The Department of Trade and Industry’s black economic empowerment (BEE) codes of good practice on ownership and management last week became as mysterious as the Da Vinci codes. And this is quite apart from the bramble of legalese in which their inner message is contained.
Due to be launched in a revised version at Gallagher Estate, they were delayed for a week or more. But a draft, embargoed to an indefinite date, had been circulated to some media in anticipation of their release last Friday at a “feedback” session addressed by Minister of Trade and Industry Mandisi Mpahlwa.
Where this leaves commentators like myself, I’m not sure. Am I commenting on the right codes? I hope so.
In any event, what seems clear is that major revisions have been made to code 100, on ownership, to clear away some of the concerns I raised in this column some weeks ago — and which elicited a strong response from former DTI BEE chief director Philisiwe Buthelezi.
Buthelezi dismissed my concerns as coming from established business, as if that did not make them meaningful. And yet the new draft makes it clear that the department was listening at least in part to the same views I was reflecting.
The problem, I suspect, lies in an as-yet-unbridged chasm of understanding between business and government on the economy, one that we all thought was sorted out in the Great Economic Debate of the early 1990s, when nationalisation was ditched and the free market accepted, if not embraced.
It surfaces again in the code: the government has backed down on details, but clung to a principle approach that needs to be rethought.
First, the good news for the deal-makers: the revision appears to remove the hurdles the previous draft put in the way of doing realistic BEE deals, and clarifies many previously unclear points.
Most importantly, the government now allows companies to obtain full ownership points on the date of the transaction, regardless of the financing structure used. So the code now eschews involvement in the finer detail of deal structuring. The government will have to stick to the principle of blacklisting those companies engaging in fronting rather than deciding what financial instruments will or will not be allowed.
The new code — or rather “Statement 100” — counts the sales of assets as empowerment as well as shares. This will be a relief for the mining industry. Many of the mining BEE deals have been done at the operational level because of the financing difficulties of selling shares at the listed company level.
So established companies can get 12 points straight off for doing a deal, no matter what “encumbrances” they have attached to the deal. Typically, these do not allow the BEE party to the deal to take full ownership of the stake until certain requirements are met. They try to get the BEE party to share some of the risk, a fairly basic demand of a commercial deal.
Another seven points out of 20 are set aside for actually concluding the deal, so rewarding a successful transaction. And if a deal continues to be encumbered the established business will lose points. The established company will have to go the extra mile to get those seven points. But that is not the main problem.
The measurement tool and its implications for policy, a matter of principle rather than implementation, promises to be the reef on which BEE may founder.
The government explicitly aims to measure empowerment outcomes rather than the inputs. Outcomes of BEE deals are dependent on a range of things, like world commodity prices, that have nothing to do with empowerment. Should the integrity of the intention not count more? Should BEE not be about distributing opportunities for wealth rather than evanescent forms of wealth?
As has been forcefully demonstrated by Jenny Cargill, of BusinessMap Investment Strategy Advisers, the basic approach assumes that every deal in every company must succeed. If it doesn’t, then the established company will have to do another one, and another one, and so on.
In other words, the “white” company will have to guarantee the success of its empowerment partners in the deal. That automatically means there can be no risk-sharing, and the commercial aspect of the deal fails away.
While this may have profound implications for the way BEE develops in South Africa, it is unlikely that business, fragmented as it is and unwilling to get into a bruising, racially charged exchange with government, will bother to challenge it.
For the moment the big concern is the treatment of indirect shareholding. The union movement has raised the apparent lack of consideration of black pension and provident fund stakes. This also affects the financial services industry, because the Financial Sector Charter splits the ownership target into 10% indirect and 15% direct.
Code 100 does in fact count government shareholdings and pension fund ownership, categorising them somewhat obliquely as “excluded equity”. What this seems to mean is that they are excluded for the purposes of calculating the overall direct stake. So if the Public Investment Corporation (PIC) has 30% of, say, Pick ‘n Pay, when that company has to transfer 25% to a black entity it only has to transfer 25% of the remaining 70% that isn’t owned by the PIC.
But should we not be using indirect shareholding as part of the eventual, overall target for empowerment, aiming for, say, 50% of the JSE Securities Exchange to be owned indirectly and directly by black people in 10 years, rather than the 15% or so present level, or the 25% target of the code?
I am not discounting the welcome approach of a balanced scorecard, which de-emphasises ownership to some extent. But BEE deals represent a real cost in more ways than one. My worry is that all this effort in reaching this somewhat arbitrary target might distract us as a nation from the real challenge of black capital accumulation at all levels.
As I pored over the algebraic formulas and the legal definitions in the codes, I wondered what has happened to the heady days when we talked about the new black Sanlams and Gencors, rather than “measured enterprises” and “realisation points”.