Where to for Black Economic Empowerment?
10 July 2009

The rise and fall of the black capitalist.

BEE may have to navigate choppy waters as funding shortages and political neglect threaten the participation of blacks in the economy.

There are two tidal waves moving together threatening to wash out black economic empowerment (BEE): volatile markets and political neglect. Without a strong market, deals will collapse; without strong political support and a champion, there's no watchdog to ensure the rapid transfer of wealth into black hands.

For the first time in its stormy journey of just over 15 years, BEE finds itself in search of not just a face and champion, but also a new rationale for why it should remain at the centre of SA's economic transformation.

BEE was Thabo Mbeki 's signature policy when he was president. He saw it as a way of increasing black involvement in the economy without changing or disturbing the fundamentals of capitalism. He put Mandisi Mpahlwa in charge of the department of trade & industry (DTI) to drive the policy.

Mbeki is gone now. His successor, Jacob Zuma, has taken over with allies - such as the SA Communist Party (SACP) - for whom BEE does not appear to be a priority. Communist Rob Davies is now heading the DTI, but there's little obvious commitment from him to be the new champion of BEE.

"There is a vacuum in leadership now, both politically and technically, to engage with the [BEE] codes," says National Empowerment Fund CEO Philisiwe Buthelezi. "Government may feel that after eight years of talking about BEE and setting up its framework, it is time to talk about something else."

The reason Mbeki was able to drive BEE with such conviction is that he had ample time to prepare. Before becoming president in 1999, he had spent five years as Nelson Mandela 's deputy, shaping economic policy and studying BEE.

Earlier, in 1993, activist and businessman Nthato Motlana had established New Africa Investments Ltd (Nail), using R140m in funding from the Industrial Development Corp (IDC) to purchase a 10% stake in Metropolitan Holdings, or Methold. Soon afterwards, businessman Don Ncube purchased assets from Southern Life to form Real Africa Holdings. By 1997, the National Empowerment Corp (NEC), had bought into Omni Media, Anglo American 's listed media assets, to help form Johnnic. This spawned a generation of companies that are now widely regarded as constituents of the first wave of BEE.

This flurry of activity took place almost at the advent of democracy. Investment bankers had created special purpose vehicles (SPVs), the popular financing structures that allowed black shareholders to purchase shares and then to use dividend flows and share price appreciation to pay for their stakes.

The euphoria of BEE came to a halt in 1998 when, between May and September, the JSE lost about 40% in a market crash that spread throughout emerging markets. Many SPVs unravelled as share prices plunged to values below those that the deals were struck at, and dividend flows dried up. Many of the newly enriched black elite were unable to pay for their shares.

The 1998 crash forced all players into introspection. One of the criticisms was that BEE had lined the pockets of an elite only. The soul-searching led to the establishment of the BEE Commission in 1998 by the Black Business Council, and in 2001 a report was produced which served as a blueprint for a new phase of BEE implementation.

A dedicated empowerment unit was set up in the DTI. Mpahlwa championed the project in his languid yet affable manner, sometimes to the detriment of other priorities, notably industrial policy.

He was not alone. Phumzile Mlambo-Ngcuka, an Mbeki acolyte and minerals & energy minister at the time, broke new ground when liquid fuels and mining were the first industries to adopt empowerment charters. The risks were obvious, though, when a leaked version of the mining charter, containing high ownership transfer targets, wiped R50bn off resources stocks.Then finance minister Trevor Manuel provided the economic setting and an attractive investment environment in which companies could remain profitable and still do empowerment deals. The Broad Based Black Economic Empowerment (BBBEE) Act in 2003 formalised the idea of drawing in community groups, employee trusts and, in the case of the platinum-rich North West Province, the tribes who own the land.

With Mbeki gone and Mpahlwa no longer in cabinet, BEE needs a face and political champion. Davies, as the new minister, has not been eager to cast himself in the role as chief advocate - and not just because he is a white male and a communist. In an interview with the FM, Davies was quick to point out that BEE "cuts across" departments, suggesting it is not his responsibility alone.

He says the challenge now is to align legislation, such as the Preferential Procurement Framework Agreement, with the codes. As a contributor to the BEE Commission report, Davies is more interested in the broad-based parts of BEE. He believes employment equity, skills and enterprise development - features in the scorecard - should be more aggressively pursued because they have a broader, more sustained impact. This implies that the emphasis on ownership is set to shift to other parts of the scorecard.

More importantly, he would like to see the BEE Advisory Council, mooted in the BBBEE Act and seated in the presidency, finally get off the ground. "The council will then drive the debate on where BEE should be going," he says. He has initiated discussions with the presidency on the matter. Does this mean then that Mpahlwa, as Zuma 's economic adviser in the presidency, would continue championing the cause of BEE by helping set up the council?

There is no clear direction from government on what will happen to BEE and who will drive it. Mpahlwa 's participation is limited by the fact that the act clearly states that the president must chair the 15-member council and appoint three cabinet ministers to it - one of whom should chair it in his absence.

Speaking to the FM, Mpahlwa described the need for the council as "crucial", saying it would have to ensure there was "proper interpretation and application" of all the rules, and that government officials who worked with procurement should apply the rules vigorously. He sees himself merely playing a supporting role in the council. This leaves Zuma on his own - which may be the problem for BEE crafters.

Zuma is not as passionate about BEE as Mbeki. In his Confederation of Black Business and state of the nation speeches, he merely undertook to "continue to implement BBBEE" without giving details of what might be done differently.

If Cosatu does not have a particular ideological attachment to BEE, it certainly has a practical one. Affiliate unions and Cosatu itself have investment companies that are BEE players, while their members are beneficiaries of various share-ownership schemes.

