BEE and the constitution

This is not a subject that I am expert on at all, the person to speak to about this would have to be Pierre de Vos. However my job is to sow the necessary seeds for your submission to the DTI. On that subject I think that the deadline is before the 5^th of December, 2012 but it might be safer to have comments submitted by the 26^th of November because it seems that Rob signed the gazette on the 27^th of September.

I believe that there is generally a relatively strong Constitutional Court case against almost all the currently gazetted codes. It won't happen because we've been getting on with them. However the new draft codes pose certain violations of the constitution that we should be aware of.

The DTI bases the new codes on section 9(2) of the constitution as read with section 9(5)

To promote the achievement of equality, legislative and other measures designed to protect or advance persons, or categories of persons, disadvantaged by unfair discrimination may be taken.

Discrimination on one or more of the grounds listed in subsection (3 – see below) is unfair unless it is established that the discrimination is fair.

This is fair enough, there are a number of statutes that derive their legitimacy on this section. The Employment Equity Act is but one. However section 9(3) states

The state may not unfairly discriminate directly or indirectly against anyone on one or more grounds

Suddenly the new codes start taking on a sinister and anti-constitutional vibe when section 9(3) is taken into account. Even with section 9(5) the discrimination proposed cannot be seen to be as fair. Also consider the bill of rights, chapter two of the constitution. The two rights that could be relevant are

18. Everyone has the right to freedom of association.

22. Every citizen has the right to choose their trade, occupation or profession freely. The practice of a trade, occupation or profession may be regulated by law.

BEE encroaches on these two rights. But there is a limitation of rights in section 36(1) which justifies the encroachment.

36. (1) The rights in the Bill of Rights may be limited only in terms of law of general application to the extent that the limitation is reasonable and justifiable

The new codes on the other hand are a blatant and unreasonable violation (as opposed to an encroachment) of a variety of rights. Consider the EAP in both employment equity and skills development and then think about section 10 - Human dignity

Everyone has inherent dignity and the right to have their dignity respected and protected.

It was one thing to be Indian, Coloured and African and regarded as black, it's a whole different level of indignity to have yourself measured on a degree of blackness basis in allocating skills development spend. By plumbing these depths you are perpetuating the notion of race and the degrees of race which is contrary to the founding principles of the constitution

The Republic of South Africa is one, sovereign, democratic state founded on the following values:

(a) Human dignity, the achievement of equality and the advancement of human rights and freedoms.

(b) Non-racialism and non-sexism.

Not to mention indignity.

Now onto section 18 – right to freedom and association. To do this we need to look at paragraph 3 of statement 000 of the new codes

3.4     Discounting of the scorecard due to non-compliance with the priority elements

3.4.1     For Measured Entities using the generic scorecard

3.4.1.1     Non-compliance with the threshold requirements for any of the following elements will result in the discounting of a Measured Entity's BEE status level:

3.4.1.1.1     Ownership;

3.4.1.1.2     Skills Development; and

3.4.1.1.3     Enterprise and Supplier Development.

3.4.1.2     The Measured Entity's B-BBEE status level will be discounted by two levels.

3.4.2     For Measured Entities using the Qualifying Small Entities scorecard

3.4.2.1     Non-compliance with the threshold requirements for the Ownership element and any of the following elements will result in the discounting of a Measured Entity's B-BBEE status level:

3.4.2.1.1     Skills Development; or

3.4.2.1.2     Enterprise and Supplier development.

3.4.2.2     The Measured Entity's B-BBEE status will be discounted by one level.

Ownership is the linchpin here, it is compulsory for QSEs and is extremely important for generics, without it you're going to drop one or two levels. This could never be regarded as a reasonable limitation of section 18. In Rob's mind (and his crew of useless advisors) it's perfectly justifiable. But again, can it be viewed as being reasonable? I'd say not and section 18 teeters.

What about promoting black owned EMEs to level 1 or two contributors.

