The finalisation of three black economic empowerment (BEE) charters since 2000 has brought a new era for empowerment.
Through their involvement in designing the charters, all stakeholders in the mining, liquid fuels and financial sectors are duty-bound to implement the BEE framework, which each charter outlines.
Charters are negotiated agreements between business, labour and the government aimed at guiding transformation. They also guide private and public sector leverage — they can be powerful tools, but need to be constantly watched. And debate on the charters is essential.
More are expected in construction, transport, property, the accounting and legal professions, agriculture and tourism.
There are obvious constraints, as recent criticism of the charter reveals. Charters are relatively ”short” processes encapsulated in written form — but no matter what, the targets, institutions and the people don’t change that easily.
Charters are instruments of negotiation, where give and take means that everybody wins something and loses something as well. More often than not, charter discussions encompass diverse and large sectors, where the nature of the sector and the varying types of firms within it require a common threshold or industry mean against which to set targets. The targets seldom capture the interests of all stakeholders.
What would make for better charters would be more effective reviews, reports and measurements. These would make it possible to adjust mechanisms, when necessary, through oversight structures, and to assess whether implementation is meeting the intentions and spirit of the charter.
There has been confusion in black and white business, trade unions and the government over who drives charters.
In mining, the government largely drove the charter process with business and labour. The Financial Sector Charter was led by business in consultation with the government and, to a lesser extent, labour and social partners. IT, construction and property are following a similar route, while the government is driving transport in consultation with other interests.
Government influence is undoubtedly the key to ensuring transformation. But if full stakeholder representation is missing, the outcome of charters may be compromised.
The content of charters has also changed over time. The financial charter, for example, was about more than traditional BEE change, a point missed by its critics.
The biggest challenge to transformation and growth in South Africa is lack of capital, and it is this, rather than the financing of large deals, that the charter has tried to address.
Much is made of the country’s low savings rate as an obstacle to growth and investment. The Financial Sector Charter argues for the targeting of investment by institutions in national priority areas — low-income housing, agricultural development for poor farmers, transformational infrastructure, small black enterprise and empowerment transactions.
The charter provides for an initial R75-billion in funding. However, a number of issues have to be finalised, including the final amount of investment, the split between different areas, the measurement system, the type of financing and products, and the detail on the participation of other stakeholders.
The key test may be the extent to which investment in priority areas normalises over time. This will depend on the willingness of companies to adapt to these markets, build up the necessary skills and experience, and broaden the frameworks of managing and defining risk and return.
The financial charter commits the sector to providing access to a range of savings and transaction products and services, and to the extension of credit for productive purposes, to households within LSM 1-5. Final targets and measurement mechanisms should be addressed by June 30.
Review and reporting elements of charters are fundamental to their success, and more consistency is required. The financial charter provides for a mid-term review in 2009 and a review in 2015 of progress and impact.
Specific objectives — such as the empowerment of black women, the existence of charters in other sectors, the implementation of diversity management, and the impact of empowerment financing — must be closely monitored and reviewed.
In varying degrees, all charters require the submission to an oversight structure of annual audited empowerment reports, which include scorecards. In mining and liquid fuels, this is the department of minerals; for the financial charter, the Financial Sector Charter Council (FSCC) — a full-time structure including industry, government and other stakeholders — performs the function. The council will start at the end of the month.
The financial charter provides some guidance on how BEE transactions in all sectors should be structured to promote sustainable empowerment initiatives. It states that deferred direct ownership will not count until the equity is transferred.
A number of recent BEE transactions have used deferred share mechanisms. While these may avoid some initial funding constraints, questions have arisen as to whether economic interest has or ever will be transferred. And if economic interest is not transferred then is it truly empowerment? These will have to stand the test of the FSCC, once a guidance note on measuring BEE transactions is issued.
Closely related is ”indirect ownership”, defined by the financial charter as equity held on behalf of beneficiaries. It provides for the measurement of indirect ownership to the extent that one can calculate the beneficial black interest of the investor in question, provided the vendor has met the minimum direct ownership target and concrete measures have been taken to address shareholder activism.
There have been various approaches in applying ownership requirements to foreign companies. In the financial charter, foreign-owned local companies must implement all aspects of the charter in their subsidiaries. If they have branches, companies must provide BEE transaction financing in the financial and other sectors to the value of what the minimum direct ownership target would have been. This is not an offset — companies are required to perform these obligations within ownership in the scorecard.
No doubt charters that follow will improve on what has come before. To progress, emphasis must be placed on effective reporting, review and monitoring. It is only through reporting that we can measure impact, and through measurement that we can manage implementation.
And only when the private sector understands that BEE does not simply facilitate deal-making but is a tool to transform workplaces, promote productive environments and grow will we be able to claim confidently that charters have succeeded.
Kennedy Bungane is president of the Association of Black Securities and Investment Professionals (Absip). Andrea Brown is adviser to Absip. Both write in their personal capacities