AMID all the talk of unbundling and black empowerment, one obvious means of broadening the economic powerbase — employee share ownership programmes (Esops) — is being largely ignored.
Not to be confused with share incentive schemes, which are aimed at management, Esops are open to all employees, with the employer providing the funding mechanism.
Says Loren Braithwaite, head of the public sector division at Msele Corporate and Merchant Bank: “The most important role for Esops at this stage in economic development is to deconcentrate share ownership, which is important for access to capital and growth.
“Esops are important for employees, if they are distributed equitably (to prevent the sort of conflict old-style share incentive schemes provoked), and if the company undertakes an education programme so that employees understand them as an additional form of saving and as an important source of collateral with which they can access additional bank financing.”
Anglo American was one of the first to launch an Esop in the late 1980s, which was very popular, says Michael Spicer, group public affairs consultant. The corporation had envisaged a second phase in the programme, but has since put the project on hold in anticipation of further tax changes.
It had been hoped that under the new government, with its emphasis on broadening the economic power-base, moves would be made to ease the tax burden on employers and employees alike in devising Esops. “But the government is being short-sighted,” says Spicer. “It is more concerned with the loss of potential tax revenue than a long-term vision.”
Says Marius van Blerck, Anglo’s group tax consultant: “While it is true to say there is nothing in existing legislation that specifically discourages employee share ownership, it is also true to say there is little to encourage it.
“The present tax system places an intolerable administrative burden on any employer who seeks to promote widespread employee share ownership, due to the complexities of administering the fringe benefits system for significant numbers of employees.”
The third Katz Commission report on taxation “didn’t go even a tenth of the way to what we had in mind”, says Van Blerck. “Either the employee pays tax on the interest-free loan the company provides to buy the shares, or else he is taxed on the difference between the market value and actual price of the shares. It is difficult to explain to employees that they have to pay a tax on a benefit they do not even own yet.”
One solution, recommended by the commission but not accepted by government on grounds of administrative difficulties, was for tax to be paid only once the employee sold the shares. Michael Katz, however, believes this proposal is still feasible.
‘Black economic empowerment is very important,” says Katz. “There is nothing in the present tax system that stands in the way. It would be difficult to discriminate against one kind of fringe benefit and not another; for instance, the soft loans given to employees for housing or education.”
One successful Esop was launched at the beginning of this month by Premier Fishing, which sold 20% of its South African interests to the staff at a nominal value of 1c per share. Once the company had overcome the hurdle of convincing the unions to support the scheme, it then faced the battle with Revenue, but eventually won through. Fringe benefits taxation was not an issue because the company restructured itself, consolidating all its South African interests under one roof.
Not all companies will want to undergo a restructuring to be able to launch an Esop, however. And until the tax structure is changed, there is little incentive to do so, says Van Blerck.
Adds Braithwaite: “At least if the incentives can’t be provided, the obstacles should be removed.”Harnessing people powerMadeleine WackernagelSOUTH AFRICANS love to workshop and talk about doing things; now is the time to act, says Peter Kenyon, an Australian consultant on local economic development (LED).LED is all about empowerment — and not sitting around waiting for the government or big business to provide the jobs the country so badly needs. In this vein, the National Business Initiative (NBI) linked up with Kenyon to devise Taking the Lead, a Community Resource Kit for Local Economic Development, presented to government and business leaders countrywide this week and next.There are some success stories but the potential for “bottom- up” growth is still largely untapped. According to a World Bank study, there are 2,5-million black entrepreneurs in this country, against an ideal target of 6,8- million. That shortfall is costing the country dear, says Stan Matsebula, chief director of economic affairs, Gauteng. Extrapolating from that lost potential, if every entrepreneur employed three people, that’s 12,9-million potential jobs that are not being harnessed.Local government has an important role to play in leading by example. Half of local government contracts will go to small- and medium-sized businesses within five years, says Matsebula. “Not just because it is politically correct to do so, but because it is common sense. We must create a culture of entrepreneurs.”It all boils down to a “can-do” attitude, says Kenyon. Instead of waiting for the cavalry to arrive and rescue them, people must take charge. LED is a process of identifying and harnessing local community energy, resources and opportunities to create jobs and economic growth.The emphasis on local is important and deliberate. Communities, better than government officials, know what they need — but often do not have the means to provide it themselves. This is where the NBI comes in. The kit sets out the end as well as the means, providing a comprehensive step- by-step guide on how to set up a business, where to get help and whom to involve, as well as damage limitation measures.
