Black economic empowerment (BEE) is regaining impetus after the big slump of four years ago — but new complexities and challenges are emerging, particularly around the financing of deals.
This is the broad thrust of the BusinessMap Foundation’s 2003 empowerment report, released this week. The foundation is widely considered the most authoritative monitor of progress on BEE.
The report shows that the quantum of empowerment deals in 2002, 62, was a third higher than that of the previous year. In value terms (R8,2-billion), they represented a more than twofold increase over 2001.
BusinessMap director Reg Rumney describes the deal flow as “an oasis in a mergers and acquisitions desert”.
And despite the departure of eight black-controlled companies from the JSE Securities Exchange, market capitalisation of empowerment firms rose from 2% to 3% of the exchange’s total market cap. Two empowerment mining groups, Tokyo Sexwale’s Mvelaphanda and Patrice Motsepe’s ARMgold, listed last year.
Rumney’s overview of last year’s deals underscores the growing role of joint ventures as an empowerment vehicle — more than 30 were concluded last year, with the Bafokeng nation’s arrangement with AngloPlats and the R1-billion MCI-Value Partners Fund created by Cyril Ramaphosa’s Millennium Consolidated Investments and Sanlam being the largest.
The report notes that most of these deals involved firms engaged in real economic activity, rather than being purely financial transactions. Joint ventures were favoured by enterprise because they spread risk and could be forged outside existing operations.
In her assessment of the “central dilemma of empowerment”, analyst Réne Marais points to a transition from the “first wave” of empowerment, when deals were funded by financial institutions with a tradition of investing in listed companies.
This came to an “ignominious” end with the bear market of 1998. “Financiers wrote off billions of rands, resulting in a dearth of funding for empowerment transactions going forward.”
Because the financiers largely “paid” for the empowerment of companies through subsidised funding, the companies themselves were not encouraged to ensure that empowerment transactions were sustainable.
Marais writes that growing government pressure for empowerment shareholders, coupled with the newfound circumspection of financiers, has forced companies into the realisation that their shareholders would have to carry the costs of empowerment.
These have taken various forms: the issue of new shares at a discount, guaranteeing finance, paying “management fees” to facilitate an empowerment company’s cash flow and debt servicing, governance stress from introducing empowerment shareholders into wholly owned subsidiaries, and financial engineering to facilitate shareholding.
At the same time, the government wants to see sustained empowerment shareholding, Marais points out and, until the mining charter, had been reluctant to give credit for past empowerment transactions.
The result is an “empowerment dilemma” — companies restricted new empowerment shareholders by imposing a “lock-in” period when they could not sell their shares, or by stipulating that they could only offload to other empowerment interests.
The inability to sell according to normal commercial criteria undermines the value of a company or
investment, she argues. “Ironically, government is seeking to transfer economic wealth to empowerment entities, but its very policy is resulting in the erosion of such wealth.”
Marais warns that the trend could increasingly inhibit the liquidity of empowerment companies, and ultimately, the liquidity of the economy. “South Africa is one of the few African countries with liquid financial markets, and it would be a pity to damage this.”
The director of BusinessMap Investment Strategy Advisers, Jenny Cargill, underscores a further set of new complexities in the area of community empowerment. This has moved up the agenda as government has intensified and broadened its empowerment focus.
Cargill points out that the first steps have been taken towards “empowerment compacts” between mining houses and rural communities.
This has already sparked controversy, with emerging empowerment concerns, rather than established mining interests, hitting flak from affected communities. An example was the clash between Bridgette Radebe’s Mmakau Mining and her own clan.
Carghill notes that agreements with indigenous people have already been struck in other resource-based economies, like Canada and Australia, with the benefits tending to focus on job, training and procurement opportunities.
In South Africa, there is a much heavier accent on ownership transfer. “With ownership positioned as a key element of empowerment, there is a high expectation in communities of receiving equity stakes in surrounding mining,” she writes.
However, community ownership is a double-edged sword.
There is evidence of improved social stability and reduced crime where a community’s interests are aligned with those of a local mine operator. But acquiring equity in mining companies without own capital is extremely high-risk, with the chances of servicing debt and retaining ownership over time being limited.
In addition, the potential for early returns, particularly in greenfield operations, is low. Long delays in returns could disrupt the stable social environment community ownership centrally aimed to achieve. Cargill asks whether it is fair to expose poor communities to the risks of major equity investment.
She also observes that mining empowerment has triggered fierce contention between political interests. While communities seek benefit for themselves, provincial and local politicians jostle for advantage in their respective spheres.