In a recent case, the Gauteng High Court ruled that empowerment-related criteria should be taken into account when allocating relief funds to assist SMMEs through the Covid-19 crisis, but ordered that the relevant regulations be redrafted to be less vague.
The State's financial relief programmes established during the Covid-19 crisis, and in particular empowerment-related qualification criteria, have been subject to intense scrutiny as distressed businesses have looked for assistance.
In a significant judgment delivered on Friday 19 June 2020 in
Democratic Alliance v President of the Republic of South Africa and Others (Economic Freedom Fighters Intervening) (21424/2020)  ZAGPPHC 23, the Gauteng High Court (Pretoria) ruled that race, gender, age and disability must be taken into account in awarding certain State relief to small, medium and micro enterprises (SMMEs) affected by the Covid-19 pandemic. However, the Court found that the State’s criteria for evaluating applications for access to that relief were "vague" and therefore unlawful and invalid.
Financial relief offered to SMMEs
In response to the Covid-19 pandemic, the Department of Small Business Development made over ZAR500 million available to assist SMMEs during the Covid-19 crisis. The Minister of Small Business Development (the Minister) established two funds (SMME Funds), namely the Debt Finance Scheme (the Scheme) and the Business Growth Resilience Fund (the Fund).
The Scheme was aimed at SMMEs which are negatively affected, directly or indirectly, by the Coronavirus pandemic. It is aimed at providing relief for existing debt repayments.
The Fund was designed for businesses geared to take advantage of supply opportunities resulting from the Coronavirus pandemic or shortages in the local market. It is targeted at SMMEs manufacturing what could be considered "essential goods", such as hygiene and medical products.
The Minister set the following qualification criteria (among others) for access to relief:
- entities must be 100%-owned by South African citizens;
- at least 70% of their employees must be South African; and
- entities must be registered and compliant with SARS and UIF.
In addition, the Minister stated that "priority would be given to businesses owned by women, youth and people with disabilities". Race was not a criterion.
Unlawfulness of criteria due to vagueness.
The above qualification criteria were the subject of the Democratic Alliance's (Applicant) application for an interdict to prevent the Minister from using "B-BBEE status, race, gender, age or disability as criteria for determining which persons or entities will receive relief”. The Applicant argued that any use of race, gender, age or disability as criteria for distributing government funds must be based on a predictable system that determines in advance how these factors would be weighed relative to each other and relative to other criteria. Any applicants should know in advance how their application would be decided.
On the other hand, the Respondents (including the Minister) argued that a clear list of criteria had to be applied in the determination of the distribution of the funds. They also argued that it was competent for the Minister to identify policy guidelines to be considered by decision makers in exercising their discretionary powers in the distribution of money from either the Scheme or the Fund. Decision makers had to have flexibility because the matter was complex, and they needed to balance competing considerations, including the funds available for distribution, the number of applicants and their demographic composition.
The court decided that the Minister had to make sure that the criteria to be employed for the disbursement of public funds were not left to a simple laundry list of hygiene and procedural characteristics "buttressed by one vague statement that ‘priority would be given’ to women, the youth and the disabled". According to the court, such a broad phrase without any guidance as to what weight is given to these criteria could not pass muster in our constitutional democracy.
The court therefore held that the requirement to prioritise women, youth and the disabled in relation to the other qualification criteria in awarding relief, falls foul of a basic principle of public law, in that the exercise of public power must be certain, even the exercise of the State’s discretionary power to allocate funds.
Validity of empowerment criteria for distribution of state relief funds
In addition to the argument on vagueness, the Applicant argued that the use of criteria pertaining to race, gender, age and disability was unlawful because no law empowers the use of B-BBEE status, race, gender, age and disability as criteria to distribute disaster relief under the Disaster Management Act, 2002 (DMA). The Applicant submitted that the DMA cannot be employed to further governmental objectives other than those connected to addressing the disaster and developing an effective response to it. The Applicant also stated that the Broad-Based Black Economic Empowerment Act, 2003 (B-BBEE Act) does not apply to disaster relief.
The Respondents argued that the State's authority to take steps to protect and promote the advancement of previously disadvantaged groups is sourced in the Constitution and flows through the exercise of all public power. The Respondents contended that the importance of transformation of the economy and empowerment of previously disadvantaged groups is inextricably linked to the effects of the pandemic.
The court held that it was incumbent upon a court to interpret legislation in a manner that promotes, rather than inhibits, key constitutional rights such as equality as set out in section 9(1) and the remedial measures which are permitted in terms of section 9(2) of the Constitution.
It further stated that "the outbreak of Covid-19 in South Africa has brought sharply into focus the fissures in our society caused by race, gender and other forms of egregious discrimination." What is at stake is assistance to those rendered more vulnerable by the Covid-19 state of disaster. The court agreed with the respondents' counsel that "there can be no appropriate consideration of vulnerability, were one to exclude race". "One of the effects of the disaster is felt by businesses and if those with less resources are assisted as a measure of priority provided that the criteria are carefully and understandably set out, then such steps are clearly what the Constitution would expect to be undertaken by the executive".
The Court dismissed the application to interdict the Minister and the SMME Funds from never considering B-BBEE status, race, gender, age or disability in granting relief. Instead, it found that the Minister must take into account race in addition to gender, youth and disability in reformulating criteria to be employed in the distribution from the SMME Funds.
The court therefore held that the qualification criteria formulated by the Minister were too vague and thus legally non-compliant. As a result, the court set aside the criteria and referred the matter back to the Minister to redraft the regulations, taking into account the role of race, gender, youth and disability in the formulation of the criteria to be applied. The Minister is required to clearly regulate requirements for the weighting of criteria in the decision-making process to award relief from the SMME Funds. Funds awarded to entities before the date of this judgment are not affected by this ruling.