South Africa’s new racial quotas could deter crucial foreign direct investment – Katzenellenbogen

President Cyril Ramaphosa’s signing of the Employment Equity Amendment Act, which toughens racial workforce quotas, is at odds with his efforts to encourage investment into South Africa, says the Daily Maverick. According to the publication, the aim of the annual investment conference, to draw foreign interest, is undermined by government-decreed racial quotas, power cuts, crime, corruption and deteriorating infrastructure. The new act, which doubles down on enforcing racial hiring quotas, may encourage companies to avoid expanding their labour force, given the large fines for a failure to comply. Furthermore, it may mean that the most-qualified individuals leave the country to establish their own companies or emigrate to find success elsewhere. Read more below.

Racial quotas in hiring: another own goal

By Jonathan Katzenellenbogen

Last week President Cyril Ramaphosa declared his fifth annual SA investment conference a great success. And last week the President also signed into law the Employment Equity Amendment Act, which seeks to double down on enforcing racial workforce quotas. The aims of encouraging investment and telling companies who they should hire based on race are diametrically opposed.

In total, the President says that more than R1.5 trillion has been raised through the investment conferences held over the past few years. He says that is more than 26 percent over the amount for which they had initially aimed. Yet South Africa’s rate of investment as a share of GDP, at about 15 percent, remains well below the world average of 24 percent.

If the world saw us as an emerging market with great prospects, investment would surge. To get there we have a lot to change. The latest amendment to the Employment Equity Act is a core part of the ANC’s racial nationalist agenda, and something that it shows no intention of abandoning.

In attracting large-scale investment we are faced with a series of own goals. Government-decreed racial quotas, power cuts, high rates of crime and corruption as well as deteriorating infrastructure do not make South Africa an attractive investment destination. The tightening of laws on racial quotas add to the deterrents. We should be laying out a golden carpet, but are instead laying out barbed wire and trenches in the path of investors.

Quotas on racial hiring stand out as an impediment, as they tell companies that you must hire based on race and merit can be secondary.

Essentially, the Act signed last week toughens up the existing requirements for racially-based hiring under the Employment Equity Act of 1998. The amendments mean a large degree of ministerial discretion in the setting of racial quotas, more reporting requirements for companies, and tougher penalties for breaching the law. It is pretty draconian stuff and effectively means that the Department of Employment and Labour will rule Human Resource Departments throughout the country.

Read more: SA’s new Employment Equity Bill: unconstitutional and counterproductive – Ivo Vegter

Heavily dominated

The amendment to the Act followed a report by the Commission for Employment Equity, a statutory body, which found that top management positions are heavily dominated by white males. The act signed by the President last week is the get-tough response to this finding. Never mind that the position of white males in society is fast eroding, and will continue to do so as women and black people come through universities and rise up corporate hierarchies.

Under the amendment, the Minister of Employment and Labour can impose hiring goals on any economic sector to ensure the equitable representation of appropriately qualified people at all occupational levels. The 1998 Act allowed the company itself to set its ‘transformation’ goals. But the amended Act gives the Minister the power to set targets for different occupational levels and regions, for companies with over 50 employees.

There are heavy fines for a failure to comply. The minimum penalty is two percent of turnover and the maximum is ten percent. All this is a strong incentive for companies to remain below the radar and only expand their labour force as a last resort. That is a perverse incentive in a country with one of the world’s highest unemployment rates.

Companies that employ less than 50 people remain exempt from the Act, but all firms that wish to sell to the government must still receive a compliance certificate that they meet the racial hiring quotas, or will do so reasonably soon.

One bizarre outcome is that companies could face the prospect of endlessly having to shift the racial composition of their workforces to comply with ministerial whims. It could also mean that promotion and remuneration for years of loyalty and experience could go out of the window. That means the most-qualified might set up their own firms or emigrate to countries where they can reach their potential. Institutional memory and experience in firms will be lost.

It has yet to be tested, but it is conceivable that foreign companies that go along with government directives on racial hiring could be charged with discriminatory practices in their home countries. If upheld, the extraterritorial application of domestic anti-discrimination law could be severely damaging to all forms of the government’s attempts at racial engineering. But the ANC would probably still insist on going ahead with what it sees as a core aspect of racial transformation.

Read more: President Ramaphosa signs bill allowing independent candidates to run in elections

High degree of rigidity

All would be a lot easier if matters were simply left to the courts to decide if there had been active racial discrimination, rather than allowing ministerial discretion to influence companies on their hiring. Allowing the Minister to make human resource decisions is bound to add a high degree of rigidity to all workforce decisions. A lot might be unforeseen, but some will be bizarre.

Say a large global company is setting up a plant in another country and requires senior managers from its South African operation to be temporarily transferred to oversee the venture in its new market. What if it sends senior managers who happen to be black to set up the new plant outside the country?

And then what if managers who happen to be white are put in temporary charge of the local operation?

 Overnight, the racial composition of the workforce changes. Labour inspectors pay a surprise visit and impose a fine because the company is not doing what the Minister has ordered.

This is one example of where the bizarre can easily become real. There can be many others when central planning combines with racial engineering, as we have seen through much of our history.

It is not distorted thinking to expect that the net effect of the new legislation will be to turn companies into something similar to government departments and state owned enterprises. On a whim the minister can decree that a company needs to change the racial composition of its workforce and employ more people in a particular region. On the eve of an election, that could be the equivalent of using political patronage.

Read more: NEASA on ‘ill-conceived’ Employment Equity Bill signed into law

Very scared

There are many reasons why businesses should be very scared about the passage of this legislation. It amounts to a vast interference in management decision-making. But Business Unity South Africa, one of the main lobby groups for big business, has come out in support of the new legislation. Most of the big business lobbies maintain their silence and leave the fight to trade union Solidarity, small business lobby Sakeliga, and the Institute of Race Relations.

The big business lobbies run scared of taking up these sorts of racial issues, knowing full well that racial transformation is a key item on the ANC agenda. This is although they must know that the amended Act now represents a substantial threat to their autonomy to make decisions on hiring and firing, and possibly to their bottom lines.

*Jonathan Katzenellenbogen is a Johannesburg-based freelance financial journalist. His articles have appeared on DefenceWeb, Politicsweb, as well as in a number of overseas publications. Jonathan has also worked on Business Day and as a TV and radio reporter and newsreader.

This article was first published by Daily Friend and is republished with permission

The views of the writer are not necessarily the views of the Daily Friend or the IRR

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