In search of the ‘missing middle’

Cabinet this week approved a black economic empowerment Bill, setting in motion the law that will give guidance and substance to the transfer of wealth. Ferial Haffajee spoke to the Department of Trade and Industry’s Lionel October, the policy’s steward

Why is there a need for a black economic empowerment (BEE) strategy? It’s been in the pipeline for a very long time. The process was started two years ago, when the BEE Commission [chaired by Cyril Ramaphosa] was launched, and it had a good impact in that it forced the government to realise it needed a focused BEE strategy.

In the early Nineties, the government wasn’t sure it needed a targeted strategy. We’ve held intense consultations, mostly with the Big Business Working Group [President Thabo Mbeki’s forum with business] and members of the BEE Commission. There have also been discussions with Business South Africa.

There are detractors on all sides — the left, black business and foreign investors. How do you balance interests? Inevitably, not everyone will be happy, but the government has to govern. Every sector’s got interests. For us what’s key is that the empowerment policy should preserve and deliver growth.

The strategy speaks of broad-based empowerment. What is this? Empowerment must be broad-based in two ways. Firstly, one wants a broader base of individual beneficiaries rather than the creation of a black elite. So the economy cannot just have big black corporates — because that’s a narrow base. For broad-based empowerment, the support of small and medium-sized enterprises (SMEs) is essential.

Our financing and incentives are focused on SMEs, on employee share ownership, the transformation of pension funds and the use of state-owned enterprises to vest assets in

a larger pool. 

We are also focusing on cooperatives and rural trusts to increase the number of beneficiaries. 

In South Africa, the base of equity is narrower than in developing countries of a similar size. But it cannot just be about equity transfer. The focus must also fall on skills, control and enterprise development.

The BEE scorecard weights each of these areas. How will it be used? The emphasis is on three areas: ownership, financing and skills development. It is a flexible scorecard meant to guide sectors and individual businesses. The sector charters would have their own scorecards. 

There is concern, primarily in black business quarters, that the drive towards sectoral charters has been decelerated with the passage of a global BEE scorecard and President Thabo Mbeki’s statement in Parliament that not all sectors need charters …

Charters are fine where the government has a clear bargaining tool like mining rights or licences.

Also, some sectors like mining and liquid fuels are highly concentrated, and it’s easier to negotiate and manage a charter. In other sectors, like clothing, where there are thousands of companies, a sectoral charter can be a bit of an escape clause. The charter processes in two vital areas — financial services, and information and communication technology — will continue.

How should or how will BEE be financed?

The R10-billion for the next five years announced in this year’s national Budget is just a kickstart.

The key vehicles for financing will be the Industrial Development Corporation (IDC), the National Empowerment Fund (NEF) and the private sector.

 

The important thing is leverage. For example, the IDC can leverage four to five times its investment from the private sector. The IDC will continue to be a big player — it has raised a bond to finance empowerment. And it’s a market leader, because the private sector is guided by IDC involvement and reassured that proper due diligence and risk assessment has been done.

We need to create the same strength in the NEF.

Should pension funds be used towards a BEE end? Absolutely. Institutional investors make up 30% to 40% of the market. That is going to be one of the key areas. Ultimately, these are forced savings and the overall objective [securing retirement funding] can’t be tampered with. A task team involving us and Treasury is looking at more innovative financing mechanisms, like joint funds with the private sector.

Is it not possible for the government to bring more to the finance pot than the R10-billion announced in the Budget? It’s not the only money. The NEF needs to be revamped with new capital from restructuring [of state

assets] proceeds. The IDC will be the other principal financier with its R28-billion asset base. The key thing with finances is leverage, and the state will never be able to take the place of the market. We can’t reduce the risk/reward relationship in the economy, and what you don’t want is that the government becomes a 100% funder.

Besides, the IDC and the private sector have much better risk assessment methods than government.

Is there the will and appetite in the private sector to be a partner? It’s a will that must be driven by strategic considerations. Most of the large corporates have started to look at what strategies they will adopt. If you look at the largest corporates, like Anglo, they’ve already achieved key targets. What the charters can do is accelerate the process. 

We believe there is an appetite because many are realising that a growth path lies in BEE. Many see BEE as a cost, but our key aim is to show that it’s a growth imperative. A recent statistic on entrepreneurship [a growth driver] shows that the white community, and to some extent the Indian community, is saturated, so the only growth of entrepreneurs lies with black business, anyway.

International investors are worried about BEE. Should they be? The key factor is the uncertainty of what the government will do and that’s weighed down our markets. The passage of the strategy aims to give a clear picture of what BEE is and what we expect. On the same day that it was announced, two ministers immediately attended an investment conference in London to explain it. That was the kick-off of an ongoing road-show.

What’s the ultimate objective — a black middle class? The ultimate objective is growth and that complementarity is actually real. A key constraint to growth is our narrow entrepreneurial base and the low skills base of the population. If you have a better skills base, you will have growth. Therefore, the BEE strategy is to release these two constraints. By increasing growth, you create a better middle class. Many foreign investors say that South Africa has a missing middle and that impacts on growth because there is little domestic spending.

Does the state have the capacity to support the strategy? We’ve tried not to make it a hodge-podge. We’ll use procurement, licensing and the legislation to create a framework to signal the market and guide society. There is also provision for a voice for black business … through an advisory council on BEE. We’ve clearly delineated the state’s role and ultimately, it’s the private sector that will guide.

Given the focus on broad-based empowerment, does the government have a role in creating black corporate titans? I think it’s inevitable you would have the emergence of large black companies, but this is not the focus of our strategy. We need to back national champion industries and black participation in them is important. But our focus in BEE is on filling in the missing middle.

Black business is not happy with aspects of the legislation, especially the fact that the BEE council is advisory and not statutory… The council is dealt with in the legislation, so it is statutory. The question is whether it should regulate. The power to regulate must stay with government. The advisory role of the BEE council mustn’t be underestimated because the Big Business Working Group wields power not by regulating but by influencing through this structure. 

Labour and the South African Communist Party worry that the BEE policy should not divert attention from jobs, their primary concern. Should they? I thought there’d be bigger buy-in from labour as the model is broad-based and provides support for employee share ownership, co-ops and union ownership. Skills and human resource development are central and they get equal weighting to ownership.