When the African National Congress came to power in South Africa in 1994, it inherited an economy deep in crisis, characterized by low growth equilibrium, underdevelopment and racial exclusion. More than three centuries of black exploitation and half a century of Apartheid rule had restricted the majority of the South African population from participating in the economy, resulting in deep structural problems.
However, during almost a decade of ANC rule, the South African economy has enjoyed consistent growth, successfully integrating itself into global markets, and becoming a thriving exporter of manufactured goods. But despite efforts to redress the injustices of the past, Apartheid still defines present-day South Africa, with inequalities remaining entrenched in the economy.
In a country where over 80 percent of the population is black, only a tiny percentage of the shares traded on the JSE Securities Exchange South Africa is owned by blacks. And while it’s estimated that 44 percent of black people are unemployed, the same is true for only around 7.5 percent of white people. It is clear that for the economy to continue to thrive, these imbalances must be redressed.
One of the ways the government is attempting to overcome this legacy of injustice is its strategy of black economic empowerment (BEE). A variety of policies aim to spread the wealth and power of the country more equally among the population.
Although BEE has been in practice for some years, it was only on March 24, 2003 that the government formalized and clarified its intentions in its document, ‘South Africa’s economic transformation: a strategy for black economic empowerment’. The government plans to make this document into legislation later this year, and has promised to inject R10 bn ($1.3 bn) into a National Empowerment Fund to assist black investor groups.
Initial failings
The first BEE steps, however, were not entirely successful. Starting in the mid-1990s, the private sector embarked on several initiatives to sell equity stakes to black investors. But these transactions were hampered by the limited access of blacks to capital, meaning that financing consortia were used to compensate for the lack of funds.
As a result, black investors were still far from positions of power in the economy, and moreover those who entered the markets were left vulnerable to the global stock market crises of 1997. Despite best intentions, black stakeholders were left highly indebted, and after the Asian stock market crash of 1998, the enthusiasm for BEE transactions fell sharply.
According to the government, one of the problems of the early BEE movement was that it lacked ‘a common definition and understanding.’ Its new BEE strategy intends to ‘coordinate and focus the efforts in this area,’ asserting, ‘The systematic dispossession and disempowerment of black people that has defined South Africa for so long requires an equally systematic response.’
The government’s broad-based strategy focuses on black equity ownership, black management, employment equity, skills development, preferential procurement, and enterprise development, all measured by a scorecard that gives each company an overall BEE percentage.
Equal opportunity
‘The government is entirely right in wanting to come up with a BEE program that will help all the people of South Africa to participate in the economy,’ says Luanne Grant, executive director of the American Chamber of Commerce in South Africa. ‘Neither sustained growth nor political stability can be achieved without equal opportunity.’
Loyiso Mbabane, senior lecturer at the University of Cape Town Graduate School of Business and former executive director of the Black Economic Empowerment Commission, is running a course in BEE in June. He agrees that the government’s new broad-based strategy is a crucial step in the development of the South African economy.
‘So far there has not been much support for BEE from all sides,’ he says. ‘Most blacks have not been supporting it because they have seen it as a plane hovering above them with a few very rich blacks sitting in business class. Most whites have misunderstood it to mean a Zimbabwe type of wealth grabbing by a few black people.’
This view of BEE as leading to ‘wealth grabbing’ through the enforced transfer of equity is a misperception which those involved in the business community in South Africa are at pains to overcome. As Nischal Patel from the Corporate Council Africa explains, ‘People are concerned that BEE means they’re going to have to give the ownership of their company away. We explain to our members that it’s about the sharing of skills and equity and being involved in the South African community, not about giving up control.’
However, Patel continues, while the majority of people both inside and outside of South Africa are generally positive about BEE, there are still concerns and questions surrounding that highly emotive sector of South African business: the mining industry.
Digging up the past
South Africa’s mining industry is historically problematic, symbolizing more than any other industry the white ruling class exploiting a national asset for its own gains while black laborers perform the most menial and poorly-paid tasks. Still predominately white controlled, it is one of the key areas where BEE is focused.
‘Mining is inextricably linked to the history of this country,’ says Zengo Lusengo, executive director of African Merchant Bank. ‘The Truth and Reconciliation Commission has pointed fingers at the mining sector as one of the tools used to prop up the whole Apartheid system, so its obviously one of the most important sectors to address.’
Before addressing the mining sector, the government had already introduced a liquid fuels charter, which stipulated that companies must have a shareholding of 25 percent by historically disadvantaged South Africans (HDSAs). This resulted in major disinvestment by foreign companies.
Despite this negative response, the government attempted to increase black ownership of South African mines with a mining industry charter. However, in the second half of last year, an early draft of this charter was leaked, with a target of 51 percent black ownership, again leading to a huge loss of investor confidence in the mining industry and mass disinvestment.
‘There was a very dramatic response from both local and foreign investors,’ according to Steve Lenahan, executive officer of corporate services and head of IR at Anglo Gold. ‘The draft document confused the desirable with the possible,’ he continues. ‘It over-extended the political aspirations of the people who drafted it, and set unreasonable expectations.’
