Khaya Sithole – “Transformation: We’re doing it wrong”

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A few days ago, in a conversation facilitated by the Konrad Adenauer Foundation, I chatted to the research director at the Human Sciences Research Council – Professor Sharlene Swartz, about the elusive pursuit of social cohesion in South Africa.

The Human Development Index – where SA stands

In seeking to articulate the nature of the social cohesion conundrum in South Africa, Professor Swartz referred to the data on the Human Development Index that is published annually by the United Nations Development Programme. The index seeks to measure and compare various social and economic indicators across different countries.


A good performance in the key indicators – life expectancy, education access and attainment levels, and income levels – implies a high level of development for the measured nation.

Given the state of our education and healthcare systems, and the vast income and wealth inequalities that prevail in South Africa, our ranking – 116th out of 210 countries surveyed in 2018 – should not surprise anyone.

Disturbing disparities

However, it is in the granular details of the South African ranking that a disturbing picture emerges. In applying the index parameters to just the black South Africans, the ranking mirrors the national ranking of 116. When the index variables are applied to white South Africans only, their rating is 16th out of 210.

This reflects that the development levels for white South Africans are not only a world apart from black citizens, but also exist at a level of development that is comparable to first world countries like Belgium, France and the Nordic countries. Given the intersectional nature of the variables that are used to calculate the index, the implication is that South Africa currently delivers social and economic outcomes only to some citizens.

The fractured and fractious starting points of the different races in the South African story is an important contributor to this current state of affairs. The acknowledgment of this reality is as old as our democracy itself. That is precisely why the country has a plethora of an intervention instruments aimed at breaking the concentration of resource and economic power across racial lines.

The instruments of intervention

The most common instruments of intervention are the laws and regulations that are aimed at promoting and fostering transformation.

The fundamental problem is that so many rules and regulations owe their effectiveness not to the design process but rather the implementation process. And when the regulated are a motley crew of market participants with different convictions and commitments to the transformation cause, the gap between design and outcomes may be wide enough to render the regulations completely meaningless.

The issue with employment equity legislation

Take the employment equity legislation, for example. There can be little doubt that the demographics of the civil service and the private sector up to 1994 were problematic.

There is equally little doubt that leaving the labour market to meander organically through the process of transformation would do little to accelerate change. Recommending targets and guidelines therefore serves as practical tool of implementation and evaluation.

The recent reports from the Commission for Employment Equity, however, indicate that the primary intentions of the law – getting the national labour profile to mirror the national demographics in terms of access to employment and leadership positions, has still not been achieved.

In the 2019 report, which cited data from Statistics South Africa, the demographics of South Africa were 78% black African; 10% coloured; 9% white and 2,7% Indian.

But in the workplace environment, the Commission reported that in top management positions, White employees occupied 66,5% of the positions; followed by 15% Africans, 10% Indians and 5% Coloured.

Given the proposition that top management positions are a proxy for earnings capacity and influence, the Commission’s findings reflect that the power dynamics that prevailed before 1994 are still prevalent in the workplace. The difficult question relates to why such a gap still persists so many years after the law was implemented.

The responses on one end could simply say that the regulations themselves are ineffective and ill-suited to their purpose; or the answer could be that the market participants have not bought into the transformation project.

If the answer is that the regulations themselves are easy to ignore, then the design of the laws may need to be revisited.
If there is an issue with the laws being regarded as optional rather than critical to the sustainability of a business, then the tendency to ignore them should not surprise us.

The crux of the problem

At the crux of the problem, seems to be the tension associated with the fact that so many of the market participants are private enterprises that feel that the mere existence of transformation legislation is a form of overreach. It is on the back of this that the Minister of Labour – Thulas Nxesi – has proposed a new way of dealing with institutions that fail to live up to the transformation mission of the country.

In the proposed amendments to the Employment Equity Act, the Minister wants to be able to impose fines of up to 10% of turnover on companies that do not comply with equity targets. Additionally, the Minister proposes banning such businesses from state contracts. This approach gravitates towards a punitive regulatory regime. Whether such a regime would facilitate better outcomes on the transformation question is difficult to tell.

The literature across the world indicates that regulation is most effective when it follows a model of compliance incentives for market participants, balances the costs of compliance, and provides latitude for corrective enforcement for the regulators.

The delicate nature of the transformation question in South Africa is that the understanding of the need to transform individual businesses as a method of facilitating overall social transformation, is something that every business leader should instinctively buy into.

Buy-in

If it turns out that the buy-in doesn’t exist, that speaks more to the difficult and delicate questions regarding the transition into democratic rule that weren’t ventilated thoroughly.

Of the two options tabled by Minister Nxesi, the penalty regime is one that might be easier to administer but has profoundly problematic side effects.

If the penalties themselves are imposed on a business, traditional agency theory would tell you that the cost would either be passed on to the end user or to the shareholders.

Alternatively, creative loopholes around the system could be found. It is not inconceivable for an entity that seeks to avoid penalties to simply employ black staff members as full-time equivalent staff, and simply outsource critical functions to affiliate entities that fall outside the definition of employee, but perform the tasks associated with employment.

This would undermine the entire penalty regime, as such companies would not only escape scrutiny because their annual reports would indeed indicate a dominance of black workers, but would also amplify their empowerment scorecards even when transformation in substance is not in place.

A second variable

That feeds into the second variable of intervention that Nxesi has proposed – denial of access to state contracts. This would of course matter to businesses that are reliant on the state for their sustainability.

But the evidence in South Africa is that businesses that contract with the state, essentially bind themselves into a relationship characterised by bureaucracy and late payments.

As a result, viable businesses have balanced their portfolios to reduce reliance on state contracts. This reality means that his best intentions notwithstanding, Minister Nxesi might just find that the punitive approach to regulation when so many market players no longer take you seriously, does absolutely nothing to deal with the transformation conundrum of South Africa.

  • Khaya Sithole is an accountant, academic and activist who writes and Tweets on finance, economics and politics. The views expressed in this article are his own.
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