The Misdiagnosis Of Corruption In BEE

Corruption in BEE is too often treated as a bug. It is more accurately a predictable outcome of a system that rewards actors for exploiting its incentives.

Despite evidence to the contrary, the notion that “corruption” is a bug of BEE rather than a predictable outcome of its systemic design continues to persist among staunch proponents of it.

“The policy itself is not the problem,” they argue. “It has just been leveraged by corrupt actors for their own selfish ends.”

Incentives and human behaviour

While this argument sounds convincing, it misses an important point about the relationship between human nature and policy or systemic incentives. It is the legendary Thomas Sowell in his classic, A Conflict of Visions, who reminds us that humans are rational actors whose behaviour is shaped by incentives.

Put simply, humans are self-interested agents who naturally respond to policies and systemic incentives in ways that allow them to maximise benefits for themselves. Even when these incentives encourage perverse practices and behaviours that harm others and appear “corrupt”, these practices and behaviours remain rational to them in their pursuit of self-interest.

Crucially, even policies with supposedly good intentions can produce perverse outcomes if their incentives encourage perverse behaviours that allow actors to maximise their benefits.

Welfare is not the best example in the South African context because the picture is more nuanced, but one could argue that the expansion of the welfare state over the past three decades has, at the margin, contributed to a degree of dependency and a decline in entrepreneurial initiative. This stands in contrast to the entrepreneurial drive among some immigrants, who almost always operate under very different incentives.

Some may regard this trend as a reflection of inherent traits, but this misses the point. For those who have come to rely on the state as a consistent source of support, adjusting behaviour around that reality is not irrational. It is a rational response to the incentives they face.

Applying the argument to BEE

The case is not very different when it comes to BEE, particularly around the principle of preferential procurement and the issue of fronting, which proponents of the policy often criticise.

It is no secret that BEE premiums exist, and that the South African state has no issue with paying additional premiums to companies with high BEE scores to encourage transformation. This, however, has contributed to inflated tender contracts, where some companies deliberately overcharge the state for procurement and pocket money at the expense of taxpayers.

This may appear selfish or “corrupt” to outsiders who are concerned about the misuse of their tax money, but it is rational to companies that are simply exploiting an existing incentive to maximise their gain from a policy with high compliance costs. While some companies do not push the premium and take it as is, the key point here is that the system contains a perverse incentive that encourages this perverse behaviour.

Some legacy companies, which have very high BEE scores, are often criticised by proponents of fronting and not being genuinely committed to transformation. The criticism goes that black shareholders and managers exist in name only without any real power or control.

This is indeed a real issue (depending on who you ask), but focusing on a few “bad” actors misses the bigger picture about a system that rewards those who are most compliant with it. The state privileges companies with high BEE scores in tendering processes to promote transformation.

This creates a predictable outcome where some actors, even if their transformation is largely symbolic, game the system and deliberately ramp up their BEE scores by ceding equity stakes to political elites, for example, to gain a competitive advantage in state tendering processes. Of course, some actors do not do this, but the key point again is that the system has an incentive structure that makes such behaviour a rational strategy for those seeking to maximise their benefits.

A problem of design

If one accepts the premise that incentive structures built into systems can drive human behaviour – perverse behaviour at that – then one can reasonably conclude that such systems must either be reformed to prioritise cost efficiency and other market considerations or scrapped altogether.

Both possibilities do not deny history or the imperative of justice but underscore the importance of not misdiagnosing problems and pursuing justice in ways that encourage perverse behaviour and waste resources needlessly.

As the debate on BEE continues, it is important to recognise that the problem lies not in a handful of bad apples – even as corruption is real and harmful – but in a system that makes such behaviour a rational response to the incentives it creates.

Ayanda Sakhile Zulu holds a BSocSci in Political Studies from the University of Pretoria and is a Policy Officer at the Free Market Foundation.