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dispute resolution | 19 May 2020
BY Aslam Moosajee AND Joshua Davis
ENSight

dispute resolution


South Africa: B-BBEE and disaster relief funding

In Solidarity v Minister of Small Business Development and Others; Afriforum v Minister of Tourism and Others, the Pretoria High Court held that the state, acting under the regulations published in terms of the Disaster Management Act, 2002 (the “Disaster Management Act”), is entitled to take Broad-based black economic empowerment ("B-BBEE") status into account when deciding whether to award disaster relief funding to businesses in the tourism sector. The finding is of interest for reasons beyond the controversial issues of policy that it raises. In particular, it provides guidance on the appropriate standard of review for regulations and directions issued in terms of the Disaster Management Act, and on the scope of the state’s power to issue such regulations and directions. 

Facts

The Tourism Relief Fund (the “Fund”) was established by the Minister of Small Business Development and the Minister of Tourism (the “Minister”) in order to provide disaster relief funding to Small and Medium Size Enterprises (“SMMEs”) in the tourism sector. Applicant SMMEs are assigned a score out of 100 to determine the order of preference in which the funding will be granted. Of the 100 points that can be assigned to an applicant, a maximum of 20 points are assigned on the basis of B-BBEE status. A wholly black owned SMME is allocated 20 points while a wholly white-owned business is allocated a minimum of 12 points and a maximum of 18 points, depending on certain criteria.

The decision of the Minister to incorporate B-BBEE status into the qualifying criteria for the Fund was challenged on the basis that it was ultra vires the Disaster Management Act and that it was irrational.

The court therefore considered:

  1. whether the establishment of the Fund, and the decision to prescribe qualifying criteria for applicant SMMEs, constituted administrative action subject to the Promotion of Administrative Justice Act, 2000 (“PAJA”), or executive policymaking subject to a narrower set of grounds of review in terms of the principle of legality;
  2. whether the Minister’s decision was ultra vires the Disaster Management Act;
  3. whether the Minister was obliged by the Broad-Based Black Economic Empowerment Act, 2003 (“B-BBEE Act”) to take B-BBEE status into account when awarding disaster relief funding; and
  4. whether the Minister’s decision was irrational.

The appropriate standard of review

The court noted the distinction drawn by the Constitutional Court in Permanent Secretary, Department of Education and Welfare, Easter Cape v Ed-U-College (PE) (Section 21) Inc between policy formulation in the "broad (political sense)" and in "the narrower (administrative sense)". In terms of the former, policy is formulated outside of a legislative framework, involves "a political decision and will generally not constitute administrative action’. Policy formulation in the narrower administrative sense, by contrast, occurs ‘where a member of the Executive is implementing legislation".

The Court also noted that in the case of Minister of Home Affairs v Scalabrini Centre, the Supreme Court of Appeal held that "decisions heavily influenced by policy generally belong in the domain of the executive and that the more a decision is driven by considerations of executive policy, the further it moves away from being [administrative action]".

On this basis, the court held that the decision of the Minister to establish the fund, and to prescribe qualifying criteria for applicant SMMEs, constituted executive policy-making and not administrative action. The court explained that the Minister’s decision was taken "in terms of the powers she enjoys by virtue of the Regulations promulgated under the [Disaster Management Act], it was taken in support of and as part of broader government policy both in relation to providing support for those impacted upon by COVID-19 as well as the government’s empowerment objectives ... it involved consideration of strategies of how to expand resources as against a larger need which involved compromises on budgetary considerations and the like".

In addition, the court noted that while "decisions that will ultimately be taken in respect of individual applications made to the fund may well constitute administrative action, the decision to set up the fund and to provide the criteria for qualification" does not. Accordingly, the court held that the Minister’s decision was subject to a legality review and not to a review under PAJA.

Was the Minister’s decision ultra vires the Disaster Management Act?

Section 27(3) of the Disaster Management Act provides that the powers conferred on the executive in terms of section 27(2) of the Disaster Management Act, to issue regulations and directions in a state of disaster, "may be exercised only to the extent that this is necessary for the purpose of –

  1. assisting and protecting the public;
  2. providing relief to the public;
  3. protecting property;
  4. preventing or combating disruption; or
  5. dealing with the destructive and other effects of the disaster"

Solidarity and Afriforum argued that the decision to use B-BBEE status as part of the qualifying criteria for the provision of disaster relief funding was not necessary for the various purposes enumerated in section 27(3), and the Minister’s decision was therefore ultra vires the Disaster Management Act.

