Once em­pow­ered ar­gu­ment may have out­lived its his­tory

Sunday Times - - Business Opinion - Andile Khu­malo Khu­malo is chief op­er­at­ing of­fi­cer of MSG Afrika

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”.

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