Ineffective ESD is a consequence of misaligned government empowerment policies

By Marcus Ambe & Sibongile Shongwe

Various scholars have offered reasons as to why small businesses, even enterprise and supplier development (ESD) beneficiaries, fail: a lack of finance, access to opportunities, skills, etc. However, the South African government has various programmes that address these issues, including incubator programmes. Why is it then that ESD is not effective within public institutions when transformation policies are legislated?

To begin to answer this question, we must unpack a misalignment between two Acts, the Broad-based Black Economic Empowerment Act (B-BBEEA) and the Preferential Procurement Policy Framework Act (PPPFA), and the effect this misalignment has on the implementation of ESD.

How is ESD implemented?
ESD is implemented in organisations by the supply chain management (SCM) function, through the procurement of works, goods and services. Public SCM is governed by National Treasury (NT) and thus SCM policies and strategies (see What is ESD?) must align with NT regulations. NT regulates SCM through the PPPFA.

This brings about the contentious issue between the two Acts (the B-BBEEA and PPPFA), that must be complied with, with one taking precedence over the other. It is a fact that is not publicly acknowledged by NT, who is the custodian of the PPPFA, and the Department of Trade and Industry (dti), responsible for the B-BBEEA.

In 2011, Cabinet directed NT to align the PPPFA to the principles of the B-BBEEA, owing to the following ambiguities:
- Inconsistency in the application of the PPPFA
- The PPPFA and B-BBEEA are not aligned
- Broad definition of black people that is leading to fronting (PPPFA Regulations, 2011)

This misalignment has had a negative impact on transformation progress with there being no meaningful transformation of black businesses (as envisaged). Black businesses continue to fail: the dti reported that the majority of small-, medium- and micro-sized enterprises (SMMEs) rarely survive beyond their nascent phases, operating for less than an average of 3.5 years. In 2013, the Minister of the dti, Rob Davies, confirmed that five out of seven new small businesses fail within the first year.

There have been subsequent revisions of B-BBEE, and recently the PPPFA, in a quest to address the empowerment misalignment.

The argument is that the inability to implement transformation initiatives is owing to the PPPFA, the reasons being that the PPPFA emphasises price over empowerment and has created a culture of compliance rather than of sustainable transformation. What this means is the PPPFA does not afford empowerment the importance it is deemed to have. This challenge has seen a call by various organisations, including the B-BBEE Presidential Council, to trump the PPPFA.

The misalignment has also resulted in litigation by companies who view empowerment as discriminatory. In most cases, litigation is instituted by big conglomerates who are of the view that they are excluded from government contracts. In almost all cases, the courts have ruled in favour of the complainant. Therefore, the question remains, has this misalignment been addressed?

The public official's dilemma
How do SCM officials balance the compliance aspect of B-BBEE with the PPPFA as well as with shareholder expectations? Each entity devises its own strategies and programmes, but there is no consistency. Some entities have ESD programmes, while some have none. Also, in some state-owned companies (SOCs), these strategies are not aligned with corporate strategies. Furthermore, research has revealed that little or no post-ESD support is being provided to beneficiaries.

The different policies and programmes found in the various SOCs demonstrate the magnitude of the ESD implementation problem.

Hindrances to ESD
The depicted diagram illustrates identified challenges experienced by small businesses within SOCs. The most critical is that SOCs are unable to provide access to market, despite transformation policies. This is the area in which the PPPFA has created a challenge, as supplier development cannot happen when ESD beneficiaries are made to compete with established conglomerate businesses.



The two empowerment policies should be reviewed. The PPPFA should enable the implementation of transformation rather than be a hindrance. NT and the dti must align the two economic transformation policies. This alignment must enable access to market for ESD in order to create development and sustainability of black businesses. The dti must develop one strategy and policy on ESD that is applied across SOCs as well as identify sectors that will be set aside for the development of small businesses. Synergies must be optimised between SOCs, and collaboration and consolidation must be encouraged to improve and enable sustainable transformation. Furthermore, monitoring and development will play an important role. The saying that you can't manage what you can't measure will be phenomenal in the achievement of transformation goals.

What is ESD?
The South African government views ESD as a vehicle to combat unemployment and poverty, which is one of government's priorities. For Q1 of 2018, the unemployment rate was 26.7% (Statistics South Africa).

Furthermore, the aim of ESD is to create opportunities that enable access to the economy for black people or businesses. It is estimated that South Africa has 5.9 million SMMEs generating 40% of its gross domestic product and 60% of employment in the country (Small Enterprise Finance Agency).

It is thus envisaged that ESD will foster the growth of black entrepreneurship.

In terms of the B-BBEE principles, ESD is a combination of preferential procurement, supplier development and enterprise development, intended to assist and accelerate the growth and sustainability of black enterprises.

B-BBEE is an act of Parliament that aims to redress past inequalities, advance economic participation by black people and thus transform the South African economy (dti). ESD is an element of B-BBEE that is executed within the SCM function. Therefore, when developing strategies, plans and programmes, SCM must incorporate ESD to ensure that the latter is implemented.