Black economic empowerment in construction

• Sep 10, 2012
• economic transformation, construction, broad based black economic empowerment, black economic empowerment, bee, bbbee
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Broad-Based Black Economic Empowerment (BBBEE) is an integrated, coherent socio-economic process that directly contributes to the economic transformation of South Africa and brings about significant increases in the number of black people who manage, own and control the country’s economy, as well as significant decreases in income inequalities.

In my time at the Gauteng Department of Public Transport, Roads and Works¹, the department had actively promoted Black Economic Empowerment through procurement policies and empowerment training programmes within the department. Excellent work was done in programmes such as the Emerging Contractor Development Programme, Women in Construction, and others, in particular, the Impophoma Infrastructure Support Entity. These programmes were rolled out under a renewed strategic approach, strengthening the following areas:

• Focusing on the transformation of the construction industry in line with the CIDB Act
• Setting targets in work allocation for the Emerging Contractor Development Programme that  were visible in procurement, in line with the targets set by provincial government, especially in relation to women, youth and persons with disabilities
• Procurement reform further gave preferential and favourable terms to affirmable business enterprises, with the contract participation goal for black empowerment in the medium to long term set at 70% in the repair and maintenance programmes
• Monitoring of BBBEE on annual basis to ensure 70% of procurement from BBBEE companies by 2009
• The achievements of BBBEE annual targets were to be included in the performance contracts of all senior managers who were expected to plan, design and implement this measure indicator in tandem with the projects, in a sustainable and meaningful approach
• The Construction Industry Development Board Programme, which aimed to focus on transformation in that industry, was to be comprehensively rolled out in all avenues of construction across the province. Further, the CIDB Processes were to be set up along-side a new roster for professional service providers and specific targets set for each year, along with a monitoring and evaluation process
• An Incubator Strategy for emerging contractors, in particular women and youth enterprise aligned to the BBBEE Act
• Through growing and supporting small and medium enterprise, the aim was not only to promote economic growth, but also create jobs through the use of the EPWP principles and transformation practices
• BEE and BBBEE were being promoted in terms of the Broad Based Black Economic Empowerment Act (Act No. 53 of 2003). The Construction Sector Black Economic Empowerment Charter had been put forward to facilitate transformation in the construction industry, and target quotas for participation had been set

In an economy where the rate of saving and investment is still too low for our developmental needs and where our ability to attract foreign saving is dependent on our growth and overall economic environment, it is clear that any financing strategy should not jeopardise domestic or foreign sources of saving or investment.

The following had to be taken into account in the financing of BEE:

• Maintaining macroeconomic balance– this means that BEE cannot be financed by taking on excessive debt or large-scale deficit financing, or by assuming excessive sovereign contingent liability
• Increasing the growth rate– we needed to ensure that the rate of investment was rising.  This meant that we had to remain attractive to domestic and international investors. Thus, it was also essential for those who are sellers of assets, to reinvest in the economy. This second factor will require an economy capable of higher rates of growth. 
• Intensifying economic transformation– this means ensuring that we increase the levels of employment and participation in the economy, and those economic benefits are shared more equitably across the geographic dimension and by all social groups. This means more access to all forms of social service and infrastructure for all citizens. In this area, BEE is particularly important
• Diversifying the size and type of enterprise– the financing strategy has to take particular care to ensure that all forms of enterprise have access to finance. This is a particularly acute consideration for SMMEs, and also for new forms of enterprise such as co-operatives
• Commercial risk must remain with the private sector– the provincial government facilitated access to capital and collateral, which are currently both structural problems for the emerging contractor and professional service provider; it could not, however, assume commercial risk.  This must remain with the enterprises, the entrepreneurs and investors. This is crucial from the point of view of the macroeconomic stability of the economy but more importantly, it will improve the quality of enterprise development and, therefore, the competitiveness of the economy

Government made a commitment to set aside finance to support the BBBEE process. A new mandate for the NEF and a review of the roles of other development finance and support institutions to ensure that these resources are effectively and efficiently employed, will be developed by the DTI and National Treasury. Financing mechanisms will be varied and will include guarantees, grants incentive schemes, and loan and equity financing. A market-making facility is being considered in order to prevent undesirable ring-fencing and thus an illiquid situation for BEE assets:

• Grants and incentives– The DTI currently provides a range of grants and other incentives to enterprises. The department will seek to coordinate such financing with other programmes in order to maximise its BEE impact. New schemes and amendments to existing schemes are also being considered in support of BEE, including supplier development, micro-enterprise development, support for skills development, and the acquisition and development of new technology
• State facilitated lending– the focus here again is on small and medium-sized enterprises.  Government has created lending facilities and has also provided for underwriting and risk-sharing. Khula is the primary facility in this regard. However, a number of problems have arisen over the past five years. A distinction is now being made between micro-enterprises and small and medium enterprises, and a new initiative for an apex fund for microlending will be established. In addition, work is being done to add a retail component to Khula
• Project financing– the public sector can play a very important role in ensuring BEE in new project development. The key institution here is the IDC. The IDC also deals extensively with SME projects and has a specific BEE policy approach. However, in public sector-led projects, such as those in Transnet and Eskom or new entities such as iGas and Petrosa, significant BEE can also be achieved. The new portfolio of PPPs is also a place for effecting BEE
• Venture capital– government will facilitate specific venture capital projects in particular sectors
• Targeted investment– government will provide inducements to finance empowerment ventures. Programmes include investment in the various Strategic Development Initiatives and the rural and urban nodes

The abovementioned parameters for financing of BEE programmes and related support structures can be applied to the construction industry. Not only is access to finance important for the emergent economy, but also technical and administrative capacitation.