The court offered three reasons for rejecting this argument:

  1. the interpretation advanced by Solidarity and Afriforum ignores the fact that the tourism sector is subject to the B-BBEE Code of Good Practice, which recognises the need for empowerment of black people in that sector;
  2. "the imperatives of empowerment are inextricably linked to the effects of the disaster" because "if the disaster has the effect of, but for financial assistance, leading to the closure of black business it would undermine and set back transformation"; and
  3. an interpretation of section 27(3) of the Disaster Management Act, which permits the Minister to include B-BBEE status as part of the qualifying criteria for disaster relief funding, "accords with the general transformative trajectory of the Constitution in which the principle of equality finds centre place".

Was the Minister’s decision required by the B-BBEE Act?

Section 10 of the B-BBEE Act provides that "every organ of state … must apply the relevant code of good practice issued in terms of this Act … in determining criteria for the awarding of incentive, grants and investment schemes in support of broad-based black economic empowerment".

The Minister argued that grants awarded by the Fund constitute grants in support of B-BBEE, and that she was therefore bound by the B-BBEE Act to apply the Code of Good Practice, which in turn required her to make B-BBEE status part of the qualifying criteria for SMMEs applying for disaster relief from the Fund.

The court,  while making no express finding that the Minister was obliged to make B-BBEE status part of the Fund’s qualifying criteria, rejected Solidarity and Afriforum’s argument that grants provided by the Fund do not constitute a scheme in support of B-BBEE.

Was the Minister’s decision rational?

The court held that the Minister’s decision regarding the Fund’s qualifying criteria was rationally connected to "the objective of the government in dealing with both the effects of COVID-19 and the imperatives of empowerment". Two reasons were offered for this finding. First, the court held that a race neutral response to the Covid-19 crisis would have the effect of exacerbating historical disadvantage. Second, the Fund’s qualifying criteria associated with race represent in total between 2% and 8% of the total scoring criteria. It therefore does not create an insurmountable obstacle for wholly white-owned applicant SMMEs but, instead, creates a reasonable balance between ensuring that those impacted upon COVID-19 are assisted and supported, while at the same time promoting the State’s empowerment objectives.

Comment

Afriforum and Solidarity attempted to appeal the Pretoria High Court’s decision directly to the Constitutional Court. In addition, the Democratic Alliance has instituted a separate application in the Western Cape High Court, in which it too challenges the use of B-BBEE status as a qualifying criterion for a broader range of disaster relief funding. While Afriforum and Solidarity’s application to appeal the decision directly to the Constitutional Court was dismissed, two issues of particular significance will likely be decided in the Democratic Alliance’s application (and before a full bench of the High Court or the Supreme Court of Appeal, if Solidarity and Afriforum pursue an appeal in those courts).

First, it will be decided whether the Pretoria High Court’s categorisation of the Minister’s decision to establish the Fund, and to prescribe qualifying criteria for applicant SMMEs, as executive policymaking rather than administrative action, is correct. While it does not appear that Afriforum and Solidarity relied on grounds of review that could not be sourced in the principle of legality, this categorisation will likely be of significance in future litigation if, for example, regulations or directions promulgated under the Disaster Management Act are challenged on the basis of procedural fairness or reasonableness.

Second, it remains to be seen whether the Pretoria High Court’s interpretation of section 27(3) of the Disaster Management Act will be accepted. As mentioned above, section 27(3) provides, inter alia, that the powers conferred by section 27(2) of the Disaster Management Act, "may only be exercised to the extent that this is necessary for the purpose of … dealing with the destructive and other effects of the disaster". The Pretoria High Court held that the adverse effects of the current crisis on black businesses constitutes "destructive and other effects of the disaster"

Aslam Moosajee

Dispute Resolution | Director

 +27 82 461 5917

amoosajee@ensafrica.com

Joshua Davis

Dispute Resolution | Candidate Attorney

+27 72 608 6733

jdavis@ENSafrica.com