SA Today: Grasping the B-BBEE nettle

helenzille2011bHow does a country make the transition from a society that has been defined by race for centuries to an open society with opportunities for all?

Political emancipation – marked by our first democratic election – was an important first step. But the goal of economic inclusion remains as relevant in South Africa as it did in 1994.

The question is, given our country’s history of discrimination and entrenched inequality, how best can we achieve full economic inclusion within a reasonable time frame?  Is it possible, or even desirable, for the state to undertake initiatives that seek to compensate for past deprivation and lost opportunities?

Most people, including the Democratic Alliance, believe that appropriate measures to redress the injustices of apartheid are necessary. We often summarise our values in the formula “R2D2”: Reconciliation, Redress, Diversity, and Delivery.

Some redress measures are universally supported. Most people agree that excellent education and sustained economic growth are essential to create job opportunities and enable people to improve their lives.  This is why our top empowerment priority must be to fix public education and create jobs through economic growth. But (apart from creating conditions for growth and improved education) does the government have any further role in promoting economic inclusion?  This question has elicited intense debate, including within the DA.

Much of the controversy focuses on “Black Economic Empowerment” (BEE) and the way it has been approached.

There is growing consensus that BEE which focuses primarily on the transfer of ownership of enterprises has done little to advance economic emancipation for the majority of people disadvantaged by apartheid. Indeed, this type of narrow-based BEE has had a direct cost (an estimated R500-billion) to transfer lucrative shares to a small number of politically connected individuals. These individuals have become very rich usually without starting new enterprises, or adding new value, or creating new jobs in the economy.

A groundswell of discontent at the enrichment of a small elite to the exclusion of others is why the government sought to rebrand it as “Broad-Based” Black Economic Empowerment (B-BBEE).

The DA has responded to this shift in a nuanced way. We have analysed each B-BBEE initiative on a case-by-case basis, supporting some and rejecting others. In each case, the key criteria we use are the following: does this initiative broaden opportunity for disadvantaged people? Or does it seek to manipulate outcomes for the politically connected? If it broadens opportunity, we support it. If it is another enrichment scheme for cronies, we reject it.

This is why we have, in the past, supported many initiatives that fall under the “B-BBEE” umbrella.

Here are some examples:

  • Multichoice’s black empowerment vehicle “Phuthuma Nathi” was allocated 20% of the company in 2006 and started trading publicly in December 2011. The vehicle initially made shares available to 120 000 historically disadvantaged shareholders at R10 each. These shares are today trading at between R65 and R67. In September 2012 Multichoice declared dividends to Phuthuma Nathi shareholders amounting to R1 billion.
  • South African Breweries’ (SAB) “Zenzele” empowerment deal involved the transfer of shares to SAB employees, retailers and the SAB Foundation. The extension of participatory rights in the share scheme to 30 000 taverners provided them the opportunity to become fully licensed businesses operating within the law.
  • There are also many examples in the Western Cape and Cape Town where the DA governs, ranging from the Premier’s Advancement of Youth (PAY) project for interns in government; to the “Work and Skills” project (which is our version of the Youth Wage Subsidy); to the  broadening of access to government procurement.
  • Just this week, I visited farms that are outstanding examples of land reform and B-BBEE, where workers own between 40% and 100% of productive enterprises on the basis of equity share schemes.

We supported (and in some cases initiated) these interventions because they contribute to redress and economic inclusion in a sustainable way. These initiatives promote economic growth and jobs, which are essential to repeat the virtuous empowerment cycle to include more and more people.

On the other hand, there are many so-called empowerment deals that failed the “opportunity and inclusion” test.  Indeed, they were thinly disguised schemes for enriching politically connected cronies.  Some of these are:

  • Absa’s ironically named empowerment deal “Batho Bonke” (All the people). This scheme saw the empowerment consortium paying out up to R300 million in equity and financing costs to Minister Tokyo Sexwale’s Mvelaphanda Holdings and less than R1000 each to the remaining 1.1 million beneficiaries.  The majority got a pittance.  Tokyo Sexwale got very rich.
  • BEE beneficiary, Mzi Khumalo’s company, Metallon, made profits of over R70 million in an “empowerment” deal with a construction company. The deal involved Khumalo and former National Director of Public Prosecutions, Bulelani Ngcuka, acquiring a controlling 51% share of the company for 82 cents per share.  As soon as the share price rose beyond R5 Khumalo started selling his shares making him a profit estimated to be more than R70 million – all in the name of ‘empowerment’.
  • The controversial, failed R1.9 billion ArcelorMittal SA empowerment deal. This would have seen 21% of the company end up in the hands of, amongst others, the “Ayigobi Consortium” which included Deputy President Kgalema Motlanthe’s partner Gugu Mtshali, President Jacob Zuma’s son Duduzane Zuma, Oakbay, the Guptas family’s investment vehicle and Jagdish Parekh, the chief executive of Oakbay. When he was putting this deal together in 2010, Sandile Zunga – who would have had a significant stake in the deal despite serving as the head of the President’s BEE advisory council at the time – admitted that it was “money for jam”. Thankfully, the deal was eventually abandoned.

When Dr Mamphela Ramphele recently revealed that the national government handed Goldfields a list of people who should be “empowered” through equity transfers in order to comply with the Mining Charter, it confirmed our worst fears of the manipulation of BEE  in the interests of a few.

