BEE deals — the surprising truth
THE much-touted notion that black empowerment deals have only benefited a handful of politically connected elites is dead wrong.
This emerges from a new study by research house Intellidex, which tracked money that flowed from BEE deals done by the top 100 companies on the Johannesburg Stock Exchange (JSE).
It found that 52 billion rand has gone to charities.
Of this, 32,6 billion rand has ended up as endowments in 27 foundations that were created through the deals.
Another clear implication of the research is that SA is becoming more like the US, with a philanthropy sector dominated by large endowments.
Earlier research had found that 16 percent of the 317 billion rand in value created by these deals by the end of 2015 had been directed to public benefit entities such as community trusts.
Far from propping up elites, much of this 52 billion rand has gone to the poorest of the poor.
As the BEE deals matured, they created 32,6 billion rand in new endowments, which were transferred to foundations and meant to provide ongoing benefits. In most cases, these assets were in shares of the company, held in a trust.
In addition, another 18 billion from empowerment deals flowed directly to beneficiaries and non-profit organisations. While some of the beneficiaries are long-standing charities, a number of foundations were established specifically to divvy up the proceeds of the deals.
A deeper analysis of what these foundations do with the money found that they spent 24,8 billion rand on education (67 percent of what they received), 3,9 billion rand on community projects, 3,1 billion rand on fostering entrepreneurship, 1,38 billion rand on developing skills and 1,3 billion rand on projects for children and youth.
The largest new foundation set up as part of these BEE deals is the FirstRand Empowerment Foundation, which has 5,7 billion in endowments.
Most of the foundations have been set up as perpetual trusts, which could theoretically outlive their founders — as has been the case with the Rockefeller and Ford foundations — or even the companies that started them.
As Intellidex says: “Most of these endowments are designed to be perpetual — so they could theoretically exist forever.”
Intellidex founder and former Financial Mail journalist Stuart Theobald says the results suggest philanthropic activity in SA is set for a major growth spurt, as many of the deals in question are only maturing now.
“A lot of this money is quite new,” he says.
“These foundations are in many cases still getting into gear and hiring staff. This is actually something that is going to move the needle in philanthropic activity in the country.”
Assuming the endowments grow at an annual yield of 10 percent, their assets could support 3,2 billion in funding for trust beneficiaries each year.
Though the research shows that empowerment has benefited charities, it’s tough to get a sense of how much it has contributed to SA’s entire philanthropic sector because data is lacking, says Theobald.
In 2015, a study by GastrowBloch Philanthropies found that 21 existing foundations collectively held endowments of 12,6 billion rand.
“But this was thought to only capture a narrow part of philanthropic assets in SA. Anecdotally, the endowment arising from BEE deals will make a significant impact on the overall asset base that is available to back philanthropic activity,” says Theobald.
The Tutuwa Community Foundation was created from the Standard Bank BEE deal.
Its CEO, Zanele Twala, says the size of the endowment has allowed her foundation to put together a number of longterm programmes.
The foundation, which stands to get up to 8,9 million Standard Bank shares (worth 1,3 billion) and dividends, runs a number of youth programmes, a high school scholarship partnership with the Allan Gray Orbis Foundation and various other schemes.
Internationally, says Theobald, charitable foundations are becoming activist shareholders — a trend that could manifest locally.
For instance, a foundation with a focus on early childhood development could use its shareholding in a hospital group to influence the way hospitals provide postnatal care.
“One challenge we foresee for these new foundations is that their investments are overwhelmingly focused on the shares of the sponsoring companies. This leads to significant concentration risk, as the value of the foundations consist only of one company,” Theobald cautions.
The continued uncertainty over the “once-empowered, always-empowered” principle also means that the companies want the trusts to remain long-term investors so they count towards black ownership statistics.
But it would be far more sensible for these funds to invest in a diverse portfolio, Theobald says.
As a case in point, after a weak iron ore price prompted a dividend freeze by Kumba Iron Ore, projects under the Sishen Iron Ore Community Development Trust were placed at risk.
The trust has since diversified its portfolio. Now, investments in hotels, airlines and renewable energy account for 30 percent of its balance sheet.
Admittedly, it is quite difficult to do this, as it means some portion of the fund’s return has to be diverted from grant programmes and towards investments into other assets.
Another option could be for funds to enter swap contracts, whereby two funds pay a portion of their returns to one another, with each fund ending up slightly more diversified as a result, says Theobald. — Financial Mail SA