SA's grand economic redistribution plan - black economic empowerment (BEE) - is proving to be a much more difficult affair than was expected at the dawn of the political transition.
The post-1994 honeymoon period is over. The populist talk and the subsequent array of elaborate policies must now bear fruit for the man in the street. A formidable challenge.
Sometimes, this BEE scenery leaves an impression that all things are falling apart. Those moments come when the president of the Black Management Forum (BMF) Jimmy Manyi springs into action. Manyi is of the view that the bulk of established white business is out to undermine BEE and must be met with more stringent legislation. If you dismiss Manyi as a maverick, you will have a tough job explaining away the constant fiery rhetoric of Brian Molefe, Peter Vundla, Buhle Mthethwa and many more.
Certainly, the data coming out of this 2008 Top Empowerment Companies (TEC) survey and the general experience of compiling this publication fuels the dim BEE view. A significant number of companies listed on the JSE, where the TEC survey is done, remain uncomfortable about answering questions concerning their BEE credentials. They prefer to bury their heads in the sand. However, enthusiastic contributors have no issues about opening up their BEE books.
An initiative of the Financial Mail and leading BEE rating agency Empowerdex, TEC is an annual survey that measures the BEE credentials of companies listed on the main board of the JSE. TEC data is captured by Empowerdex, which applies the broad-based BEE scorecard to these companies. Out of this, a top list is then produced to make this publication. As the JSE can, to a large extent, be considered a proxy for the SA economy, TEC could be used as a primary indicator of BEE trends in the country.
Save for a few shining examples reflected in the data, the minimum BEE targets conceived as far back as 1994, and now infused across the broad-based BEE scorecard, remain a distant dream. Given a 10-year timeframe, these targets include 25% black ownership, about 50% management control and up to 50% in preferential procurement. Note that these 10-year targets are applicable at inception of the complete BEE legislative framework. This framework was introduced only at the beginning of last year and came with a 12-month transition period. That means these minimum targets extend to 2018.
A baseline BEE study produced last year for the Presidential Black Business Working Group also tells a sad BEE story. The broadest study of BEE so far, it reflected that about 40% of sampled enterprises had no BEE plan and only 24,7% reported a formal scorecard with which they can track progress. Up to 40,7% of the sampled companies ranked below the level four mark. Level four is considered to be the entry level in BEE contribution. Reacting to the baseline study, Vundla - the chairman of the Presidential Black Business Working Group - did not mince his words. "The survey exposed a rather bleak picture of the advancement of BEE."
The TEC data produced four level three BEE contributors. These are companies with a total BEE score of between 75 and 85 out of 100 points. These companies are led by services group Adcorp Holdings, which emerged as the most empowered entity with a total BEE score of 81,69. Adcorp is followed in the second place by mining group Merafe with 79,15 points. Then comes Hosken Consolidated Investments (HCI) in third place with 76,80 points and Tongaat-Hulett in the fourth place with 75,64 points. Detailed accounts of how these companies have achieved these standings are carried in other sections of this magazine.
Then comes a group of level four contributors with scores ranging between 65 and 75 points (see the tables section). There are 20 level four contributors in the 2008 TEC data. Leading them is financial services group Metropolitan Holdings with a total BEE score of 73 points and placed in fifth place in the overall TEC rankings. From the sixth to the 10th position follows Investec (72,32), Oceana Group (70,93), Super Group (70,70), Standard Bank (70,08) and FirstRand with a total score of 69,90.
That means only 24 companies in this TEC data set were ranked above the level four mark. An overwhelming majority of these companies come from heavily regulated sectors with stringent preferential procurement regulations and/or transformation charters. Indeed BEE implementation tends to be better in regulated sectors, says Empowerdex researcher Steven Hawes.
About 12 companies in the group of 23 companies that are above the level four contribution come from the financial sector. Other prominent players with high BEE performances are from the IT sector, gaming and leisure operators, and to a lesser extent miners. The implication is that sectors that have minimal or no dealings with the public sector, such as retail, property and manufacturing, are not bothered about BEE.
The current state of the markets and the direction of the economy will certainly slow down BEE activity. The equities markets have gone south and economic growth is set to slow down while the cost of money has risen significantly. The weak financial structures, which dominate in the BEE world, will be ruffled.
