Government deserves recognition for trying to balance economic growth prerequisites with a fairly ambitious programme of social engineering in the Broad-Based BEE Codes of Good Practice.
The soon-to-be gazetted codes will give certainty to business on what government wants businesses to do about BEE. BEE deals will increasingly become a matter of compliance rather than creativity, which is not necessarily an improvement. Certainty is what business wants, after all.
The devil is in the detail, and the full text has not been released. If I am deciphering the information released in mid- December correctly, and focus only on the ownership section, for instance, problems of complexity and sheer unreality remain.
For instance, seven out of 20 possible points are still reserved for ensuring the deal actually happens. They are awarded for creation of “net value” rather than “realisation”. The phrasing has changed from the draft, but the principle seems to be the same. The deal has to succeed for those points to be earned.
As I have pointed out before, no company can guarantee its deal will work out. There is an element of risk in all BEE transactions. So companies doing BEE deals will probably not want to bank on earning those points.
This is especially so because BEE parties do not have the finance; the common practice is to sell off part of the shares allocated in a BEE deal to own the remainder outright. So a BEE company may be entitled to 25%. It may want to sell 15% so that it can pay off the financing for the remaining 10%.
What has been called the “once empowered, always empowered” principle should cater for this and for black shareholders wanting to move on and consolidate their investments.
The idea is that neither the black shareholders nor the established company should be punished if those BEE shareholders want to realise their profits. Mzi Khumalo’s quick and profitable exit from an investment in construction firm Basil Read is an example.
It could even include cases where, for some reason, the BEE shareholders cannot find the financing to pay off their shares. An example here is the 4% of Telkom that BEE grouping Ucingo had to walk away from.
Reports seem to say the principle is accepted that these deals will be counted, even though the company no longer has those shareholders. But the department of trade and industry document expressly says there will only be partial recognition, and if the BEE partner cannot finance the shares, they will not be counted at all.
The department of trade and industry refers to this as “recognition of ownership after the sale or loss of shares by black partners”.
The document I have says recognition of that deal will depend on “both the net value created in black hands as well as the level of transformation in the measured entity”.
And this deal can earn only a maximum of eight points out of 20. The department of trade and industry says the limited recognition for past ownership is to “encourage the retention of black direct investment of at least 15% on a continuing basis”, and “provide enterprises with enough time to enter into another BEE ownership transaction in order to retain their BEE status”.
The 25% direct ownership target remains. This whole concept must be revisited. It is absurd to think that black people have to buy 25% of every company, even the dud ones.
The target for each company should be replaced by an overall percentage for the JSE and bigger private firms, reviewed from time to time, and it should measure direct (i.e. black individuals) and indirect (i.e. through pension funds and retirement annuities) ownership.
We should know how much of the JSE, for a start, is directly owned by white South Africans, how much by foreigners, and how much indirectly. The only research on this I know of was produced by Businessmap some time ago for the Banking Council.
Government’s BEE strategy represents ambitious socio- economic engineering, with little if any international precedent. Yet what background economic and financial research informed the codes?
What seems to have happened is that vested interests, in the form of BEE parties and white business, have intervened to shape various aspects. But the Broad-Based BEE strategy by design affects more than those two constituencies.
Let’s not forget that the stated aim of the codes is to increase “the numbers of black people that manage, own and control the economy, as well as significant decreases in income inequality”.
Rigorous, independent analysis of the draft codes would have been useful. For instance, financial services think tank FinMark Trust has produced a detailed analysis of the implications and possible unintended consequences of the National Credit Act, whose final phase kicks in this year. It spells out the possible unintended consequences, the pros and the cons of the proposed regulations, and compares the provisions of the Act to those of other countries.
The codes are the meat of the BEE legislation. They should dramatically affect, through the cascade effect of preferential procurement, almost the whole business sector. It is surprising that no similar analysis has been done.