Once empowered argument may have outlived its history
Earlier this week I came across a letter written by the B-BBEE Commission to the Trade and Industry Minister Rob Davies in October 2016 stipulating the commission’s view on the issue of “once empowered, always empowered”.
It reminded me of what two American academics, Paul Sabatier and Daniel Mazmanian, said about policy almost 40 years ago: “The capacity of public policy to alter social behaviour is a complex process that should be seen in historical perspective. In any specific policy area, the basic policy orientation often remains fairly constant over time, with change coming in small increments as a result of adjustments made by relevant agencies, interest groups and legislative committees.”
The B-BBEE Commission was unequivocal in its view that the principle of “once empowered, always empowered” — and the basis on which it was being argued — rendered it “unfounded and therefore contrary to the objectives of the B-BEE Act”.
The commission went further to note that current legislation allows, under very specific criteria, the recognition of B-BEE points for empowerment transactions even when the black shareholder has exited. However, this “continuing consequences principle” is meant to be a transitional provision — just to cover the period between the old deal and the new deal.
It is not meant to be a permanent structure, and anyone proposing “once empowered, always empowered” undermines the entire policy and its objectives. But the lockin debate has a particular history, and it is entrenched in the funding of BEE transactions.
Given the history of economic exclusion, it was no surprise that black participants generally had no capital of their own to acquire ownership stakes in white-owned companies. As a practical compromise, the companies funded deals through a series of hybrid funding structures and arrangements.
What became common across all funding models was a “lock-in” clause. Under such a clause, BEE shareholders remained tied to the company for two reasons. First, the dividend flows due to the black shareholders were used to fund the acquisition cost, and, more crucially, for as long as such shareholders remained locked in, the company was indeed in possession of black ownership that met the threshold.
Naturally, such lock-ins could not possibly last forever. Those deals that worked well were able to generate sufficient cash flows during the lock-in period to ensure that the full benefit of ownership flowed to the black shareholders at the end of the lock-in. Others simply never generated enough cash during the lock-in period to clear the funding debt. Such deals then either had to be bailed out by the other shareholders or rolled over into the future.
In both instances, though, whether the deal was in the money or not, a new problem accrued at the end of the lock-in period when the black shareholders were free to sell their stakes on the open market. Illustration: Nolo Moima
When the BEE conversation started, political dynamics were different
When this happened, companies struggled to trace the new shareholders and couldn’t possibly account for them as empowerment shareholders.
It is on this basis that the Chamber of Mines is arguing that once a company is empowered it must always be regarded as such, regardless of the actual shareholder profile after the end of the lock-in period.
While for the mining companies such a principle eliminates the burden of having to finance new deals to maintain black ownership levels above the threshold, the problem for the government is more acute. Given the primary objective of BEE policy, supporting the always empowered principle when the ownership patterns essentially regress after lock-in periods will deem the BEE policy to be a failure.
When the BEE conversation started two decades ago, political and global dynamics were different. Perhaps it is time to test if the founding objectives of the empowerment policies are still fit for purpose. After all, “the capacity of public policy to alter social behaviour is a complex process that should be seen in historical perspective”.