The intention of some companies to link their procurement to pure ownership rather than a broad-based measure can result in risk to broad-based BEE
Government, the private sector and other economic stakeholders will need to work together to ensure transformation.
Government's proactive role through mentions of black economic empowerment (BEE) in the state of the nation address, the release of the broad-based BEE strategy and the promulgation of the broad-based BEE Act resulted in a renewed impetus for empowerment, and last year will be remembered as one of the defining years in the history of BEE.
In the private sector, the completion of the mining and financial services charters as well as the proposed development of charters in the information & communications technology (ICT), construction, agriculture, properties and transport sectors illustrates the importance of BEE for SA companies.
BEE is no longer focused only on the redistribution of ownership.
It is implemented and measured through a balanced scorecard consisting of seven pillars: ownership; management; employment equity; skills development; affirmative procurement; enterprise development; and corporate social investment.
To evaluate the effect of the broad-based strategy and the effectiveness of its implementation, a snapshot of the status quo and the progress made by all JSE Securities Exchange-listed companies is presented in Top Empowerment Companies (TEC).
The analysis will focus on the consolidated BEE status of the JSE-listed companies under assessment.
The JSE often reflects the economy, so this analysis also allows for further extrapolation and assessment of the progress of BEE across the economy.
Ownership
On September 30 last year black people directly and indirectly owned about 15,7% of the market capitalisation of all companies listed on the main boards of the JSE - worth R234,3bn .
A similar assessment of the top 100 companies last year estimated black ownership of the JSE at about 9,5%.
But splitting ownership between that held directly by black investors or management (direct ownership) and that held indirectly through pension funds and other institutional investment (indirect ownership) shows a different picture.
In terms of direct ownership, black people hold only 1,6% of the JSE (estimated at R23,8bn), while R212,4bn, or 14,1%, is held through institutional investment, where black shareholders often do not have a direct say over the management and use of the economic resources.
The lack of capital in the hands of black investors is often identified as a key challenge for BEE.
An estimate based on this sample indicates there is a need for about R162,4bn in funding to reach a 25% black ownership target (if both direct and indirect ownership are included).
This shortfall in funding will increase to R355,6bn if a target of 25% direct black ownership is set.
To overcome the funding shortage and facilitate black ownership in large companies, different innovative transactions involving vendor financing, derivatives instruments and conditional conversion structures were implemented last year.
Though these transactions often resulted in no immediate economic benefits flowing to their new black investors, they do highlight the innovative corporate efforts to resolve the funding shortage and introduce black partners and shareholders into their business.
Management
The total number of black directors on the JSE increased from 367 in 2002 to 432 last year - just more than 17%.
Though there has been an increase in the number of black directors, the ratio of executive to nonexecutive directors worsened from 1:5 in 2002 to almost 1:7 last year.
So the increase in black directors was mostly in nonexecutive roles.
The delisting of some black-empowered enterprises from the JSE last year also lessened the number of black directors.
There is no black CEO in any of the SA heavyweights listed on the JSE, with the exception of Telkom and MTN, which are both in the regulated telecommunications sector.
The litmus test of the broad-based approach to BEE will be the degree of control that black managers achieve in the boardrooms of JSE-listed companies over the next decade.
Employment equity and skills development
Only 21% of the companies paying skills-development levies had received grant disbursements after applying the requirements of the act and implementing training programmes.
As the act relies on the induced participation of companies through the skills levy, the low participation rate by companies indicates that its objectives have not been achieved.
The key measure of success will be the way in which government further encourages SA companies to participate in the training programmes. However, companies should not see skills levies as an additional tax, but rather as a deposit by the company to illustrate its commitment to future skills-development programmes.
Affirmative procurement
If 50% of the current procurement undertaken by JSE-listed companies was bought from black companies, the value of affirmative-procurement opportunities that could benefit black businesses is about R515,3bn.
The present reported affirmative procurement of R15bn indicates an implementation gap of just more than R500bn.
We estimate the opportunity cost of this implementation gap, calculated as the loss of potential profits and salaries to black owners and employees, at R100bn.
The intention of some sectors and companies to link their procurement to pure ownership rather than a broad-based measure can result in significant risk to broad-based BEE. Such efforts will encourage fronting and exclude smaller business from the BEE process.
It will be interesting to track the strategy taken by both corporate SA and government to overcome this gap.
Enterprise development
At least 102 JSE-listed companies (29,7% of all listed companies) disclosed the existence of different enterprise development programmes.
The total estimated contribution through enterprise development amounts to R26,7bn, or 1,8% of the market capitalisation of the JSE.
However, most recognised enterprise development contribution involves the introduction of black owners or partners into the subsidiaries of the companies.
In many instances these initiatives are used as a way of circumventing black ownership requirements at holding company level.
Corporate social investment
Listed SA companies reported at least R800m in contributions towards different corporate social investment (CSI) projects last year.
This represents 0,9% of total profit of the reporting companies. As the amount represents only the reported contributions and excludes those that have not provided detailed disclosure, the actual contribution towards CSI is estimated to be much higher. CSI is likely to provide immediate relief to many South Africans living below the poverty line.
The future
Much progress still needs to be made by SA companies over the next decade.
The possible linkage of broad-based BEE to government procurement and the expanded public works programme, together with the development, introduction and implementation of industry BEE charters, will sustain the momentum in BEE.
Ultimately, a concerted effort between government, the private sector and other economic stakeholders will be needed to ensure that the momentum provided by the BEE achievements last year will result in meaningful transformation of the SA economy.
Chia-Chao Wu is deputy CEO of Empowerment rating agency Empowerdex.
