The biggest black economic empowerment (BEE) deal of the year may not even be a deal. And it may not even be that big in monetary terms. Yet its implications are huge.
In February, IBM announced it would add 900 jobs to the 500 it already has at its South African call centre.
IBM has made no secret of wanting to keep its subsidiary in South Africa wholly owned in complying with the government’s BEE initiatives.
The latest draft of the government’s Codes of Good Practice on BEE allows some flexibility for foreign investors — under strict conditions. The government’s Broad-Based BEE Scorecard counts equity transfer as 20 points out of 100.
Those foreign firms that qualify can use “equity equivalents” to score all or part of those 20 points in place of doing a BEE equity deal.
IBM’s move to create jobs was not flagged as such, but clearly it could be seen as an alternative to parting with equity. Since being announced in the second phase of the draft codes in December last year, the equity-equivalent approach has drawn mixed responses.
A Business Day editorial in March accused the Department of Trade and Industry of bending over backwards to appease multinational companies that did not want to part with equity.
The spur for the editorial was the sale of a 26% stake in its local operations by family-owned German company Henkel to a Western Cape-based BEE consortium. The paper’s leader writer saw this as “refreshing” — but it did make a lot of sense, not least because consortium chairperson Mercia Isaacs brought to the party experience as a former chairperson of the Western Cape Tender Board.
Another point of view was put forward by University of Cape Town lecturer Anthony Butler in a special edition of New Agenda on BEE.
“Empowerment requirements will also discourage some of the foreign investment that might otherwise compensate for South Africa’s savings shortfall. Despite government’s much-vaunted flexibility towards multinational corporations, they must still deliver compensatory ‘equity equivalents’.”
Actually, foreign investors have demonstrated flexibility in embracing BEE. The wrong impression may have been created, for example, by the attitude of technology firms towards equity transfer. Several, for example Siemens, have transferred equity to local partners.
As with Henkel, firms such as Siemens and Alcatel saw value in doing so, and their global structures could accommodate having subsidiaries with external shareholders. South Africa’s mostly foreign-owned oil firms were the first to enter any charter with the government on BEE. The Liquid Fuels Charter agreed to the sale by oil companies of 25% of the equity of local operations by 2010.
Other foreign firms, notably the automobile companies, do not see their way clear to parting with equity. This problem is not easily overcome. South Africa’s automobile industry encapsulates the only major success in export-oriented manufacturing.
All the motor manufacturers are wholly-owned subsidiaries except Toyota, which is majority-owned by Toyota Japan. The departure of any of the motor manufacturers would hurt South Africa’s image as an investment destination.
South Africa is a small market, and one that, though profitable, is not really compelling for these companies. Packing up was quite simple for some United States firms during the apartheid years, for just this reason.
Yet the automobile companies are willing to support empowerment in other ways. BMW, for example, makes no secret of its backing for black entrepreneurs in owning dealerships. As a family concern, BMW is unlikely to countenance having any kind of partner in any foreign country.
Yet even when firms do go into joint ventures in regions where this may be encouraged, such as Asia, this does not mean they will do so happily in South Africa. Again, they can afford not to invest here. This is a lesson in humility we have to learn.
The question is not: “Why don’t more foreign firms invest in South Africa?” The question is: “Why should any expanding firm look anywhere else but the rapidly growing, highly populous and potentially lucrative markets of Asia?”
The most important benefit of the flexibility represented by equity alternatives is that it could tap the innovative energy of the private sector. Multinationals are not static, and can be endlessly inventive and restless in their pursuit of profit.
This was underlined in a presentation by Dennis Lewis, board member of fast-moving consumer goods multinational Unilever, at the third meeting of the UNIDO-Africa Investment Agency Network conference in Johannesburg recently.
Talking about how African countries could fit into the supply chains of multinationals like Unilever, he pointed out that, although the firm had R3-billion in assets in Africa, this was not static, but was constantly changing in composition as the company sought to profit from its investment.
Seen through the lens of BEE, the divestment of subsidiaries of multinationals can create new black companies, big and small. The creation of new local suppliers to supply multinationals that do not want to get involved in every aspect of the value chain can also help deracialise the economy and create wealth and jobs.
The sugar industry’s creation, in the 1980s, of small black sugarcane growers to supply the mills is another example of private sector innovation in empowerment.
A new kind of thinking on empowerment, one that works with markets rather than against them may achieve more than we have done so far through equity transfer.