Whoever said it was going to be easy misled the nation. Many other countries that have been down this road already know that political economic reform is no walk in the park. The less said about many African initiatives the better. The model of post-Soviet Union Russia is better left alone. SA's model will probably go down in history as the most organised, closely resembling the Malaysian initiative. But then the jury is still out on the effectiveness of the Malaysian experience.
In truth, BEE is to a large extent a "reparation programme", as correctly characterised by commentator Moeletsi Mbeki. It is not meant to be painless. BEE should bite, says analyst Duma Gqubule. When a BEE deal is announced markets should fall, not rise, he says.
Though BEE hardliners tend to suggest that the slow progress is due to resistance by white corporations, government should share much of the blame. It has taken the department of trade & industry (DTI) close to 10 years to come up with a complete BEE legislative framework. Even when the final leg was reached last year with the passing of the broad-based BEE Codes of Good Practice, there remains serious teething problems around legislation. As the DTI continues to fiddle with legislation, the question is: When will the country focus on BEE implementation?
As we speak, the codes have not been fully unleashed on the market. The DTI extended some conditions in the applicability of the codes. The codes were enacted in February last year, with a 12-month transition period to allow for a smooth migration from a narrow-based BEE approach to the new broad-based scorecard.
The DTI has since extended the transition period to August 31. That is because complementary regulations have not come into place. These include the amendment of the narrow-based Preferential Procurement Policy Framework Act (PPPFA) by the national treasury and the rollout of a formal BEE verification regime.
The single biggest challenge (facing BEE) is still government's delays in aligning the PPPFA, which only measures black ownership, to the codes, says Empowerdex executive director Chia Chao Wu. The lack of alignment means that public-sector procurement officers are bound by two separate and very different BEE frameworks, he says.
The development of sector-focused charters is also proving to be a painful exercise and spilling over to the codes. The process of drafting the key financial sector charter has stalled as a result of disagreements about how it should relate to the codes.
It is not clear when these teething problems will be resolved, which causes uncertainty and confusion in the market. "The fact that less than 25% of SA companies have formal BBBEE scorecards points to the wait-and-see' attitude discovered during this research," conclude the researchers who compiled the 2007 BEE baseline study.
"Government has demonstrated an embarrassing lack of leadership and maturity on BEE," says Kevin Lester of BEE consulting firm Mohlaleng. He says BEE should be given a single face or be abandoned.
The mixed messages coming from BEE legislators make it difficult for enterprises to comply - though enterprises have to a certain extent abused this wait-and-see principle. The fact is, a real equity transfer deal should stand up to any form of examination - be it the codes or charter-based scrutiny.
But then the approach of the DTI does perpetuate the wait-and-see principle. The DTI has developed a complex set of codes accompanied by a vague policing system into the BEE legislation. The approach purports to be a science of some sort. Under that approach people are justified in waiting to see the exact rules before acting, to avoid offside traps. There goes the culture of compliance.
The brouhaha which surrounded the announcement of the Sasol deal last year is a perfect illustration of how companies can find their BEE initiatives to be offside. The petrochemical giant announced its intentions to close what will be the largest BEE deal thus far.
The deal will deliver 10% of Sasol shares to a broad-based consortium. The consortium will be made up of the Sasol employees share ownership scheme (Esop), which will claim 4%. Then there is the mass-based retail scheme to claim 3%, independent BEE investment groups (1,5%) and the Sasol Foundation's 1,5%. At current prices the deal will cost more than R20bn.
The noise rose around the inclusion of white employees in the Esop portion of the BEE deal - though the inclusion of white employees in BEE-related Esops has been done before - sparked controversy in the Sasol case.
Pointing to the Esop, an official from the DTI said the Sasol deal "falls short of the level of empowerment envisaged in the codes". Though DTI principals intervened and eventually embraced the Sasol deal, that saga showed just how companies can be caught offside in this BEE game.
The truth is many enterprises have experienced a lot more difficulty in collating compliance data than expected, says Lester.
It's not all doom and gloom. A broader view taken by Wu suggests some significant BEE progress.
"In terms of numbers, we are able to see the progress made towards BEE," says Wu.
From a small black ownership base in 2003, there are now more than 100 JSE-listed companies that have sold more than 10% to black groups. Out of these, there are at least 15 black-owned companies and 29 black-empowered companies on the JSE.
The 90 BEE transactions announced during 2007 reached a record-breaking R85bn in total transaction value, says Wu.
There was also at least R4bn worth of unlisted shares or assets which were acquired by BEE entities in 2007, he says. "Across all elements, we see a similar pattern," says Wu.
