Can revised BEE laws loosen white grip on economic power?
On the eve of the introduction of a strict regimen of black economic empowerment (BEE) legislation since the fall of apartheid more than 20 years ago, BEE observers have questioned if the revised policy has enough bite to tip the balance of economic power in favour of black South Africans, who are struggling to make inroads in key sectors of the economy.
From banks, mines, retail, telecoms, to information and technology, white-owned capital still maintains a tight grip on the economy while the African National Congress (ANC)-led government has had limited success with its BEE and affirmative action policies.
The governments’ policies have so far enriched a tiny group of politically-connected black elite and educated professionals while the majority of people still languish in poverty or are jobless.
Three successive waves of BEE dating back to the 1990s have failed to place a significant chunk of wealth in the hands of black people, prompting government to spring into action by re-introducing a new round of amendments to the broad-based BEE codes of good practice to inject pace into black economic participation, and put blacks at the centre of driving industrialisation and economic growth.
The JSE puts black ownership at 17% of the top-100 listed companies, but this figure is in stark contrast with Empowerdex’s estimate of 5.75% direct black ownership of the JSE.
According to BEE rating agency Empowerdex, as much as R359.6 billion worth of empowerment deals involving JSE-listed companies, financed mainly through debt, were concluded between 1994 and 2010, but the 2009 global economic recession decimated some of these investments.
The economic recession left black investors with a heap of debt and investments that will take a long time to repay as dividends are not plenty enough to cover interest and capital repayments.
The string of headline-grabbing multi-billion BEE deals of the 1990s and early to mid 2000s have dried up and the announcement in March that Northam Platinum shareholders have approved a R6.6 billion BEE transaction to sell 35.4% of the platinum producer to black investors and workers is a rare development these days.
The JSE puts black ownership at 17% of the top-100 listed companies — which make up 85% of the bourse’s total market capitalisation — but this figure is in stark contrast with Empowerdex’s estimate of 5.75% direct black ownership of the JSE. If the debt-free portion of share ownership is stripped out, black ownership falls to 1.6%, which represents true ownership.
During the recession, some BEE assets were repossessed by lenders after share prices tanked and black investors failed to meet their debt obligations. To put it bluntly, black wealth accumulation in South Africa is in crisis, hence left-wing socialist ideologies and political formations like the Economic Freedom Fighters and United Front are on the rise and are agitating for state ownership of wealth and prime commercial land for the benefit of the poor and workers.
The National Union of Metal Workers of South Africa, expelled last year from labour federation COSATU, is behind the United Front. Threatened by these political formations, the ANC has promised to up the ante to decisively transform the economy and break white economic stranglehold.
FROM MAY 1 COMPLIANCE KICKS IN
From May 1 this year, South African companies and institutions will be required to comply with the legislation and its concoction of revised BEE codes of 2013, which now place greater priority on enterprise and supplier development, skills development, and black equity ownership compared with their predecessors that were often criticised for narrowly focusing on ownership.
The BEE codes were first introduced in South Africa in 2007 and they came with a generic scorecard used by companies as a compass for achieving meaningful racial economic transformation.
The BBC wants the state to set aside 30% of its procurement spend for black suppliers, a policy that will mean that white-owned or foreign-controlled companies cannot bid for contracts ring-fenced for black businesses.
However, the codes failed to develop black-owned small and medium enterprises as well as promote job creation and manufacturing processing, hence in nowadays the government is pushing to instill an entrepreneurial culture in black communities through the Department of Small Business Development, under the stewardship of Minister Lindiwe Zulu. Zulu has been given a budget of R3.5 billion to help create as many SMMEs as possible.
Under the revised codes, BEE elements such as ownership, skills development, and enterprise and supplier development have been given more prominence and account for 85 points out of the generic scorecard’s 105 points while the same elements accounted for 70 points in the old scorecard.
Just over half of the 85 points is attributable to the supplier and enterprise development component of the BEE scorecard, suggesting that the government is legislatively pushing for black-owned enterprises to be included in the lucrative supply chains of both the private and public sectors.
The Black Business Council (BBC) wants the state to set aside 30% of its procurement spend for black suppliers, a policy that will mean that white-owned or foreign-controlled companies cannot bid for contracts ring-fenced for black businesses. South African President Jacob Zuma supports the idea of set-asides for black businesses.
BLACK INDUSTRIALITS TO DRIVE ECONOMY
The man from the Luthuli House tasked with driving the “second radical phase of South Africa’s transition” Mzwandile Masina, who is also deputy trade and industry minister, is driving the creation of 100 black industrialists over the next three years, who will own large businesses in sectors such as transport, green industries, agro-processing, biofuels and chemicals.
“This means we have to go beyond the predominantly equity-based BEE that has not fundamentally restructured industrial asset ownership and has also not succeeded in the expansion of our industrial assets beyond what the democratic state inherited,” Masina wrote recently in the ANC Today, the online newsletter for the ruling party.
Last year, he established a 10-member advisory panel to advise him on the black industrialists’ project. Some of the panel’s members are businessmen Sandile Zungu, Vuyo Jack, and independent economist Xhanti Payi.
