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Black economic empowerment is in big trouble

Business Maverick


Black economic empowerment is in big trouble

(Photo: Unsplash)
By Tim Cohen
29 Nov 2020 5

The Broad-Based Black Economic Empowerment (BBBEE) world has been rocked by the decision of some of the icons of the industry to go public on a series of complaints about the Black Economic Empowerment Commission, a department of the Department of Trade and Industry.

First published in DM168

The complaint is irritatingly shrouded in some mystery because the commission, headed by the affable Zodwa Ntuli, claims its work in individual investigations is confidential. A year ago, the Kagiso Charitable Trust, the Mineworkers’ Investment Trust, HCI, the WDB Trust, Ditikeni Trust and Wiphold Trusts appealed to Trade and Industry Minister Ebrahim Patel to gazette clarifications that certain broad-based ownership schemes are legitimately black-owned.

These companies are among the most established empowerment companies in South Africa. If they have issues with the commission, imagine what kind of problems less august organisations have.

Conceptual problems

In one case, a four-year-old deal, long since put to bed, is being challenged by the commission on the basis that, among other things, some of the beneficiaries are under 16. That means, technically, they don’t have the power to “exercise the rights of ownership” which is required by the legislation.

What the commission appears to require is that beneficiaries have to qualify as personal shareholders and nothing less. That means bursary schemes, housing assistance programmes, community development, preschool projects are out. The commission claims this is not so, but clearly this is a grey area.

If the issue were only about technicalities in the Act, which could be cleared up with some astute rulemaking, that would be one thing. But actually, there are deeper problems at a conceptual level. Recently the European Union did a survey of members doing business in South Africa. There was unanimous support for the notion of black economic empowerment, and the companies recognised the philosophical justification for the idea.

But their complaints were trenchant. The costs of BBBEE, they said, are high and have a significant impact on businesses. EU companies question the return on investment. This is critical. 

The commission claims it must ensure that BEE compliance is not so expensive that it becomes deal-breaking.

BEE and corruption

Look at the precipitous decline in South African manufacturing over the past decade. You have to ask whether BEE compliance isn’t at least partly an issue of concern. The EU survey showed that there needs to be a recalibration of the points accorded to the different elements of compliance.

Incredibly, although the commission claims it’s not restricting investment, it has done no study to calculate the actual cost of BEE. On top of this, there is a much larger problem: the JSE. Many BEE deals were done willingly by progressive industries, of which there are plenty in South Africa, using an ingenious scheme: rising stock prices and dividend flows would pay for large BEE stakes. This was the era of the special-purpose vehicle.

With the JSE essentially flat for the past five years, the utility of this mechanism is fading. And the declining economy is restricting dividend flow. Now BEE companies often demand vendor financing, but that increases a project’s debt burden, making the products more expensive.

And there is one more problem: corruption. I always get into trouble for raising this issue in the context of BEE, because the BEE advisory lobby, which is now very large, claims corruption and BEE are totally different issues.

But they are not. They have become entwined. The mechanism that opened the door was BEE; the justification for doing corrupt deals is often BEE.

The fly-by-night companies that suddenly appear before a contract is awarded are there to leverage BEE requirements. Consider just one egregious example: Eskom’s McKinsey fiasco. When Eskom hired McKinsey, the Guptas wangled their way into the deal through their notional advisory associates Trillian. Eskom couldn’t hire McKinsey without a BEE component to the contract, and that, surprise surprise, fell into the Guptas’ laps.  

I thought BEE could become a real demonstration of South African business innovation – using the levers of capitalism to unwind, at least somewhat, the evils of apartheid. But my faith is being sorely tested. The way it’s turning out, BEE could be harming transformation more than it’s helping. DM168

Tim Cohen is the editor of Business Maverick.


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All Comments 5

  • Using something as shallow as skin color to decide on economic favor was always destined for abuse – one would have thought the current administration had learned from the mistakes of apartheid, but now seem destined to repeat them. As a country it might be wise to stop trying to force equality of outcome, and rather focus on creating equality of opportunity?

  • Dear Tim, great article. It is questionable however that BBBEE IS in big trouble. In my humble opinion your headline should have read something like “BBBEE SHOULD be in big trouble”. It is after all state sponsored, and is unlikely to be reversed any time soon while the connected elite are creaming it at the expense of the majority! The unintended consequences of this legislation, and how it has been managed, has had a devastating affect on small business in South Africa. It HAS furthermore enabled a lot of the disgusting corruption that has had such a debilitating affect on the South African economy, and by extension, (un!)employment. The obscene wealth amassed by a select and connected section of the population at the expense of the BB component bears testimony to this. Before the virus hit us we were already in an economic mess, in part because of restrictive labour legislation. If South Africa is to start prospering again, we need to create an environment conducive to entrepreneurial risk taking, unfettered by severe government restrictions!

