The Vuyo Jack codes

Over the past decade there have been 1 127 publicly announced black economic empowerment (BEE) deals worth R232,6-billion, according to Ernst & Young.

After more than 10 years following such issues, I know of only four companies on the JSE Securities Exchange with unencumbered black equity worth more than R1-billion. These are MTN, African Rainbow Minerals, Mvelaphanda and Hoskens Consolidated Investments.

At the end of May, the JSE Securities Exchange had a market capitalisation of R2 800-billion. The black equity in the above companies is 0,36% of the market total. Adding the other companies on the JSE with unencumbered black equity, it can safely be assumed that the total is less than 1% of the JSE’s market capitalisation.

The message is clear: South Africa’s capital reform project, to deracialise ownership in the economy, is in a state of crisis. By any reasonable benchmark, the project has been a failure. There is a need for deep introspection to answer the question why so much effort and resources deployed over a 10-year period have yielded so few results? It is clear that ownership is by far the most difficult indicator of the BEE scorecard to achieve, which implies that the issue should get more, not less, prominence.

Against this background, one would have expected Minister of Trade and Industry Mandisi Mpahlwa to make a bold statement pointing the way out of the crisis at the recent launch of the draft amended BEE Codes of Good Practice. Instead, he made an incorrect statement about one of the most contentious issues arising out of the first draft: whether companies could get full points upfront for ownership under the BEE scorecard for having concluded a BEE transaction, whether or not black people own the shares. Mpahlwa said they could. The codes said they could not.

Furthermore, Mpahlwa released a second draft of the codes with indicators and targets for all BEE indicators that are so watered down and meaningless that it would make more sense to cancel the process, and for everyone to forget about empowerment and return to business as usual. The amended scorecard has 10-year targets for transformation. But, with the exception of ownership and control, most companies have already achieved the targets. This makes the whole exercise a complete waste of time.

So why would Mpahlwa make an incorrect statement about such a serious issue? The logical explanation is that the only people who knew what was in the codes were those at BEE rating company, Empowerdex, which drafted the codes.

There are a number of questions that most people who were at the launch wanted to ask, but did not. Why did the Department of Trade and Industry repeatedly deny, over the past six months, that the codes had been written by Empowerdex? Why does nobody at the department appear to know what is in the codes?

Why did the department outsource the development of such an important policy document to a private company? Was the process of appointing the company transparent? Is the mindless and insane complexity and gobbledegook in the codes a deliberate ploy by Empowerdex to create work for itself in the private sector because it will be the only company that can explain them?

At the launch, Empowerdex CEO Vuyo Jack, who presented the codes on behalf of the trade and industry department, used 10 slides to illustrate what could have been explained in one bullet point.

The codes also contain a bizarre clause relating to excluded equity, which effectively reduces the ownership target for non-mining listed companies to 15%. Briefly, the proposal excludes institutional shareholdings from the calculation of black ownership. According to one estimate, institutions own 67% of the equity on the JSE. Therefore, the target is 25% of the remaining 33%, which is 8,25%. But the exclusion can only count if a company has achieved an arbitrarily chosen target of 15%, which will render most BEE shareholders unable to block special resolutions on the board.

It is not clear why non-mining listed companies should have a lower target than non-listed companies and listed mining companies, which have committed to a 25% target. Mining, oil and gas companies account for a third of the JSE’s market capitalisation. Jack’s explanation to a weekly financial publication was that institutions were excluded because it is not possible to work out how much of their funds are owned by blacks.

Yet indirect ownership by institutions can never be equated with direct ownership; the two issues should not be conflated. Over the past four years, Empowerdex has lobbied hard, with private sector support, to allow companies to lump indirect and direct ownership together. Therefore, almost every company rated by Empowerdex has a BBB rating (a good contributor to empowerment). The way out of this mess is for the trade and industry department to cancel the codes and start a quick, negotiated process to restore sanity.

Duma Gqubule is an economic consultant

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Duma Gqubule
Duma Gqubule is founding director at the Centre for Economic Development and Transformation

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