Funding vs fronting: Is the 3% BEE levy the answer to empowerment?

Bruce Hunt, MD Transcend Capital

A new private-sector proposal has reignited debate about how South Africa might simplify transformation. The concept is simple: companies pay 3% of gross revenue in exchange for automatic Level 3 B-BBEE status — a neat alternative to the complex scorecard system.

On paper, it sounds practical. The model offers predictability, reduces red tape and could channel significant funding into the Department of Trade, Industry and Competition’s (DTIC) proposed Transformation Fund. For small and mid-sized businesses, particularly those with turnover under R200m, it could turn empowerment from an administrative task into a straightforward contribution.

However, this is not government policy. The idea was developed by Alan Knott-Craig Jr and his NGO, Kululeka.org, and submitted privately to the DTIC. While Minister Parks Tau has said “challenge accepted”, there has been no formal process - no Treasury modelling, Sars mechanism, Cabinet memorandum or gazetted discussion paper. For now, it remains advocacy, not state policy.

Even so, it has merit. A revenue-based levy could simplify compliance and create a predictable flow of funds for empowerment. It reframes transformation as a manageable cost rather than a compliance burden, while potentially making funding more transparent and scalable.

Tackle fronting first

But reform must begin by confronting the reality of what already exists. Across many industries, an entrenched fronting economy has taken hold. Businesses can buy instant 51% Black-owned, Level 2 status for less than 0.5% of turnover through structures that offer little genuine ownership or benefit. These arrangements, often disguised as private-equity or option-type deals, mostly benefit the intermediaries who design and sell them.

Until regulators tackle these practices and verification agencies have the means to detect and challenge them, any new levy will face competition from lower cost fronting solutions. If a company can opt in, why would it pay 3% of turnover when it can buy a compliant fronting structure for far less?

There is also the arithmetic. For a business with a 10% profit margin, a 3% levy equates to about 30% of pre-tax profit - a heavy cost for most sectors outside high-margin industries such as software or financial services. Unless the payment is tax-deductible and linked to indicative sector profit margins, it could be unsustainable.

A more balanced version could focus on smaller or mid-tier companies, with the levy tapering off above a certain revenue threshold or capped relative to profit. Firms could opt in based on a turnover threshold, then transition into the traditional BEE framework. This would ease the compliance burden on smaller businesses while maintaining fairness and consistency.

Lingering questions

Operational questions remain: what happens in a loss-making year? Would a company lose its BEE level if it couldn’t pay, and how would it transition back? These are practical issues, however, not fatal flaws.

One of the other hurdles is trust. Businesses would need to believe that any Transformation Fund established under such a model is well governed - that funds are transparently managed and channelled to Black-owned enterprises in the way originally intended. Without that assurance, even a well-designed levy would face scepticism and low uptake.

The real value of the 3% proposal lies in the debate it provokes. It challenges South Africa to treat empowerment as a way to build real enterprise, not just a compliance exercise.

But credibility must come first. Until fronting is rooted out and trust restored in the verification system, no levy or fund will deliver genuine transformation.