Often, in our line of specialization, we get asked whether Broad-based Black Economic Empowerment (BEE) is consistent with South Africa’s obligations under the World Trade Organisation (WTO). Our enquirers point out that surely BEE must be contrary to one of the core principals for WTO law being non-discrimination.

What they actually refer to is the National Treatment principal which addresses a form of discrimination where a WTO Member adopt internal or domestic policies designed to favour its domestic producers vis-à-vis foreign exporters of a given product, even though the foreign exporters may be treated in a uniform way. The National Treatment principal therefore states that imported products or services, from other WTO Members, shall be accorded treatment no less favourable than that accorded to like products or services of national origin in respect of all laws affecting their internal sale. Thus once border duties have been paid by foreigners no additional burdens may be imposed. The WTO provides for various prohibited methods by way of which these burdens may not be imposed, such as through internal sales taxes, or any law and regulation which affects the foreign products’ or services’ internal sale. However this is only prohibited if the laws and regulations only apply to foreigners and not to domestic producers. This principal is contained in both the agreements relating to the sale  of goods and services as evidenced by Article III of the General Agreement of Tariffs and Trade (GATT) and Article XVII of the General Agreement of Trade in Services (GATS).

Now at face value it would seem as if South Africa’s BEE legislation does not violate the WTO principal of National Treatment as both domestic and foreign products and services are subject to the same set of rules.  As a consequence if you want to provide goods or services to the South African government, whether you are a domestic or foreign person, you will have to comply with the BEE legislation. However there are numerous examples of national legislation and regulation which, at face value, do not appear to be discriminatory, but in effect do in fact discriminate against imported products or services. Numerous proponents may wish to argue that many WTO Members will not be able to import products and services as “black people”, as defined in the BEE Act, may prove to be an insurmountable discriminatory obstacle to their imports.

Now if we look at our BEE Act, the requirement to consider any Code of Good Practice, issued in terms of this Act, seems to be centred on government procurement. Thus in determining whether government will procure from someone, the Code of Good Practice needs to be considered before it is decided who will be the preferred supplier to government. A supplier of goods and services to government will therefore have to comply with the BEE legislation. The legislation does not, on the face of it, discriminate between domestic and foreign producers, but it may indirectly discriminate against foreign producers who may not be able to fulfil the requirements as contained in our BEE legislation.  It could also be argued that the legislation is only applicable to enterprises conducting a business, trade or profession within South Africa and therefore the BEE legislation should not have an impact on foreigners. It is however not necessary to try and make such an argument as the WTO agreements relating to goods and services has an exception to the principal of National Treatment. According to this exception, the National Treatment principal shall not be applied to laws governing the procurement by governmental agencies of products or services purchased for governmental purposes and not with a view to commercial resale or with a view to use in the production of goods or supply of services for commercial sale. Therefore whether you are a domestic or a foreign supplier to the South African Government, you will be subject to any law, regulation or requirement which the South African government wants you to comply with as the government is fully entitled under WTO law to regulate government procurement.

Since government procurement contributes heavily to global trade, the WTO Members negotiated an Agreement on Government Procurement. In terms of this agreement it is recognised that laws regarding government procurement should not be applied to foreign or domestic products and services so as to afford protection to domestic products or services or and should not discriminate among foreign products or services or among foreign suppliers. Having said this, like all international treaties it will only be applicable to a nation in the event that it is a signatory. South Africa is not a Member of the Agreement on Government Procurement and as such does not have to comply with its requirements. As a consequence hereof BEE, in terms of pure government procurement, is not in violation of South Africa’s WTO commitments. At the moment it would seem as if the South African government does not intend to become a signatory of this agreement.

What then is the situation with regard to private entities? In terms of the BEE Act and the current Code of Good Practice only government entities need to consider a private entity’s BEE status. Thus if a South African company wishes to supply goods or services to government it must be black empowered (ignoring for the moment the different levels introduced by the Scorecards). One of the recognised ways which may contribute to a private entity’s black empowerment is if that entity itself enforces black preferential procurement.  As preferential procurement is one of the major contributors (roughly 20% for small entities) to a private entity’s BEE status it is a necessity, in most cases, to procure goods or services from black-owned or black-empowered enterprises. Therefore although our BEE legislation does not force private entities to become black-empowered, it does effectively do so if your enterprise wants to supply goods or service to government. The downstream effect is that most companies will need to become black-empowered as invariably almost all private companies will feel pressure to become black-empowered.

Let us pretend for the moment that you are small private entity who supplies goods to another South African firm which provides services to a government entity. You will need to be black-empowered as this other private entity will surely exert pressure on you to be his preferred black-empowered provider. Perhaps due to your size, or whatever other reason, a major contributor to your BEE status is black preferential procurement. You in turn are forced to exert pressure on your suppliers to also become black-empowered. What do you stand to do if your only suppliers are located outside South Africa? For one, they may not stand a chance of being black-empowered. Do you have to limit your procurement from them and increase your procurement from a South African black-empowered entity in order to continue supplying services to the government? Does this not effectively contravene the National Treatment principal as that foreign supplier is not supplying to the South African government within the conditions laid down by the exceptions to the National Treatment principal?

Would this ‘unforeseen’ consequence of BEE legislation not qualify as a law that, at face value, does not discriminate against foreigners although the downstream effect does indeed (indirectly) do just that? Would other WTO Members not be able to argue that South Africa’s BEE legislation contravenes the exception which allows a government to discriminate against foreigners when government procurement is involved? Of course it could be possible to argue both for and against BEE, but the question should perhaps be if any WTO Member would risk doing so? This is especially true given that under GATT’s article 20 and GATS’ article 14 we have general exceptions (such as public morals) to unjustifiable discrimination against other countries. It could be argued that BEE is a moral protection infused into the South African society as a protection against the highly immoral legacy of Apartheid. If South Africa does take this defence it would be politically thorny for any WTO Member to take issue with South Africa in the WTO as they would be seen to be attacking the laudable mechanics which are redressing Apartheid.

By Rian Geldenhuys

*the views expressed herein do not constitute legal advice