WHAT’S IT ALL ABOUT
BEE and its surrounding legislation has long been a topic of heated debate. With strong opinions on either side of the spectrum, should it be scrapped entirely, or embraced wholeheartedly? By Searle Silverman1
More than 20 years into a new democratic era, Black Economic Empowerment (BEE), or what is more recently known as Broad-Based Black Economic Empowerment (B-BBEE),2has become a key part of South African legislation.3In brief, BEE is aimed at addressing the racial inequality that was a product of the apartheid regime by creating a more representative distribution of wealth and opportunity amongst the various population groups.
Although there are various aspects that BEE encompasses, we will focus on those pertaining to ownership. The objective here is to improve black4 ownership in business, and this is usually achieved by selling a share in the business to appropriately qualified candidates. Owing to the way these structures are typically set up, there is no guarantee that the BEE stakeholders will receive any equity at all.
Now, if there is no guarantee of equity, to what extent is the target group of these transactions getting any real benefit? Of course there will be times when they actually do receive equity, but how often and to what extent is this the case? In addition, who is typically targeted as candidates for such structures, and will this help BEE achieve its objectives?
There are views on either side of the spectrum as to whether there is value in the BEE legislation. Among some of the prominent advocates of BEE are Cyril Ramaphosa,5Dr Rob Davies,6and Themba Dlamini.7Although the current way in which BEE is being implemented may need improvement, they are of the view that BEE has a fundamental role to play in the economic well-being of South Africa. This is in addition to the need to address the demographic imbalance of black participation in South African businesses.
Others, among them former Reserve Bank governor Tito Mboweni,8argue that BEE should be banished from the legislation. Various reasons are given as to why this should be the case. Mboweni’s point is that the main barrier is funding, which he believes a state bank could help to address. Others claim that the vague rules with subjective interpretation have created further issues. It is also claimed that BEE causes a slowdown on growth, implying that it is having an adverse effect on the economy. 9Yet others argue that BEE is actually hindering the equitable distribution of wealth and business representation, as it exacerbates the political injustice of the past and at best implicitly maintains the status quo.10
MISSING THE POINT
Though these arguments may have their merits, it seems there are two fundamental points that are being overlooked. Before we side with either of these disparate views, there are a few key issues that need to be reflected on.
The first is in terms of the equity value being transferred to the BEE stakeholders. Besides the quantitative aspect behind this – which has its own share of complications11– perhaps a more fundamental question is: how do we structure these deals in a way that we can meet the requisite growth targets, and hence the BEE objectives, in volatile markets? Businesses need to take more responsibility in building a forecast model in line with their business plan, and then align the objectives of the BEE structure to this. Given the slowdown in the economy, perhaps these structures also need to be revamped.
Given the number of ways in which capital can be raised, funding plays an important role in terms of how the structure should be set up, and what the regulatory costs could be.12The same applies to the tax implications.13Setting the BEE structure up carefully could help to reduce costs and increase benefits, potentially making more institutions open to such deals.
The next important consideration pertains to the targeted beneficiaries of the BEE structure. Are businesses targeting a few top talented individuals, or the lower-level staff? Though the former may be a more attractive option, because of the potential business opportunities that may arise, too many of these types of structures will do little to benefit the masses.
Given a brief consideration of some of these factors, perhaps the question is not whether BEE is the right thing to do or not, but rather how BEE can be implemented for a specific business at a specific point in time, by targeting the right audience.
LET’S DO IT
It seems few would argue that the political injustices of the past need to be adequately addressed. BEE has certainly had some success in attempting to amend these. 14This seems to demonstrate that, with the right factors in place, BEE has a key role to play in addressing these injustices. Of course there may also be other initiatives that could contribute, which can be applied in conjunction with BEE. We therefore feel that instead of an ‘all-or-nothing’ approach to BEE, a more sensible tactic would be to help refine the way in which the BEE legislation governs how these structures are put together, as was briefly touched on above.
AUTHOR Searle Silverman is a senior manager at Deloitte, Capital Markets
1Thanks to Akiva Ehrlich and Claudette van der Merwe for useful comments and suggestions.
2See, for example, http://bee.co.za/ for more on the differences between BEE and B-BBEE and additional information.
3We will treat the terms BEE and B-BBEE synonymously, and will henceforth use BEE in this article.
4Black, in the BEE context, is taken to mean African, Indian and Coloured people born before 1994. See Black Economic Empowerment Guide by Bowman Gilfillan.
11See Claudette van der Merwe, Lost in BEE valuation, Accountancy SA, 1 February 2008.
12 See Ashley Sadie, Joseph Zitha, and Mgcinisihlalo Jordan, Basel III and its impact on BEE transactions,
http://www2.deloitte.com/content/dam/Deloitte/za/Documents/audit/ZA_BaselIIIAndItsImpactOnBEETransactions_17042014.pdf (accessed 7 May 2015).
14Like the Exxaro Resources BEE scheme (see http://www.moneyweb.co.za/moneyweb-mining/r1bn-payout-for-exxaro-staff).