All companies wanting to do business in SA will have to demonstrate their commitment to the principles of BEE
One of the main challenges of black economic empowerment (BEE) is the perception of foreign investors that it is an investment risk.
SA faces a unique challenge: attracting desperately needed foreign direct investment while transforming the racial ownership profile of its businesses. To achieve this, government must win the confidence of multinational corporations.
SA experienced net foreign capital outflows of R11bn in the next six months following the leak in 2002 of the "draft" mining charter. This contrasts with average foreign capital portfolio inflows of R19bn over the previous seven years.
This resulted in government pushing for business-led empowerment initiatives, the first of which was the financial sector charter. Since then government has encouraged businesses to take the lead in formulating charter and transformation processes to allay investor concerns. But there is still much work to be done.
Multinationals may understand empowerment, but there is a question about whether they should be forced to sell equity in their SA subsidiaries. Some sectors have forged ahead, selling equity stakes to local empowerment partners. In the petroleum industry, for example, BP, Caltex, Shell and Total Fina Elf have successfully completed deals. But foreign investors remain uneasy, saying empowerment is an additional risk to doing business in SA.
A survey by US think-tank The Heritage Foundation found that empowerment remained a problem for foreign investors and concerns had been raised by SA companies too. Oil multinational Sasol caused a rumpus in 2003 when it categorised BEE as a risk factor in a New York Stock Exchange disclosure.
"Local directors and managers of multinationals have a good grasp of the complexities of BEE, but their foreign shareholders are battling to understand how the objectives will be achieved," says Ernst & Young BEE strategic services director Ajay Lalu.
UBS's Chris Niehaus says most foreign investors are less concerned with the philosophy of BEE than about why they should be giving away shareholder value.
Though the risks of empowerment can be exaggerated, the perceptions of risk could have a big effect on the SA economy.
Prominent business leaders Jonathan and Nicky Oppenheimer of De Beers launched the Brenthurst Initiative in an attempt to guide government on how to manage the transformation process without alienating foreign companies.
"Investors were reacting to what they perceived to be an environment that was becoming hostile to them," said De Beers chairman Nicky Oppenheimer. "They realised there was uncertainty about what businesses would be asked to achieve and were concerned about the future value of their investments."
Government has sought to reassure investors by establishing a national transformation scorecard, as suggested by the Brenthurst Initiative. Last year the department of trade & industry (DTI) released its draft code of good practice for empowerment. The code attempted to provide standards for transformation, applicable across all sectors, with unambiguous definitions for each scorecard factor.
A nationally applied scorecard has value in its own right in defining transformation requirements, quantifying progress and providing certainty, says Oppenheimer. Its real power, however, lies in providing a basis to create a competitive advantage for those firms that transform.
But multinationals still lack certainty - at the last minute, the DTI withdrew sections of the code that pertained to multinationals.
"Far from giving clarity, the different sector charters have created confusion for multinationals," says Lalu. "There are now a number of regimes."
In the liquid fuels and financial sector charters, multinationals are not exempt from charter requirements under any circumstances. In the automotive industry, however, government has said it will not enforce a BEE charter, effectively exempting foreign manufacturers from ownership requirements. In the draft information & communication technology (ICT) charter, multinationals are likely to be able to apply for exemption from ownership targets under specific conditions. These circumstances include, but are not limited to, issues pertaining to global policy, intellectual property rights, company structure and other softer issues.
ICT charter team chairman Dali Mpofu says code of good practice applicable to all multinationals would help to provide clarity and reduce perceptions of risks associated with BEE, but there cannot be a blanket exemption for all multinationals from empowerment targets. "Each company should be considered on a case by case basis," he says.
He says a blanket exemption would open up loopholes and SA companies could register offshore to avoid complying with targets.
"Some multinationals, especially those that serve government and parastatals, are realising that meeting empowerment requirements is in their best long-term financial interest," says Mpofu. "And selling equity is one of the quickest and easiest ways to achieve this."
SA Petroleum Industry Association director Colin McClelland agrees. He says progress on empowerment in the oil industry has outpaced other sectors because oil multinationals recognised early that empowerment was crucial to ensuring the long-term stability of the local economy. Since the oil industry is capital intensive and based on long-term returns, this was essential for its future growth.
"It also helped that the industry is cohesive and competitive," says McClelland. "Each company realised that if it did not transform, it would be left behind its competitors."
Over time, empowerment will become the minimum requirement for prospering in SA. As each company has to meet its own sectoral procurement requirements, the effect will ripple through the supply chain.
Alternatives to equity ownership could be found, such as allocating a percentage of aftertax profit to a BEE partner. Government could also offer tax incentives to encourage corporate SA to transform.
But it is clear that all companies wanting to conduct business in SA will need to demonstrate their commitment to BEE. This could mean a reduction in SA's competitiveness as a global producer in the short term, but may be the price it has to pay to achieve BEE within an acceptable period.
