State makes rapid BEE policy reversal

THE Department of Trade and Industry has made one of the quickest reversals in government policy making to date. After casually introducing a “clarification” on Tuesday that dramatically altered both the substance and value of broad-based black economic empowerment (BEE), and which would have affected the standing of about 80% of deals done to date, on Friday the department effected a reversal.

In the first notice, broad-based and employee share ownership schemes were downgraded to only three points — out of a possible 25 — on the ownership scorecard.

The second notice said this would not affect deals done so far. These would get full points as they did in the past, provided they met the criteria. So while all those who did their deals prior to May 1 — BEE transaction advisers guess at 80% of the top 40 companies on the JSE — could again breathe easy, the reality is that the department still plans to downgrade broad-based BEE in some way.

Exactly how, it said on Friday, would be determined by a technical task team, which would advise Trade and Industry Minister Rob Davies over the next 30 days.

The issue is one that not too many JSE companies or even large and medium unlisted companies have thought about much: broad-based and employee ownership schemes do not create rich capitalists, although they do spread the gains made from business more broadly. The reason it has not been top of mind is easy to understand.

First, the policy message from the government, since it introduced the BEE scorecard in 2007 with points for everything from procuring from black business to training staff, has been that BEE should be broad-based. Companies doing broad-based deals and creating employee, community and education trusts believed they were meeting government policy.

But to those with a more finely tuned ear, policy has been shifting over the past two years. The first signal came with the decision that in the new codes — published in 2013, but only just coming into effect now — companies that did not do ownership deals would be penalised and dropped two levels on the ratings ladder.

The second signal came in the call by President Jacob Zuma in October 2013 for the creation of a class of black industrialists. For emerging and aspirant black capitalists, the black industrialist vision aligns keenly with their aspirations. The first wave of BEE saw the creation of super-wealthy individuals leading black investments vehicles, such as Saki Macozoma, Cyril Ramaphosa and Tokyo Sexwale. Broad-based BEE, with its score-card that allowed companies to get kudos for BEE without selling equity, slowed that train. The political reaction against the fact that too few individuals were benefiting from successive deals also sent companies looking for alternatives in community trusts and employee share ownership schemes.

For many companies this was a more palatable way of doing BEE instead of being in the invidious position of choosing politically connected individuals.

But for the emerging black business person, already frustrated by the high barriers to entry in SA’s very concentrated economy, this meant more frustration.

“They preferred to empower amorphous entities. But we also want to create our own GT Ferreiras and Christo Wieses. You are not going to create those through broad-based ownership … We are not saying companies must no longer do broad-based BEE deals at all. But if you think broad-based deals will move the needle, then you are mistaken,” says Sandile Zungu, who sits on the Black Business Council.

Over the past eight years, while the 2007 broad-based BEE regime prevailed, the political influence of emerging black business has grown. Apart from a closeness to Mr Zuma, their interests are increasingly intertwined with those of the African National Congress (ANC) leadership through social, family and business relationships.

The pullback to narrow BEE has found deep resonance in the ANC. The solution now, says the director-general of the department, Lionel October, is to find a balance of how to score “passive” BEE share-holding versus “active” shareholding through individuals.

One of the unintended consequences of the downgrading of broad-based and employee ownership would have been the diminishing of some of the most successful broad-based investment vehicles with the stroke of a pen.

Among these would have been: Thebe Investments, which is 47.5% owned by the Batho-Batho Trust, of which the ANC is the sole beneficiary and 20% owned by an employee scheme; Chancellor House, 100% owned by a trust belonging to the ANC; Kagiso Tiso Investments, which also retains some of its broad-based roots; the Mineworkers’ Investment Company, 100% owned by the Mineworkers Investment Trust; and the SA Clothing and Textile Workers Investment company, 100% owned by a trust and which in turn is the biggest shareholder in Hosken Consolidated Investment.

The ramifications for companies in which these are invested would have been profound.

Mr October says the technical task team will also have to draw a distinction between these sorts of vehicles and passive trusts.

No doubt these politically connected broad-based vehicles will be key to the view taken by the task team. So will the trade unions such as the National Union of Mineworkers, which on Friday called the move to downgrade broad-based BEE as “regressive and backward” and an unacceptable shift towards the enrichment of a small elite.

However, employee share ownership schemes in the mining industry, with a few stunning exceptions, have generally not performed that well for workers as many of them were done at the top of the commodity boom cycle and in the end, when they vested, were mostly disappointing. The leadership of many trade unions, similarly to the ANC leadership, also identifies closely with aspirant capitalists with whom it shares social, family and political ties.

Do not expect, therefore, that the unions will fight tooth and nail for broad-based BEE to retain its full status. It is likely they will be happy to accept a compromise.

BY CAROL PATON, 11 MAY 2015, 05:51