chimera – an apparent benefit only.

There are other problems with BEE as well. Outsiders or foreign investors simply see BEE as a tax on top of the taxes they already would pay – but often allocated to black people that are connected. Given that a decision to invest in South Africa is based on a risk-weighted required return after taxes, increased levels of taxation including BEE set-asides simply raise the required return and as such, numerous investments that could have been made don’t get made.

Almost all the taxes are collected by the central fiscus and then spent in terms of the annual budget allocations decided by the elected government. Most people accept that this is a legitimate process. BEE might be seen as some sort of privatisation of the redistributive function of the state. Perhaps having the redistributive function and the selection of who should benefit ought to remain under democratic as opposed to corporate control.

Of course, if BEE was working well, any objection to it could easily be dismissed no matter how principled but it isn’t. This is a real problem for everyone. Because, BEE as it currently exists is the centrepiece of increasing black participation in the economy, means that its very existence means that instead of seeking out better ideas with far better prospects (including others based on race), we double down on the existing flawed system hoping that new regulation, better implementation and enforcement will turn things around. But it won’t because, like communism, it is doomed to fail. DM