Despite an extensive policy framework that broadened the ambit of black economic empowerment from the narrow focus on ownership that prevailed in the Nineties, black shareholding still punches way above its weight. But that could change.
The ongoing controversy over BEE has prompted the most clear and positive statement yet on a policy review. The New Growth Path (NGP), released recently by Minister for Economic Development Ebrahim Patel, highlights the “disproportionate emphasis” on “ownership and senior management issues”.
The NGP calls for a “substantial revision” of the BEE codes of good practice “to do more to incentivise employment creation” and “investment in new productive capacity by black entrepreneurs”. In its early formulation, black corporate shareholding was politically compelling.
It was inconceivable that the political landscape could be transformed without also shifting the locus of power within the economy. Ownership therefore was envisaged as a necessary intervention to enable black South Africans to move from the periphery of the economy into the mainstream, accumulating capital and assuming control and influence over economic decisions. Since then much has changed.
South Africa has to balance the competitive demands of a global economy with its own economic imperatives, principal among them being employment creation. Importantly, the NEP finds the codes are more of an impediment than a help in meeting these demands. Still, a thorough revision will be difficult to achieve. Much more than tampering with the current framework of the codes will be needed.
More significantly, the newly entrenched and powerful vested interests that have emerged off the back of BEE ownership can be expected to put up a strong fight. BEE ownership is a much bigger component of the codes than is apparent.
When first released, the codes were lauded for attributing just 20% of the so-called ‘balanced scorecard” to ownership. Black shareholding, however, is also the main gauge by which a company may qualify for preferential procurement and enterprise development. If we factor in the ownership obligations in these two elements of BEE, the effective weighting for ownership in the codes more than doubles.
Further, the codes are not structured to promote the outcomes that the NGP emphasises. Their construct endorses the redistribution of wealth (with potential for personal enrichment, as many can attest to) at the expense of the creation of productive economic wealth. Less influence and control — with less of the commensurate risks and responsibilities — is being transferred under current policy than was the case in the Nineties.
The codes have placed an effective 25% ceiling on BEE ownership. There are incentives for transacting with new entrants, for example, but not for exceeding the 25% level. Further, black shareholding tends to be truncated into small equity parcels to accommodate the various categories of shareholders — black women, broad-based, new entrants, and so on.
The overriding incentive therefore is to gain access to many thin slivers of corporate assets and realise value as early as possible. In other words, the codes encourage the proliferation of asset traders and not asset creators. Further, asset traders do not tend to change their spots and become entrepreneurs once they have accumulated capital.
Nowhere in the codes are black owners required to be more than holders of equity, who are able to exercise their economic and voting rights. It is difficult, if not impossible, for the numerical formulas of the codes to capture sound, productive shareholder relationships — and so they don’t try to, although the policy objectives require this.
The vast amounts of capital invested in BEE ownership point to the powerful vested interests that have been created through the channels of corporate shareholding. Far more capital has been invested in the sale of shareholding to black groups than in other areas of transformative investment, such as low-income housing and land redistribution — at least R500-billion as against some R150-billion on housing and land.
As much BEE investment again could be needed to complete the 25% ownership marker, meaning that the codes still offer considerable opportunity. In addition, much of the enrichment associated with BEE shareholding is pending and not actual. This is because BEE is debt financed, with repayment periods stretched for years, given the current poor economic conditions.
So any tampering with the system before aspirations are fully realised is likely to stir resistance. Another suppurating sore is the patronage and corruption that is taking place under the mantle of legitimacy provided by BEE policy, which has created high levels of political cynicism.
As a young ANC member told columnist Jacob Dlamini: “The National Democratic Revolution ended a long time ago. It’s now the Tender Distribution Revolution.” Unfortunately, the ANC itself has become embroiled in this system, as an alleged beneficiary of the Chancellor House group of companies.
So it, too, has vested interests that will be impacted by any “substantial revision” of the codes that supports productive investment over redistributive forms of empowerment. The mining sector in particular gives pertinent insight into the kind of costs of BEE ownership to the economy, but equally, into the levels of personal enrichment that are possible without adding any productive value — what is sometimes referred to as “rent-seeking” or a “spoils system”.
We need look no further than the recent ArcelorMittal and Kumba controversy, prompted by the loss of iron-ore rights to unknown BEE consortium Imperial Crown Trading (ICT) 289. To get back its right, ArcelorMittal was prepared to pay R800-million to ICT — an amount one ICT shareholder, Sandile Zungu, reportedly described as ‘money for jam”.
This is by no means an isolated case although its scale is exceptional. There is enough international research to suggest that such rentseeking and its associated costs inhibit growth; in particular, because a key driver of growth — innovation tends to be hurt more than everyday production.
Government wants innovation as a pillar to the success of the NGP and therefore it needs to rethink BEE with this in mind. Importantly, the NGP already acknowledges that BEE has imposed ‘significant costs on the economy without supporting employment creation or growth”.
Fundamentally, the codes have not provided the right kind of rules that encourage money to be well spent. The crux of the problem lies in shifting from the redistribution of wealth to the efficient investment of capital in ways that encourage black inclusion in the mainstream economy, across a broad spectrum of economic activity and investment.
The NGP appears to suggest that BEE objectives may be met through job creation, local production and state ownership, rather than explicitly racially defined measures. There is some room for adjusting the codes to meet the NGP’s broader economic and developmental objectives. For example, there is provision in the codes for equity equivalents, currently available to multinationals with policies that disallow the sale of equity in subsidiaries.
The scope of equity equivalents could be widened to include local producers and priorities such as job enhancement, research and development, and improved skills development. Greater flexibility could be introduced for sectors earmarked for new or revitalized growth, such as the green economy and manufacturing. But only so much may be achieved through changes to the codes.
A new, overarching transformation and empowerment framework is required. This will not readily be achieved without a strong political champion and greater leadership coherence within the ANC.