The government has now refined its mining charter, setting a mandatory target of 15 percent black ownership within five years, and an aspirational target of 26 percent within ten years. The charter confers all mining rights on the government, so companies that currently hold rights will have to meet this target of 15 percent in order to obtain new ones.
Questions & concerns
Anglo Gold is finding that investors are understandably interested in what BEE will mean for them. ‘We’re being asked questions about our ability to meet the government’s expectations, and about the cost impact of BEE measures,’ Lenahan says. ‘Investors are obviously concerned about our capacity to convert our old order mining rights into new order ones.’
In Anglo Gold’s case, by the last quarter of 2002 it had already passed 24 percent of production assets into the hands of HDSAs. While the government has yet to audit this move, as far as Anglo Gold is concerned it is already 9 percent higher than the government’s five-year target.
Lenahan comments that it is mainly foreign investors who are worried. ‘Typically, domestic investors are more familiar with the BEE terrain,’ he says. Lenahan also asserts that investors have no reason to be fearful for the future of the South African mining industry: ‘The industry is confident that it can reach these targets, and is relatively upbeat about its capacity to deliver,’ he says.
‘The widespread response [to the leaked charter] arose from uncertainty more than anything else,’ continues Lenahan. ‘Although it sent a dark cloud over the development of this mining regulation, now that the final draft has been released, confidence in the future of the industry has returned. Investors are now far more positive than they were three or four months ago,’ he continues. ‘And in another year, they’ll be more positive still.’
Worry list
Another company hoping to avoid foreign investor concerns over BEE is Telkom, the South African telco which finally listed on the JSE on March 4. Two and a half years in the planning, Telkom’s privatization process is a key part of the government’s BEE plan. Interest in the listing was strong, with 1.5 mn people registering for the sale, just under 10 percent of whom were converted into applicants. Non-white South Africans were offered a 20 percent discount on shares, with 43 percent of the retail share applications falling into this category.
On completing the first Telkom roadshow in March, Belinda Williams, head of investor relations for Telkom South Africa, reports that investors were voicing concerns over the impact of the mining charter. ‘From an international investor perspective, the biggest fear they have after what happened with the mining charter – which was seen as hugely negative – is what is anticipated for the telecoms sector,’ says Williams. ‘It’s definitely on their worry list.’
Institutional investors also wonder what will happen if and when a competitor to Telkom is brought to market. ‘We envisage a second telecommunications operator – our competitor – being introduced within the next year or two,’ Williams says. ‘Hence investors are asking, Will this new company be considered better from a BEE perspective? And would Telkom lose revenue as a result? These are important considerations for investors when deciding where to spend their money.’
In response to concerns about BEE, Williams makes the following comments: ‘Over the last five years we’ve made huge strides in our BEE policies. When we’re spending money, we look at a company from an ownership perspective to determine whether it classifies as a BEE company [that is, one with at least 51 percent black ownership]. For example,’ she continues, ‘we get a BEE firm to print the company’s annual report.’ Williams believes these BEE procurement practices will increase across all sectors as the BEE movement gathers momentum.
Increase in interest
BEE is also making strides in the financial services sector – the next on the list for a government BEE charter later this year. Tyrrel Murray, general manager of group finance and head of investor relations at New Africa Capital, says he too has seen a huge increase in interest from investors about the topic.
‘Up until recently, investors didn’t really care about BEE,’ notes Murray. ‘But over the last six months, primarily because of the mining charter, all of the fund managers I’ve met with have been asking questions about BEE. Investors are concerned that a BEE charter will mean we’re forced into carrying out a transaction that we otherwise wouldn’t have done,’ he continues. ‘But we need to make sure that we can prove that whatever we do is for sound business reasons.’
As for the concerns over the mining charter and the planned financial services charter, Murray insists it’s important to differentiate between these two sectors. ‘With mines, you have a national asset that people feel very emotional towards, and the government wants to enforce an increase in black ownership,’ he says. ‘But when it comes to financial services, it has to be looked at a lot more broadly.’
Indeed, the financial services charter is not being handled by the government but by a range of South African financial associations with input from the country’s major financial institutions. ‘The government has said, You develop the charter, and come and talk to us afterwards,’ explains Murray. ‘They’re in favor of industries coming up with their own charters – ones that make sense.’ This should alleviate one of investors’ main concerns: with industries creating their own policies, there should be no more nasty shocks like the one created by the leak of the mining charter.
Flexible approach
Unlike in the mining sector, where BEE ownership targets are to be enforced, the government is promising flexibility in the BEE strategy for other industries. It recognizes that different industries need different types of persuasion and regulation. Only those industries where government licenses are required, or those companies doing business with the government, will need charters.
With the introduction of the BEE scorecard, a South African company can be 100 percent foreign owned, but if it has good skills transfer to HDSAs, a high percentage of black management and staff, and a good BEE procurement policy, it can still score highly. The aim is to make BEE happen through natural and smooth evolution – a process that should now speed up and start to make a real difference. The hope is that the government’s BEE strategy will lead to empowerment of black South Africans and indeed the country’s economy at all levels and across all sectors. It needs to get under the skin of the economy, and go right to the heart of South African life.
