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The Africa Journal is a bi-monthly publication that provides information on current African issues related to African arts and culture, business, economy and policy, as well as editorials from members and others interested in African affairs. |
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FEATURE
Black Economic Empowerment:
What it means to American businesses
<By Luanne Grant>
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OWNERSHIP AND CONTROL
The Financial Services Charter refers to ‘direct ownership’ and ‘indirect ownership’.
Direct ownership corresponds with equity ownership as defined in the Broad-Based Strategy.
The concept of indirect ownership includes economic interest but excludes direct participation by a BEE investor.
Control, as used in the Strategy, means the right of the BEE shareholder to direct or control the majority of votes attached to the shares in a company; the right to appoint and remove directors and the right to control the management of a business.
COMPLIANCE
Companies are now appraising the requirements of being BEE compliant.
Being BEE compliant means that:
· The company complies with the requirements of the balanced scorecard or the BEE charter for its specific industry.
· The company is ‘black empowered’ if it has 25.1% ownership by black persons or organizations.
· The company is ‘black controlled’ where there is 50.1% ownership by black persons and significant black management control.
In the case of foreign-owned companies, the BEE shareholding will be measured against the value of the South African operation only.
The advantages of BEE are summarized as follows:
· Provides short term relative competitiveness;
· Introduces new entrants into a sector;
· Increases competitive intensity;
· Increases spending power in the economy;
· Increases the supply of skilled labor; and
· Increases Government’s tax revenue.
BEE should be seen as an opportunity rather than a risk and as an investment rather than a cost. It requires vision, leadership, strategic and tactical compromise both at local and international (home office) level.
EQUITY FINANCING
Many of the early black equity transactions were financed by means of special purpose vehicles (SPVs) that relied on the economy doing well and the share price increasing. The collapse of the international and local equity markets some years ago resulted in the non-performance of most of these SPVs.
Over the last five years, business has refined these models to ensure sustainability and as broad an empowerment base as is possible. To date transactions range from simple structures, where cash is paid for the shares or the funder has sufficient security, to complex deals – such as options, deferred shares, vendor funding, future share prices, growth targets etc.
There are a number of unintended consequences that are beginning to arise particularly relating to financing of many of the equity transactions, one of which is the tax implications of employee share ownership schemes. Other financing arrangements are being affected by foreign exchange control regulations, income tax requirements, capital gains tax, reporting requirements of employee option schemes in the US, directors’ fiduciary duties and other possible related legislation in the US. There are also concerns around BEE shareholders who sell their shareholding at a profit to non-BEE companies relatively soon after the transaction has been completed. As a consequence, companies have to find new BEE partners.
BROAD-BASED EMPOWERMENT
Equity transactions have resulted in a few black people becoming very wealthy, giving rise to the development of a few large black conglomerates, which in itself is necessary in a normal economy. However, this has not resulted in bringing the majority of black people into the mainstream of the economy. This is where skills development, employment equity, enterprise development, affirmative procurement and possibly corporate social investment become important.
GOVERNMENT LEGISLATION ON BROAD-BASED EMPOWERMENT
Government is placing more emphasis on broad-based empowerment.
· Skills Development and Employment Equity are regulated by the Skills Development Act and the Employment Equity Act.
· Enterprise development could be either direct investment in black-owned/black empowered enterprises or joint ventures with such companies.
· Government procurement is regulated by the Preferential Procurement Framework and the National Small Business Act.
· Company procurement is governed by company policy, which should include procurement from, or outsourcing to, previously disadvantaged companies. This should result in a transfer of skills and economic power to the black enterprise.
A commitment to BEE is an economic requirement to operate in South Africa. Although a lot of positive work has been done this is still very much a work in progress.
Luanne Grant is the Executive Director of the American Chamber of Commerce in South Africa.
For additional information, contact the American Chamber of Commerce in South Africa at tel: (27-11) 788-0265; fax: (27-11) 880-1632; or Email: amcham@yebo.co.za; or visit the website at www.amcham.co.za.
Case studies courtesy of the American Chamber of Commerce in South Africa.
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