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Could SA’s BEE billions have been better spent?
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Hilary Joffe
Business Day
Tuesday, July 06, 2010
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What would SA look like now if we had taken R600bn over the past decade and spent it on creating jobs? It’s hard to know how we would have spent that much: even now that the government has made job creation its priority, innovative ideas on how to do it are hard to come by.
But huge feats of innovation and creative thinking have gone into the structuring of black empowerment ownership deals over the past decade or two. Jenny Cargill, the author of a new book on black empowerment — Trick or Treat: rethinking black economic empowerment — estimates the total value of those deals at R550bn-R600bn, far more than the R140bn of capital that has been invested in land redistribution and low-income housing in recent years.
How much of SA’s scarce capital should have been invested in share ownership for black people, as opposed to jobs, land or houses for them? It’s a crucial question, but not one that has ever really been asked.
And that’s one of the most remarkable things about black economic empowerment (BEE). It is, Cargill argues, the biggest exercise in social engineering that the post-apartheid government has undertaken. Yet there has been very little attempt to align it with other elements of economic transformation policy. Nor, she says, has there been much clear thinking on just what it is the ownership requirements are meant to achieve. Originally, those doing deals aimed to transfer control, or significant influence, to new black shareholders. But the control idea has long gone out the window and the BEE codes of good practice effectively put paid to it altogether. By requiring 25% black ownership they set a ceiling, Cargill argues, so that all companies had the incentive to do was tick that box, not exceed it. And though 25%-26% was originally a magic figure because it gives the power of veto over key decisions by shareholders, the broad-based requirements of the codes have diluted that.
So Cargill comes to the conclusion that BEE ownership now is essentially about redistribution — not control, influence or productive investment. But nobody has asked whether this is the best way to do redistribution, nor whether it is equitable or effective. Some black people can access deals, some can’t; some get good assets, others don’t. Most take on huge debt to buy their shares, so deals often unravel, or shareholders end up having to sell some of the shareholding to repay the debt.
“A puzzled ‘Why are we doing this?’ is in order — particularly when we consider the costs involved,” writes Cargill.
One would have hoped that the kinds of questions she is asking would have been taken up as the government, labour and the mining industry worked to develop an updated mining charter. Last week’s declaration on a “strategy for the sustainable growth and meaningful transformation of SA’s mining industry” does at least make the link between macro policy and empowerment policy, and there are hints of new thinking on BEE.
Yet, in the end, the declaration does not confront the “articles of faith” (as Cargill calls them) of empowerment ownership. For one thing, that 26% target is still there.
Why are we still doing this? Why not, for example, just donate some shares instead? Cargill points out that it cost the big four banks 2,5%-3% of their market capitalisation to transfer 10% of their equity to black shareholders. Which implies that giving the shareholders 3% free would have transferred the same economic value as trying to sell them 10%. Then there’s the thorny “once empowered, always empowered” issue. If the black empowerment partners sell their stakes, does the company get the full credit for a deal done, or must it start again? This is crucial, for companies and black shareholders.
If firms have to keep doing empowerment deals forever to comply with the rules, the cost to the economy will be incalculable. One way around this is for companies to lock the black shareholding in for good. If they bar the black shareholders from selling at all, then they are not transferring wealth: the shares are worthless because they can’t be traded. If they insist the shares can be sold only to other black people, the effect is to slash the value of those shares, because the pool of investors who can afford to buy them is so small they will have to be sold at a deep discount.
Apparently there were behind-the-scenes talks on this among the mining stakeholders, but Mineral Resources Minister Susan Shabangu wasn’t persuaded, telling reporters that any company that sold its empowerment stake to non-empowered shareholders would just have to do another deal.
The charter is still on the drawing board, but Shabangu’s comments were a depressing reflection of how little appetite there is in the government for a rethink. Policies often do prove to have unintended, even damaging, consequences. But it takes bold leaders to admit that, and even bolder ones to throw out the articles of faith and start again.
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