SACP deputy secretary-general and deputy transport minister Jeremy Cronin says his party supports empowerment of the African majority, but what has passed for empowerment over the past decade "has been a fallback position for white corporates to avoid thorough transformation". Cronin says the empowerment government should drive is one based on job creation through industrial policy, as well as rural development.

Rural development seems to be one of Zuma 's signature policies. But BEE practitioners stress that empowerment and rural development are not mutually exclusive. African Merchant Bank deputy executive chairman Peter Vundla points out that the BEE Commission, on which he served, stated in its report that rural development and job creation were crucial elements of empowerment.

So, does the lack of political direction, at a time when BEE is suffering from the backlash of a markets crash, imply that it will fade into obscurity? Should it be scrapped? Saki Macozoma, chairman of Safika Holdings and a leading BEE deal maker, says the ANC needs to keep BEE as a priority or run the risk of alienating a key constituency of black business.

He does not hide the naked self-interest that drives BEE. "There is also a view, held by significant individuals and groups within the ANC alliance, that they did not benefit from BEE to the extent that they would have liked because Mbeki philes were favoured. They will make sure BEE remains a priority."

Macozoma reiterates his argument that BEE should not be seen as a "cure-all" for the legacy of exploitation, marginalisation and economic exclusion. The biggest threat to BEE over the next decade is economic stagnation and lower growth, he says.

But political analyst and businessman Moeletsi Mbeki writes off BEE as a sham. "We are a capitalist society and BEE is a fraudulent system," he recently told the FM. All that BEE has done, he argues, is take away wealth from poor blacks (and whites, who are shareholders in listed companies through their pension funds) and give it to "some ANC politicians".

But Mbeki 's definition of ownership through pension funds is not regarded as direct BEE ownership, since it does not translate to a board presence and strategic influence for the black fund members.

Mbeki, a strident critic of his brother Thabo 's policies, argues that even the broad-based elements of BEE, which are meant to have a far wider benefit, are "bells and whistles" added by politicians to appease. He even dismisses preferential procurement, arguing that all it does is increase the cost of goods and services meant for poor people by adding a "middle man".

So what model of wealth redistribution does he suggest? "I do not have a model for wealth redistribution, I have a model for wealth creation," says Mbeki. He cites Herman Mashaba, founder of Black Like Me hair products, and Omar Matani, owner of Matani lounge furniture manufacturers, as examples of black entrepreneurship that should be advanced.

They set up their businesses in the days of scarce or no capital for blacks. Mbeki argues that SA has to "encourage people with imagination to build businesses". His solution is the South Korean formula of providing good education and cheap capital for entrepreneurs.

Vundla, whose own business career predates BEE through his establishment of HerdBuoys advertising agency in 1991, is of a different school of thought. "We don 't have to talk of BEE as if it's a dirty word," he says, rejecting Mbeki 's call for the scrapping. Vundla says the aberrations of BEE, such as fronting and corruption, need to be treated as such and not used to taint the whole process.

He says BEE must be pursued with vigour. He cites an August 2007 baseline study by the Black Business Executive Council of a sample of 1 782 companies across SA, including 239 JSE-listed entities. It found that 19,7% of companies said they fully implemented BBBEE. Almost double that number, or 38,9%, had no plan in place or any progress to show.

Vundla attributes this to flaws in the framework. He says the low targets set by the BEE codes and even lower targets in the sector charters do not infuse a sense of urgency. But setting unrealistically high targets risks simply damaging morale and, in the absence of anyone getting near to the target, everyone will just give up, rather than get as close as they can.

The financial sector charter is a reminder of how politics can bedevil empowerment. The charter has collapsed over disagreement on the targets relating to ownership. Unions have called for higher targets, while industry is arguing that higher targets confer responsibilities (such as being required to provide additional capital) that BEE players cannot meet.

This means that charter targets, like spending R42bn on affordable housing, or having an ATM within a 20 km radius of any dwelling, are no longer enforceable, a development which Tshabalala decries as a "tragedy and crying shame".

What needs to happen then? Michael Spicer, CEO of Business Leadership SA, suggests a shift from the box-ticking, rules-based approach to a sincere attempt by companies to "bring a maximum number of people into the formal economy". He says alongside employee share-ownership schemes, there should be an increased focus on education. Spicer says a source of opportunity would be "proper liberalisation" of the small and medium enterprise sector.

Vundla is harsher. Unempowered companies should be penalised, he says, such as being prevented from opening new branches. But any attempt to prevent a commercial transaction on the grounds of lack of transformation is likely to be successfully challenged in court. This could be partly why Vundla wants the BEE Council to be more than just advisory. He says suppliers should also put pressure on companies to transform at ownership level.

Sources of opportunity for BEE range from the R787bn infrastructure programme to the five-year review of the mining charter, but only if the minerals department maintains the 26% ownership targets for 2014. The decline of the mining industry may force a rethink.

The NEF's Buthelezi says areas of opportunity include family-owned businesses, which offer an opportunity of buying a more significant stake than in listed entities. Companies in distress because of the downturn also look attractive, due to depressed prices. Finally, when the economy turns and investment momentum picks up, foreign players will be looking for local partners. The NEF has R2bn in capital to play in that space.

BEE on its own cannot be used to tackle problems such as chronic youth unemployment and severe inequality.

Macozoma once noted that BEE, as was said of 17th century French statesmen Cardinal Richelieu, "has done too much harm to be praised and too much good to be damned". The challenge is to ensure that, in the long run, BEE does more good than harm.

Thebe Mbanga, www.financialmail.co.za