Multinational corporations have not lined up in large numbers, as was expected, to take advantage of the ownership exemption extended to them in the black economic empowerment (BEE) Codes of Good Practice.
To date (equity equivalence) applications have been a trickle rather than a flood, says department of trade & industry (DTI) acting chief director of BEE Nomonde Mesatywa.
This exemption was introduced into the codes following an outcry that subjecting multinationals to the BEE principle of selling equity to black players would compromise SA's attractiveness as a foreign direct investment (FDI) destination. The issue became serious when the American Chamber of Commerce and its German counterpart sprung into action with a warning that this could lead to extensive disinvestment from SA. Companies like IBM and Microsoft pointed out that their business models do not allow them to part with equity.
In its 2006 trade policy agenda document the US characterised BEE as the main risk of doing business in SA. The biggest bone of contention for US enterprises operating in SA was a blanket BEE requirement to surrender some equity to black interest groups.
Drafters of BEE legislation in the DTI came up with the equity equivalent principle that would allow qualifying multinationals to opt out of the ownership element carried in the broad-based BEE scorecard. Those who opt out of this principle are required to come up with an alternative investment plan, which in value would be equivalent to 25% of their local equity. Such a plan is to be assessed and approved by the DTI.
Only two notable equity equivalent initiatives have come to light publicly. These came from the US IT giants IBM and Hewlett-Packard (HP). A few others have reportedly been quietly forwarded to the DTI for assessment.
HP announced its equity equivalent initiative in August last year. The initiative led the US-based group to establish an IT skills development institute called HP Business Institute, which will train about 1 800 candidates in the next six years. Trainees will be drawn from HP's employee base and new graduates who are looking to establish independent business entities. HP says the investment into this training institute boosts its overall investments in BBBEE to more than R150m. The initiative has been blessed by both the ministers of trade & industry and communications, Mandisi Mpahlwa and Ivy Matsepe-Casaburri.
IBM announced in September last year that its R300m FDI, made in 2005, would be treated as an equity equivalent by the DTI. IBM brokered this deal in 2005 as it was searching for a suitable location for one of its global sourcing centres - known as Integrated Delivery Centres (IDCs). With the motivation of IBM SA & Central Africa MD Mark Harris the US IT giant decided to bring this investment into SA and created about 1 500 new jobs. In turn Harris secured an undertaking from the DTI that this investment would be regarded as an equity equivalent.
Other prominent multinationals like Microsoft are expected to follow the equity equivalent route.
But then a significant number of multinationals has opted not to go the equity equivalent route. In September last year Nasdaq-listed IT group Cisco Systems announced a deal that seeks to transfer 25,1% of its local equity to a BBBEE consortium for an undisclosed amount. The consortium features prominent BEE players in the form of Lereko Investments, which is led by former environmental affairs & tourism minister Valli Moosa and former North West province premier Popo Molefe. Other beneficiaries of the consortium are made up of Cisco's black staff and its educational trust. The Cisco deal went further by giving a further 25,1% of Cisco Capital SA and another 20% of its local sales and marketing division to black staff and the educational trust.
Through this deal Cisco joined a series of other multinationals that have already facilitated BEE equity transfer deals. These include Deutsche Bank SA, which sold 25% of its equity to a BEE group in 2005. In 2006 US investment bank Merrill Lynch sold 15% of its local equity to a consortium made up of black staff and an education trust and to a consortium of black professional women. This list will also include German-based IT player SAP and most global petroleum players.
Mesatywa says that though equity equivalents, like the rest of the codes, are voluntary and flexible, they are designed to make companies weigh up the cost and benefits of going the equity equivalent route. This is through the requirement that equity equivalents need to be 25% of SA turnover. "Companies have to carefully weigh up whether selling equity is not a better option before settling on equity equivalent," she says.
She points out that companies will face rigorous scrutiny before being granted an exemption. This starts with the need to satisfy the DTI that 100% ownership is practised globally by the multinational.
What the DTI is looking for in equity equivalents is innovation, says Mesatywa. Companies are not expected to "just do more on the other six pillars of the scorecard to compensate for not selling equity", says Mesatywa.
Companies are expected to fund programmes that are in line with either the Joint Initiative for Priority Skills Acquisition (Jipsa) or the economic growth plan, the Accelerated & Shared Growth Initiative (AsgiSA), she says.
Mesatywa says equity equivalents are expected to be widely applied in sectors such as information & communication technology; pharmaceuticals; and mining - where the multinationals debate started.
Mesatywa says the process will be administered by an equity equivalents committee, comprising the DTI and a sector specialist, if required. The department will also draw on the expertise of the Industrial Development Corporation (IDC) and other DTI agencies.
She says since the process is in its early stages, applications have been trickling through and no applicant has been refused exemption as yet. Once the process has been properly established, she says applications will take about one month to process.
At the time of drafting the codes, the DTI estimated that there were about 1 936 multinationals registered in SA from seven countries.