In late March, the Department of Trade and Industry hosted a two-day Black Industrialists Indaba at the Gallagher Convention Centre, where attendance was only by invitation.
“This means we have to go beyond the predominantly equity-based BEE that has not fundamentally restructured industrial asset ownership and has also not succeeded in the expansion of our industrial assets beyond what the democratic state inherited”
This has raised a few eyebrows with questions being asked why was the conference not opened to the public, with some critics going as far as implying that there was a risk that the black industrialists’ project could degenerate into another narrow enrichment by the politically-connected elite, who will get a fourth bite at the cherry. It emerged from the Indaba that between R10 billion and R20 billion will be raised to fund projects for black industrialists.
These industrialists will be a different breed from the generation of BEE moguls before them, who were largely passive and relied on white executive teams to manage on their behalf the assets they bought.
Masina has a vision of black industrialists that are hands on and are directly involved in the origination, creation and management of industrial assets. As these industrialists emerge, they are expected to lift black-owned SMMEs with them by linking black suppliers to supply chains of businesses they own.
This is what Afrikaner industrialists did when they emerged in the South African economy. They lifted Afrikaner workers and small businesses with them, wiping out the poor white problem that existed after the Afrikaners were defeated by the English in the Anglo-Boer War that ended in 1900.
AFRIKANERS BUILT WEALTH BEHIND PROTECTIONIST WALLS
Afrikaners, who owned roughly 5% of the economy in the early 1900s according to Govan Mbeki’s book Learning from Robben Island, mobilised savings and invested heavily in founding their schools, technical colleges, and universities and used these to build industrial wealth and eventually broke out of subsistence farming. They used total monopoly on political power to build their businesses from ground up instead of buying stakes in English and Jewish businesses, which were dominant at the time.
The BEE has largely encouraged black capitalists to purchase equity stakes from white companies than building their own businesses from scratch.
Today, Afrikaner capital has internationalised and Afrikaner-owned businesses like Shoprite, Naspers, Sanlam, Remgro, PSG, and Steinhoff have tentacles across Africa and the rest of the world. And when experienced and skilled Afrikaner managers were pushed out of public sector by the Africans, they went entrepreneurial in the private sector.
Unlike BEE capitalists, Afrikaner capitalists had an advantage of accumulating their wealth behind tariff walls and benefitted immensely from cheap African labour, which also served as a big market for their goods and services.
Contrast this with BEE capitalists, who have had to accumulate wealth in a highly competitive and globalised world economy characterised by share price swings that often shave their wealth.
The BEE, modeled on the Malaysia’s New Economic Policy which sought to increase economic ownership of the ethnic Malays, known as Bumiteras, from 2.4% to 30% between 1970 and 1990, has largely encouraged black capitalists to purchase equity stakes from white companies than building their own businesses from scratch in a push to get blacks to own 26% of the economy in a short period of time.
This meant that the focus was on cutting the economic pie instead of growing it, creating an economy that is deficient of jobs.
OPINION SPLIT ON AMENDED BEE CODES’ IMPACT
Will the amended BEE codes and the clamour for black industrialists result in BEE flourishing and its spoils trickling down to the majority or will it marginalise the poor again?
The response to this question depends on who you are talking to. The BBC, a vocal mouthpiece for black business, believes a magic wand has been found to hasten racial economic transformation.
“The revised codes provide the necessary context for BEE to work. This time around, we are focusing on the entrepreneur and we are saying that the big corporates must transform their supply chains to include black-owned SMMEs and assist in growing them through switching their procurement from foreign suppliers to local suppliers,” says Xolani Qubeka, BBC’s secretary general.
“The easiest way to comply with them is to create 51% black-owned companies that will effectively be fronts. Black participation will be limited even further”
The Business Unity South Africa (BUSA), perceived by the BBC to be flag-bearers for big corporate interests, has welcomed the revised codes, but warns that the codes are too onerous for SMEs and may deter foreign direct investment.
Vanessa Phala, executive director for social and transformation policy at BUSA, believes that SMEs will be impacted negatively because they lack the administrative resources and capacity to comply with the codes’ provisions.
“Over 34 000 SMEs may be detrimentally affected or excluded from public procurement directly or through the value chain, discouraging the growth of this sector and its employment generating capacity. Local businesses need to continue to be encouraged to transform without the bar being set too high as to discourage transformation and investment in the local economy,” warns Phala.
Paul Janisch, founder of BEE consulting firm Caird, has also cautioned that the revised codes have raised the compliance bar too high and this could lead to more fronting and enrichment of the few.
“The easiest way to comply with them is to create 51% black-owned companies that will effectively be fronts. Black participation will be limited even further. Also the same black people who are already wealthy will benefit to a larger extent.
“You must remember that in many cases there are two parties to a fronting transaction, the “white” company that is putting the black person up to front for them and then the black person who is doing the fronting. Often both parties have a lot to gain from the front. You have entrenched interests in dodging the legislation,” he explains.
*Article first published by www.getbiz.co.za