Sep 15

15 September 2005

Mood of euphoria in empowerment circles

There’s a mood of growing elation about black economic empowerment (BEE), if an empowerment conference hosted by Ditikeni Investment Company this week is anything to go by.

BEE deals are regularly taking place – barely a day goes by without one and often many more deals being announced in the daily newspapers, and even just about every non-BEE deal has a BEE component.

The major difference is that whereas one year ago each deal was awarded to one of the usual highly-connected names, today’s deals are broad-based – benefiting company employees, management and a BEE consortium of individuals often doing their first deal.

What’s been inhibiting even more deals from taking place has been an uncertain regulatory environment and sluggish economic growth.

As the conference heard, both these barriers are crumbling.

For instance, deputy director-general of the Department of Trade and Industry (dti) Lionel October told the conference that the full Codes of Good Practice for Broad-Based Black Economic Empowerment (BBBEE) will be published within two weeks, possibly even within days.

Previewing some of the imminent changes, October said the type of broad-based deals being done at the moment is precisely what the Codes envision continuing. The Codes, when finalised, would reinforce trends already evident.

Soon, any company not BEE-compliant according to the Codes will find themselves marginalized from the economy, he said.

At the moment the emphasis remains largely on equity transfer, but once the Codes are finalised each of the other pillars of transformation will gain equal importance. And even equity deals will change in nature: “For instance,” said October, “we are introducing incentives of bonus scorecard points to encourage empowerment deals that bring in new entrants – those who haven’t previously benefited – in equity deals.”

October lauded the fact that many of the latest model of deals included a `golden triangle’ of beneficiaries: employees, management and BEE investors. This model too would be encouraged by the Codes.

Deals have to offer substance, he said. Too many deals in the past had been announced to considerable fanfare, the deal subsequently collapsed because of an unsustainable financial model, yet the company retains its scorecard-compliant rating.

“Deals with complex financial structures must have a finite term of five or ten years for financial structures, at which point the equity becomes unencumbered. This will be enforced by awarding scorecard points only upon the date true ownership vests,” he said.

The scorecard approach will also measure the real value of black ownership: if a 25% black-owned business acquired a 50% stake in another company, the latter company will be considered only 12,5% black owned, rather than 50%.

Another area of uncertainty has been the relationship between existing transformation charters and the new Codes. October explained to the conference that any inconsistencies between the two in terms of targets and principles would be addressed on the basis of `substantive compatibility’.

The negotiation of the Mining Charter was too historically important an event to be discarded, he said. It was also legislated, meaning it would remain in its current form until it expires after 10 years. At that point, the dti would seek to align it with the Codes.

The other charters for the Liquid Fuel and Financial Sectors would be looked at on the basis of whether it was substantially compatible with the Codes, and any differences would be negotiated. Other charters currently being drafted – and there are many – are in any event awaiting the Codes to ensure alignment.

One easy way that companies could be ownership-compliant would be by counting as black-owned investments by the state-owned Public Investment Commission and pension funds. October dashed hopes of this, admitting in the process that much of that money was black-owned, but that it would defeat the purpose of empowerment to make it so easy for companies to comply.

“Many companies could overnight qualify as BEE companies without having actively done anything to transform. Our view therefore is that government and pension funds have no colour and will not count towards BEE ownership,” he said.

Codes were being drafted which would grant special exemption from ownership criteria for small business and multinational corporations. They would instead make up the deficit in scorecard points from `equity equivalents’, or the remaining pillars, such as preferential procurement and especially enterprise development.

None of this now-certain regulatory environment would man anything if there were no economic growth. Fortunately, the country is on the verge of stronger growth than we are accustomed to, said economist Iraj Abedian, chief executive of Pan-African Investment and Research Services.

Previously disadvantaged communities, who were in any event largely excluded from deals in the past, well now benefit not only from being included but from a more robust economic growth.

They are likely to benefit, but with one important proviso, said Abedian: “Few people realise the extent to which South Africa’s economy is no longer dependent on commodities and agricultural produce. Fully two-thirds of the economy consists of tertiary services that are far more capital-intensive than labour-intensive.

“Higher growth may therefore not benefit the broad masses unless they acquire skills to avail themselves of opportunity. High growth in a diversified economy seldom creates unskilled jobs.

“The top priority for the country should therefore be skills development,” he said.

Saki Macozoma, deputy chairman of a number of leading financial institutions and deputy chairman of Safika Holdings, warned that capital accumulation by blacks should not be under-emphasised, because the result would be to sentence them to being perpetual consumers.

“One of the more remarkable economic trends over the past three years has been the property boom, but I’m convinced that 99% of the benefit went to whites. Why is it that every new property development has an English name such as Stonehaven and never an African name? It is because none of the property developers are blacks. We shall only ever be consumers in South Africa, unless blacks accumulate the capital to build infrastructure,” said Macozoma.

Abedian also said that arguments against BEE as a growth strategy had been rebutted by the strong economic growth currently taking place: “Sceptics were the last opposition to BEE, and they have been answered by the economic growth we are experiencing. It is now recognised that the largest deterrent to economic growth is failure to implement BEE. Recent favourable economic news is the result of having a bulging black middle class, which itself is the product of government policies such as employment equity and BEE,” he said.

Income distribution analysis demonstrated that BEE had accelerated an already -evident swing in income towards the black community: whereas in 1970 19% of total income was in the hands of blacks and 71% in white hands, that ratio had swung around by 2001, with 51% in black hands and 38% with whites.

The conference heard that empowerment had to reach deeper still into previously disadvantaged communities. Mayor of Ekurhuleni, Councillor Duma Nkosi, proposed a simple solution to accelerating empowerment: focus on support mechanisms for micro-businesses and local communities, including cooperatives.

Whereas R30bn spent in a capital-intensive sector of the formal economy might yield barely 1,000 jobs that same money spent on capacity-building and skills transfer in the info犀利士
rmal sector would go much further.

“Informal businesspeople want to acquire business and management skills, and business and other institutions have the wherewithal to assist them,” said Nkosi.

“BBBEE is about `transformation’ rather than `transfer’. This has to be linked directly to the expansion of the economic base and the restructuring of society. Rather than being a cost, BBBEE should become the driver of new growth. In this way, new markets and new investments and new economic activity will focus on the development of the second economy,” he said.

Sarah Ryklief, chairperson of Ditikeni, said it was clear from not only from the tone of speeches, but the dramatic shifts in the regulatory and economic environments, that BEE was poised to transform the South African economy as never before.

Issued by HWB Communications
Contact: Caroline Swift
Tel: 021 462 0416
Cell: 084 303 6777

On behalf of:
Ditikeni Investment Company
Contact: Gordon Young, Investment Adviser
Cell: 082 928 0028