Broadening BEE is Imperative and Can Be Rewarding

Broadening BEE is Imperative and Can Be Rewarding Norman Reynolds Last week Saki Macozoma defended BEE as adhering to the industry sector Charters and as having a range of objectives beyond ownership. More importantly, he called for greater innovation, “to broaden the base of participants”. If this were done, 2005 would see numerous BEE deals that should lead to the deracialisation of South Africa’s economy. As Chairman of a Bank and a leading BEE player, Saki Macozoma might have been more open about current problems. His starting point is that BEE deals, if comprehensive, will drive company performance higher. There is no evidence for that as yet. Rather, current practice indicates that, apart from popular perceptions around the elite, BEE is beset with financial and especially institutional and economic costs and failures. The banks love BEE because they issue loans against exorbitant collateral provided by the parent company. They stand to buy up South African equity for a song – just as do moneylenders who grant relatively small loans for weddings and funerals as the short cut to low cost acquisitions of peasant farms etc. Only six black companies took up 73% of all BEE deals in 2003 and some 73% of companies report that the short supply of suitable black candidates is a real handicap.[1] An historic opportunity is being missed to grow all citizens into ownership, to endow key services and to back new ‘green’ and ‘future’ companies under an outpouring of co-operative rather than narrowly competitive behaviour. At present, much of business is confused, BEE is driving costs up, and investors are wary. The correct starting point is to ask, “What can BEE provide the nation?” The promise is far, far greater than can be achieved by present practices. The task at hand is to re-distribute the ownership of, at first and over 6 years, a quarter of all public and private company equity. The first information to know is that the total value of all equity is R2, 400 billion, or some R54, 500 per citizen or around R200, 000 per family. This is big enough to allow a new nation to emerge! A quarter, R600 billion, that is R9, 000 per citizen or R33, 000 per family, must be re-distributed over the next few years. Present practice is not going to achieve this. The various ‘Sector Charters’ point to some but not all of the following that should form the sole basis of BEE: - 1. The first obligation must be to employees – those who already run the firm / farm from Monday to Friday. A democratic Employee Ownership Trust model exists in South Africa and an Association is being formed. The democratic model is important for, if done properly, international expereince shows that employee ownership can drive companies some 7% to 11% or higher per year re capital, market share, employment growth and taxable revenues. This secures the repayment of debt created to buy shares – today’s main concern with BEE - and drives the economy wonderfully! Present policy, as with the grant to support new employee owners, does not distinguish between a democratic set up and the fatuous provision of individual shares that does not drive higher company performance. Employees do build up large equity stakes that add to their economic options and family security. The only way to alter labour conditions on farms is to use the democratic Employee Ownership Trust model as that keeps present owner / manager intact whilst introducing a redistribution of ownership and the introduction of participative and progressive management. Add-on farm health and housing programmes do not break the shackles of the past. 2. Social Groups are acceptable – see the ICT Charter for instance. Schools, medical services, groupings of poor women, research institutions etc. can be endowed through Trusts, the Trustees of which require and oversee certain ‘use’ standards with the dividend flow. 3. Community Investment Programme. For those outside formal employment, a new reform movement is converting village and urban neighbourhoods into democratic property companies registered as Community Trusts owned equally by all adult member owners. This “community–as-business” approach builds the ‘second’ marginalised economy. Annual citizen ‘Investment Rights’ drive these bodies, replacing the inefficient expenditure of the consumption oriented social grants now ‘eating’ R60 billion per year. This corrects the breakdown of the village and urban community under a vast SMME programme that can build the equity of millions of the ‘left-behind’ citizens. 4. Renaissance Companies. These are companies we need now but do not have as yet. For instance, there is no national green energy policy / plan. Nonetheless, citizens want to see green energy promoted. Cape Town and Ethekweni Metros have recently announced the aim to have 30% of their electricity ‘green’ by 2020. This is a popular move backed by new technologies and demonstrated performance elsewhere. To do that, there will have to be a massive investment in the capacity to plan, implement and manage ‘green’ policies and energy generation. It now appears that the relative pricing of conventional coal and fossil fuel energy will stay high and that ESKOM’s electricity price will surge as it builds new power stations over the next six years. Rather than plan for ESKOM to spend R170 billion in new conventional energy generation, with a little for foreign companies to fight over, South Africans should be able to set local energy generation and use goals, to build local green capacities to off-set the use of conventional power, and to introduce incentives and taxes to raise efficiencies and so to lower demand. Next year, the formation of Regional Electricity Distributors will open the market to local solutions including the selling of surplus power by private parties to the ‘grid’. This could include households with a ‘rooftop’ solar panel system now popular, for instance, in Germany, where it generates 30% of all power (despite its wet weather), and in many other countries and communities. Overall, the time is right to promote ‘green’ (invariably local) energy policies and programmes within a comprehensive package of ‘best practices’. These would act to lower the dependence on imported fossil fuels and the use of coal-based generation and thereby to reduce the large associated health and pollution costs. A multitude of big and small companies can pass shares to such, preferably local, new ‘green’ or ‘future’ ‘Renaissance Companies’. Government should encourage this by providing, as for new employee owners, a grant that provides the initial operating income whilst the loan is being unwound and the dividend flow begins. A special Renaissance Company could usefully partner and invest in Community Trusts so that South Africans as residents of poorer areas also benefit as new BEE owners. South Africa must move beyond the outdated notion – pushed by the ‘oil’ clique around President Bush - that there is a trade off between environmental and economic priorities. Not true. A full ‘green’ energy programme will create a wide range of new, local high-class jobs whilst cutting costs to consumers, to industry, to society and to nature whilst growing the economy surely and sustainably. The rough breakdown of new BEE ownership should be: - Employee Ownership Trusts 60% Social Groups 15% Renaissance Companies 25% Financing BEE To support employee ownership and the take up of shares by social groups and Renaissance Companies, Government should require that present owners, holding R2, 400 billion of equity, provide a cover to these categories of BEE loans equal to 4% of their equity value. That would provide R96 billion a year to guarantee BEE loans that enhance company performance, social well being and the economy. That action would under-write the value of all present equity! It would also remove the banks from their present rapacious activity. The BEE loans they provide can be generated more efficiently and fairly and at no risk to the ‘broad-based’ objectives at the heart of BEE by dealing with present owners. [1] Deloitte Human Capital, Business Day December 9th 2004, page 11.