The table below shows the PPPFA points' allocation system. I have highlighted the points' advantage in a PPPFA bid for a level one and two bidder in comparison to a level four bidder (all would be EMEs). It's 5 point advantage under 90/10 and 8 point advantage under the 80/20. For clarity's sake a level two EME has a 4 and 6 point advantage respectively.

Contributor Level (current codes)	Draft codes	90/10	80/20
Level 1 Contributor (≥100)	≥100	10	20
Level 2 Contributor (≥85 - <99)	≥95 but <100	9	18
Level 3 Contributor (≥75 - <85)	≥90 but <95	8	16
Level 4 Contributor (≥65 - <75)	≥80 but <90	5	12
Level 5 Contributor (≥55 - <65)	≥75 but <80	4	8
Level 6 Contributor (≥45 - <55)	≥70 but <75	3	6
Level 7 Contributor (≥40 - <45)	≥55 but <70	2	4
Level 8 Contributor (≥30- <40)	≥40 but <55	1	2
Non-Compliant Contributor	<40	0	0

The PPPFA comes from section 217 of the constitution, specifically section 217 (3)

National legislation must prescribe a framework within which the (the allocation of preference points) may be implemented.

But – section 217(1) says this

217. (1) When an organ of state in the national, provincial or local sphere of government, or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective.

It identifies five principles of procurement that every company should implement; namely fair, equitable, transparent, competitive and cost-effective. Promoting a business to such a high level on the basis of race is certainly not fair, I doubt it's equitable and the competitiveness and cost-effectiveness of the process could be debated for many years to come. I can't see Treasury allowing this to happen. Do you think Rob even knows that we have a Treasury?

And finally socio-economic development

This debacle has been covered adequately in a previous post, this is postscript to that post. I can't see that there is a constitutional issue about the new SED code – it doesn't discriminate against white people or those who don't fit into the prescribed definition (there is nothing stopping anyone from donating to any cause, you just won't get points for the wrong donation). It is a moral and ethical issue and morality and ethics sell more papers than constitutionality. The new codes in their entirety pose a major threat to the NPO sector who might derive a some or all of their support under ED and SED. The current codes allow a company to get to a level 8 by spending 4% of NPAT on ED and SED and making up the remaining points under the rest of the elements – normally this is done under procurement. Rob's draft makes this impossible for a few reasons.

1. The new entry level is 40 points. You can buy a maximum of 20 if you have a supplier development programme and perform all the other tricks that the supplier development code requires. You are now 20 points short of the 40. However if you don't comply with ownership or the other two priority elements you'll drop two levels. Let's say you manage to scrape another 20 points from somewhere (and that's not easy), you get to a level 8. But because you haven't reached the 40% subminimum on the three elements you drop down two levels – which is a level 10.
2. I haven't done the calculations for ownership because there are too many permutations but if you meet the subminimum under skills and procurement you'll get 22 points. Throw in maybe 4 for employment equity and the SED points you still come short at 31 points and miss the ownership targets, you then get demoted by two levels – a level 11.
3. In both of the examples there is no point in buying points (and thereby benefiting a wide variety of causes) because they're not going to get you onto the scorecard. I submit that more than 70% of the companies that would consider complying with BEE fall into the above two categories.

I had a long chat to a pastor yesterday who has been tasked with submitting something to the DTI on codes and he is very worried about the codes for the reasons above.

Whilst I'm calculating points and sub-minimums, look at this scenario below

Say you managed to reach the subminimum under ownership with 10 - 25% shareholding.  In the case of the 25% the shares of would need to be argely paid for, in the case od 10% they'd need to be paid up completely (allow me a little poetic licence).  Under those circumstances you'd get between 12 and 21 points. Add on the sub minimums for the other two, which is 22 points and the remaining EE and SED points postulated above (sorry this getting really complicated) you get between 41 and 52 points, you'd still be a level 8. Bloody ludicrous.