The DA will always reject crony enrichment and patronage schemes that seek to manipulate outcomes, rather than broaden opportunities. Indeed, the examples of crony enrichment posing as B-BBEE far outweigh the examples of genuine broad-based empowerment.

We see this trend, yet again, in the Department of Trade and Industry’s “revised codes of good practice”.  Far from broadening economic inclusion, they will protect and encourage the re-enrichment of the already wealthy.  It raises the threshold for new entrants from R20-million to R50-million, thus enabling the already wealthy to be “re-empowered”. And it makes 40% of the BEE ownership target compulsory in order to qualify for any rating.  The DA strongly opposes these codes in their current form.

So where does this leave the DA in the debate on the B-BBEE Amendment Bill, currently before parliament?

The Amendment Bill focuses primarily on preventing “fronting”, which occurs when businesses fraudulently misrepresent their B-BBEE status to win contracts. The Committee heard genuinely shocking examples of business owners submitting the names of people as directors of the companies without their knowledge – and without any intention of allowing them a meaningful say or stake in the company.

We believe that “fronting” is wrong and should be exposed.  We therefore support this core aim of the Bill.  But there was also much in the draft Bill with which we disagree.  As a result, the DA proposed many amendments during the committee stage.

We succeeded in getting the ANC’s support for many of them, which is significant progress.  For example, we succeeded in limiting the Minister’s power to appoint members of the B-BBEE Commission. He must now do so in consultation with Parliament. This is a significant check and balance on potential power abuse.

But we lost the debate on the definition of “beneficiaries” in the Bill. The DA wanted this definition to focus on disadvantage rather than race. The ANC was determined to retain a race-based definition (presumably to leave the door open for further crony enrichment).

This race-based definition is difficult to accept, because even though there is a still a strong overlap in the South African context, race is not an exact proxy for disadvantage. We will never be able to fully support policies that require racial classification because this was the founding principle of the apartheid system which we fought to change.

Some people will argue that liberals cannot, under any circumstances, support a Bill that includes a race-based definition (even if we support the Bills’ main purpose to prevent ‘fronting’ and even if we unambiguously support redress for the injustices of apartheid.)

But not all liberals agree with this view.

For example, many of us believe that the state has a responsibility to broaden inclusion for historically disadvantaged individuals, because this will not happen by itself.

In the early 1960s, the South African Liberal Party’s policy handbook noted that “the state must…not shrink from such measures of intervention as may be necessary to ensure the creation of a non-racial economy with fair distribution and opportunity for all.”

I agree with this position.

The critical question we must now ask ourselves is: Do we oppose the Bill as a whole because we did not succeed in changing this definition (even though we know the outcome will be broadly the same?) Or do we, on balance, support the Bill because it enables us to proceed with more examples of positive empowerment and economic inclusion (such as the examples I have mentioned above, especially where we govern in the Western Cape) while continuing to expose instances of abuse of B-BBEE for political patronage?

If we accept this Bill, we can continue to show how, where we govern, economic empowerment can work to redress apartheid’s legacy by broadening opportunities for all.

The question is, couldn’t we just do it anyway, without this Bill?

We believe that a framework of incentives is necessary. And it is crucial to point out that empowerment legislation in South Africa is largely based on incentives, not punitive measures. The Codes of Good Practice incentivise companies to use local suppliers, to support small businesses, to invest in skills training for their workers, and to support non-profit organisations. All of these incentives are entirely non-racial. The system even actively incentivises companies to include ‘new entrants’ into all ownership transfer deals, irrespective of race.

This is significantly better than affirmative action in Malaysia, for example, where the redress system is based on undisguised coercion. In Malaysia, every company must by law be at least 30% owned by ethnic Malays (Bumiputera). Where this is not the case, companies are compelled to effect an ownership transfer – which means they are effectively forced to give away 30% of their company.

Supporting the Bill, despite reservations, does NOT mean that we will support all the codes of good practice issued by the Department of Trade and Industry.  Again, our yardstick will be: do the Codes broaden opportunities for the historically disadvantaged; or manipulate outcomes for the politically connected?  We will support the former.  We will oppose the latter.

After very careful consideration, I believe that rejecting this Bill, even in its imperfect form, will be more harmful for the essential project of economic inclusion than the alternative.  Indeed, the many positive incentives in the Bill increase the prospect of greater investment in skills, the creation of new small businesses and the expansion of existing ones, social investment, local content procurement and the consequent development of our manufacturing sector. And above all, these measures are compatible with our primary policy objective: job creation.

Of course, racial definitions leave loopholes for crony enrichment under the fig-leaf of race-based redress. We will continue to expose and oppose these.  Most South Africans have already seen through this ruse. The recent outrage over the Gupta family’s grip on the President is a result of this insight.

As on so many other issues, our position is nuanced. We understand that life is rarely a clear choice between pure good and pure evil, and that there are many shades of grey. But we can say unequivocally that we support Black Economic Empowerment when it is genuinely broad-based and productive.  And we insist on the application of the broad-based definition of “black” to include all people denied the franchise under apartheid, including coloured and Indian South Africans.

Our work in the Western Cape to advance economic inclusion has demonstrated this. And nothing in the Bill will detract from it. The solution is for more and more voters to elect DA governments where they live, so that we can implement genuinely broad-based empowerment, focusing on disadvantage, not political patronage.

Our job is to convince voters to do so.
Helen Zille

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