Where BEE means growth

If you wanted to have a frank and honest conversation about black economic empowerment (BEE), now is not the best time to do it.

A contracting economy invariably means squabbles between suppliers and clients and among shareholders, as credit tightens and bills get harder to pay.

In the case of BEE, in particular, it means that many—if not most—of these deals are underwater, meaning that the ruling share price is below that which puts the black investors in the money.

So the timing for the Mail & Guardian‘s debate sponsored by Metropolitan on black economic empowerment was very good for a ‘warts and all” discussion.

BEE is a subject on which there is little agreement. As noted at the debate, it is everywhere and nowhere, everything and nothing. Whites grumble that there is too much BEE, blacks that there is too little.

There are spectacular success stories about how some high-profile (and some not-so-high-profile) black individuals have played starring roles in the empowerment process, amassing tidy fortunes.

There are even, perversely, a few whites who have done very nicely, thank you, by tying their colours to very successful BEE masts.

So BEE is controversial. At best, it appears to make very few beneficiaries happy.

Why have BEE?

You could hardly imagine a system as effective as apartheid in ensuring that one section of the population had nothing while the other had everything.

When apartheid officially closed for business in 1994, the number of black millionaires could be counted on the fingers of one hand and they had all made it in areas such as traditional medicine, at which whites could hardly expect to succeed.

It could be added that the apartheid system, no matter its scandalous ethical foundation, is entirely unsuitable for a modern economy.

The notion remains widespread that South African business relishes the sea of unemployed labour in which it operates as it makes its profits by exploiting this labour. This is not true of a modern economy in which it is increasingly skills, not labour, that you need.

The unhappy truth about too much of the country’s workforce is that inadequate education and training mean that the job-seeker offers very little to business.

The criminal underinvestment in people is just one of the inefficiencies that apartheid bequeathed to the new South Africa.

It is well understood that apartheid was racebased, that it favoured whites at the expense of blacks. Less understood, though, was that the apartheid economy had tremendous inefficiencies built into it.

For one thing, it ensured that workers were often housed too far from their place of employment so that perhaps half of their wages went to transport costs.

Apartheid favoured centralisation over decentralisation and big business over small business.

It preferred monopolies and regulation to markets and competition. In too many cases in post-apartheid South Africa, the elite has conspired to cut in some blacks rather than opt to reform a sector or company to improve prices and services for the benefit of both the majority of the people and the economy.

There are numerous cases like this, both in the public and private sectors. In the oil industry, as a case in point, a structure designed to meet apartheid South Africa’s oil needs in the face of sanctions and boycotts remains pretty much unaltered 15 years into democracy.

The cry here, as elsewhere, was that there must be empowerment before efficiency. But this was never the challenge of transformation, which was always to do both at the same time.

Empowerment and efficiency had to go hand in glove if the economy was to be truly transformed. To succeed, transformation would also have to deliver better prices and services, driving down the cost of doing business and up the chances of the unemployed being drawn into the economy.

The cellphone industry is a breathtaking case in point, at one level being no more than an extravagant infrastructure for taking money out of the pockets of the poor and transferring it into the bank accounts of its wealthy management and shareholders.

Market leaders Vodacom and MTN earned combined revenues of R15.5-billion last year from interconnect fees—what the cellphone networks charge one another to terminate calls on their network. These fees have been eye-poppingly high in South Africa.

Costs are estimated by insiders to be between 25 and 40 cents but consumers have been paying through the nose at R1.25 a minute.

The fee will now be cut to 89 cents through the intervention of Communications Minister Siphiwe Nyanda. Hopefully this will be just the first of many such cuts.

The cellphone industry has been hugely profitable because this sector, as with many others, has been insufficiently competitive.

Economists have pointed to the large gap between producer and consumer inflation as evidence of insufficient competition in the South African market.

Producer prices have responded well to lower global demand and higher interest rates locally, the PPI falling to -3.1% compared with a year ago.

The CPI, on the other hand, also released this week, although in the 3% to 6% target range at 5.9%, was almost 10 percentage points higher than the PPI.

The two measures are not directly comparable, but the wide gap between them suggests that competitive forces are indeed working at the factory or farm gate, but market power, both in the public and private sectors, is conspiring to keep the prices paid by consumers relatively high.

As the CPI is the key determinant of interest rates, insufficient competition, coupled in some cases with cartel activity, is extracting a high economic cost.

Reg Rumney, a panelist at the debate, noted that too often in South Africa there are only a few players that dominate a sector.

He said that BEE could be coupled with an efficiency drive by using BEE to create more market players and facilitate greater competition.

He suggested, tongue in cheek, that something be nationalised just ‘to see what a mess it would be”, but added: ‘We must look at privatisation where BEE could be used to increase competition.”

‘Why do we only have SABC and e.tv? Why not privatise SABC3 as a BEE initiative? Why do we only have three cellphone companies?” he said, suggesting that a fourth licence could be used to promote both competition and BEE.

Kevin Davie

Kevin Davie

Kevin Davie is M&G's business editor. A journalist for more than 30 years, he has worked in senior positions at most major titles in the country. Davie is a Nieman Fellow (1995-1996) and cyberspace innovator, having co-founded SA's first online-only news portal, Woza, and the first online stockbroking operation. He is a lecturer at Wits Journalism. In his spare time he can be found riding a bicycle, usually somewhere remote. Read more from Kevin Davie

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