  • Never mind the high direct costs to a company in trying to comply with BBBEE, the indirect costs of time spent with consultants, BBBEE auditors, potential BBBEE partner and trying to explain to one’s foreign owners what it is and why this time and money has to be spent far outweigh the direct costs and yes, lead to questions about the value of doing business in South Africa.
    The other thing that we must not loose sight of is the cost to the taxpayer and ultimately the poor when SOE’s, government and municipalities buy an item at 2 or 3 times its real value because the supplier is top BBBEE rated. What nonsense is this? The money could be far better utilised for education or health etc.
    Finally, the long term cost to the country of emigration of non-BBBEE but highly talented and educated youth who see no future for themselves in our so-called rainbow nation. This will hurt us for decades to come!!

  • BEE was supposed to create a new class of black capitalists. It has created a small class of parasites, encouraged corruption, and allowed the exodus of “white” capital out the country.

  • The B-BBEE Commissioner is under fire for interpreting BEE law as she wants to or as BusinessLive put it, the “Broad-based BEE commissioner has gone rogue”. The article suggests that Zodwa Ntuli, the B-BBEE Commissioner is questioning the status of broad-based empowerment schemes, arguing that they are not genuine black owners.
    Just as a social worker might be forgiven for having a jaundiced view of society based on what they see on the streets every day, one could argue that the Commissioner’s view on B-BBEE is coloured by constantly having to investigate BEE Ownership transactions where Broad-based schemes are fronts to avoid real transformation.
    In the Commissioner’s statement on B-BBEE rules or policy regarding use of Trusts, BBOS and ESOPS (attached), issued in 2019, she laments that:
    “The B-BBEE Commission is clear in its communication that of the 341 ownership transactions submitted to it for registration from 9 June 2017 to December 2018, 33% involved broad-based structures in the form of Trusts, BBOS and ESOPs.
    When assessed against the ownership rules, the majority of the schemes involving Trusts, BBOS and ESOPS did not meet the rules set in Statement 100 Annexes (B)-(D), and thus cannot be recognised for ownership points.”
    If this statistic still holds, the South African business world needs some answers. And has this experience made the Commissioner suspicious of all such schemes or is there something else?
    A recent Business Maverick article by Tim Cohen tackles this subject and reports that respected organisations such as Whiphold, Kagiso and others complain that the B-BBEE Commissioner has her own agenda when evaluating the participation of Trusts in Black Ownership transactions. The article highlights the Commissioner’s reservations about the ownership rights of beneficiaries in trusts and mentions a case where beneficiaries under 16 were viewed as being technically unable to exercise their ownership rights. These schemes are the result of strategic transformation decisions by major players in the SA to achieve a credible B-BBEE score and have significant long-term financial implications for them.
    The Codes of Good Practice and the Sector Codes embrace Trusts and Broad-based schemes as valid entities in black ownership structures and the rules for their qualification are clearly laid out. They also assume that beneficiaries are just that and their ownership rights will be exercised dutifully by the Trustees on their behalf.
    It’s a pity that Tim Cohen’s article spins off into EU issues with the cost of B-BBEE as he is on to something quite big that is being discussed widely by BEE professionals; that is the central and unresolved issue of Active vs Passive ownership. To a large extent the debate concerning black ownership of broad-based schemes and trusts hinges around this conceptual issue. In reality most South Africans are Passive owners in companies. The whole JSE Market Capitalisation is Passive ownership where shareholders (citizens and institutions) entrust boards, management teams and governance rules to look after their wealth over the long run. Introducing Broad-based Ownership Schemes and Trusts as a Black Ownership recognition is merely an extension of this.
    It appears that the issue driving the BEE Commission’s view point is the suggestion of active ownership alluded to in terms like “Participation” in paragraph 3.1.1 of code 100 and words like “similar to the management role of shareholders in a company having a shareholding” in Annexe 100 C 2.5.2.
    What seems to be happening here is that words and phrases are being given special meaning within the B-BBEE Codes. Why should broad-based schemes in the B-BBEE environment be endowed with a requirement for some form of active participation in their shareholding when the general role of shareholders is specifically not to be active. In every other circumstance the role of shareholders is to maintain an investor’s perspective leaving the directors and managers of businesses to perform the activities in and for the company. It is true that there has been considerable abuse of MOI’s, Shareholder Agreements, Structuring and Finance Agreements that reduce the rights of shareholders which may also contribute to the Commission’s insistence on shareholder activism. However to address it narrowly for the black ownership schemes recognition criteria seems to be the wrong place. Instead upholding Companies Act and common law principles would achieve more.
    Ideally the BEE Commission’s notions of active ownership should be fulfilled in the Enterprise and Supplier Development measurement of the Codes as this is where entrepreneurialism is encouraged and where “active ownership” is intended. Perhaps the idea that an Enterprise or Supplier Development beneficiary must have at least 25% ”direct Black shareholding” being the owner / operator as alluded to in 3.10.4 of Code 100 is where Active shareholding should be measured.
    But to some extent, we are dancing around the houses here! What are the B-BBEE Codes really trying to achieve? If they are “broad-based”, are black individuals preferred in ownership structures? This matter needs clarification and demands an urgent investigation by a qualified independent body and perhaps that is where this must end up – in a court of law. The sooner the better because the huge buy-in to BEE by SA Inc has been largely lost and the Commissioner’s stance on Broad-based schemes, Trusts and ESOPs is further undermining its credibility.
    Alasdair Yuill
    MD Mantis Networks (Pty) Ltd

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