11 May 2020
Should principles related to Broad-Based Black Economic Empowerment (BBBEE) apply to relief measures for businesses affected by Covid-19? Last week, in a judgment by Judge Jody Kollapen, the Pretoria High Court said yes.
Due to the severe impact of the Covid-19 pandemic on businesses, the ministers for tourism and small business have established several initiatives to assist ailing enterprises, especially in the tourism industry.
One of these initiatives is the Tourism Fund, which will provide relief to Small, Micro and Medium-sized Enterprises (SMMEs). A maximum grant of R50,000 will be provided to each entity. Grants will be guided by the Tourism BBBEE Code of Good Practice and the fund administered in line with the objectives of economic transformation and inclusive tourism development.
In terms of the scoring criteria for the Tourism Fund, a business can get a maximum score of 100 points, and there are three main categories which will be assessed: The first category relates to formal and regulatory compliance matters such as company registration, UIF contributions, and so forth. A maximum of 25 points will be allocated for this.
The second category relates to “functionality” – this includes business profile, proof of financial statements, the effect of Covid-19 on the business and so forth. A total of 55 points is allocated for this.
The third category relates to BBBEE Status. A maximum of 20 points will be allocated to this. It provides for four levels, ranging from 20 points for level one and 12 points for Level 4. A wholly black owned business will get 20 points. A wholly white owned business will get a minimum of 12 points but could reach Level 2 status depending on other initiatives it has aimed at business transformation. In other words, there is a maximum of eight points that a white-owned company can lose in comparison to a black-owned one, but this could be as few as two points.
Both Afriforum and Solidarity challenged the relief measures because they use race as a criterion for Covid-19 relief. These separate legal challenges were consolidated and heard as one case.
Firstly, the court had to decide whether the decision to establish the Tourism Fund constituted administrative action or executive policy-making. This distinction matters because of the type of judicial review which is applicable. Administrative action must be lawful, reasonable and procedurally fair. Any other type of government decision is subject to “legality review.” This means there must be a rational relationship between the decision and the objective it seeks to achieve.
The court decided that the minister’s decision was not administrative action, but rather executive policy making. This is because the decision was taken as part of broader government policy on how to deal with the impact on Covid-19 on businesses and broader empowerment objectives.
Also, the decision involved a determination of how to make the best use of scarce resources which involved compromises in the government budget.
The court foundd however that decisions made in respect of granting relief to individual businesses may constitute administrative action.
Secondly, the court had to decide whether the minister was empowered by the Disaster Act to consider race as a criterion for Covid-19 relief measures.
Afriforum and Solidarity argued that the minister was not empowered by the Disaster Act to consider empowerment and therefore race-based metrics as a criterion for providing relief to businesses. The minister could only take measures to deal with the destructive and other effects of the disaster, they said.
The court disagreed. Firstly because this approach fails to interpret the Disaster Act in its context. While the Act does not expressly provide for transformation criteria, the relief measures introduced by the minister will operate in the tourism industry whose BBEEE codes recognise the need to advance the empowerment of black people and make the sector more accessible to all South Africans. So, while the Act says nothing about empowerment, there can be little doubt that the obligation to ensure transformation is expressly recognised by the Tourism sector.
Secondly, since the minister was empowered to attend to the destructive and other effects of the disaster, then this clearly included empowerment issues as well. If the disaster has the effect of closing black businesses if they do not receive financial assistance, then it will obviously set back transformation in the sector. Also, empowerment is linked to the Constitution’s goal of achieving substantive equality and addressing the injustices of the past.
In addition to the Disaster Act, the Minister relied on section 10 of the BBBEE Act, which requires all organs of state to apply the relevant code of good practice to determine the criteria for awarding grants in support of BBBEE.
Solidarity and Afriforum contended that the tourism fund cannot be regarded as an empowerment fund because funding in a time of crisis does not meet any of the objectives of the BBBEE Act.
Judge Kollapen disagreed. He said this argument was based on a flawed premise: namely that the fund must either be aimed at providing relief directed towards Covid-19 or be an empowerment initiative. But he pointed out that while the Covid-19 crisis had united South Africans it had also “highlighted the fault lines in our society where it is evident that more often than not the poor and disadvantaged face the major brunt of the crisis”. Government’s response to the crisis must therefore recognise the “uneven playing field” and take into account historical disadvantage. “A race neutral response can have the effect of deepening the fault lines in our society,” he wrote.
While the other small business relief funds do not use race as a criteria, they do prioritise “women, youth and people with disabilities”. The court said that it is ironic that Afriforum and Solidarity do not challenge any of these other schemes. If youth, disability and gender can be used as criteria, then why not race, the court asked.
The judge held that the scoring criteria are not rigid and inflexible nor do they create an absolute barrier for white-owned businesses. BBBEE status only accounts for 20 points. The other 80 points are based on criteria which are not related to race. The code gave black-owned businesses a head start which other candidates can overcome.
The court concluded that there was a rational connection between the objectives of the fund’s eligibility criteria and the objectives of the government in addressing the impact of Covid-19 on businesses. It said the treatment of race had been done in a narrowly tailored and constitutionally compliant fashion.
Judge Kollapen dismissed the application and made no costs order.
Afriforum and Solidarity have indicated that they will appeal this decision to the Constitutional Court.