Government is not abdicating all responsibility, however. Dr Bernie Fanaroff, deputy director-general of the newly reconstructed Reconstruction and Development Programme (RDP), stressed the authorities’ role: “Rather than looking at LED in a vacuum, we must look for the interface between LED and the major new investments which government and the private sector are making, such as those in municipal infrastructure and housing, and the new activities such as tourism.”
He continued: “These investments create economic opportunities. Government and business have a responsibility to empower people to grasp these opportunities. Human resource development is crucial, but our other policies must also support this process.”The RDP office, which is aligned to the NBI’s LED programme, “is still the centrepiece of all of the Government of National Unity’s policies”, says Fanaroff. “The growth and development strategy is not something different — it is simply the implementation strategy of the RDP … As such, it recognises and emphasises the importance of community participation and of partnerships between all three tiers of government, with business and communities.”The road show, says Brian Craig, head of economics at the NBI, is drawing in huge crowds — the hall in Pietersburg was overflowing. Now all that remains is for the enthusiasm to translate into action.Financial giant casts its eyes abroadLynda LoxtonTRANSPARENCY is catchy in South Africa these days with even traditionally secretive financial giants such as Sanlam revealing more and more about their finances.
In its latest annual report, for example, Sanlam discussed its profits for the first time, even though, because of a change in year-end, they are not strictly comparable. In the 15 months to end-December 1995, profits were R1,1-billion compared with R601-million for the 12 months to the end of September 1994.
Managing director Desmond Smith said this was an indication of Sanlam’s ability to finance new business. As a major player in the property development and financial services markets, as well as its staple insurance business, this bodes well for activity in the year ahead.
It also provides more details of its various investments than ever before and it is interesting to note that after its long dominance of the South African economy, it is gradually getting a toehold in the international investment market.
With R140-billion worth of assets under management, Sanlam has, along with its main rival Old Mutual, been a major investor in South African property, equities and gilts, but since the lifting of sanctions has been casting its eyes abroad.
It has formalised links with United States- based Alliance Capital, which is providing it with research and portfolio management expertise and training.
Last August it became the first South African institution to be given approval for asset swaps abroad and by the end of the year had processed transactions worth more than R675- million.
According to Smith, this has enabled clients to make investments in “world-class companies such as McDonald’s, Honda, Colgate, Palmolive and Walt Disney” for the first time.
Sanlam has also forged links with Britain’s Mercury Asset Management and Standard Life.
According to its latest annual report, Sanlam’s foreign investments had nearly doubled to R1,7-billion by the end of 1995. In 1994, most of its foreign investments were in neighbouring Namibia, but although these increased slightly to R993-million in 1995, the rest were international.
The bulk of the investments were in interest- bearing stock, but the amount invested in shares grew to R263-million in 1995 from a mere R49-million in 1994.
“This was because of the asset swaps,” says Hendrik Bester, senior general manager, investments.
However, the weakness of the rand has slowed the pace of foreign investment.
Financial institutions are allowed to swap up to 5% of their assets and Bester said that at the moment Sanlam was “quite comfortable with our 2 to 2,5%” in asset swaps.
Going any further would depend on client perceptions, the movement of the rand and Sanlam’s own balance sheet.
Bester said that although “hopes had been very high” until recently about the further lifting of exchange controls, it was not likely now, given uncertainty in the economy and the political situation.
The annual report for the first time gives a breakdown of Sanlam’s stake in some of South Africa’s major corporations. These include a 42% stake in Sentrachem, 26% in Engen, 36% in Murray & Roberts, 30% in Gencor, and 32% in Malbak.
Its 10 largest shareholdings are in Gencor, South African Breweries, Richemont, Murray & Roberts, De Beers, Amalgamated Banks of South Africa (Absa), Malbak, Rembrandt, Anglo American and Servgro.