An MBendi Profile: South Africa - Miscellaneous: Black Economic Empowerment

Under the Apartheid system, which was implemented by the National Party government in power from 1948 to 1994, all South Africans were classified by race, with whites, or those of European or Japanese descent, given preferential access to ownership of land and business assets, education and amenities, while non-whites enjoyed second-class status. As in most countries in the world, women and the handicapped were, and continue to be, discriminated against in the workplace, though probably more by neglect than design.

While the South African constitution adopted after 1994 fosters the notion of a state devoid of bias on the basis of race, sex, religion, physical disability, language or sexual preference, in practice the state continues to categorise people on the base of race and sex in order to favour the “previously disadvantaged” as part of leveling the playing field and creating a more equitable distribution of wealth, skills and resources.

In the workplace, the Employment Equity Act provides for a measure of redress through affirmative hiring and promotion practices. State and parastatal tender practices increasingly favour companies that are owned or managed by members of previously disadvantaged communities. Private sector companies are encouraged to do likewise and there is a move to favour SMMEs which are, in many instances, small companies owned and run by previously disadvantaged persons. The government provides various incentives to investors who enter into empowerment ventures or which are SMMEs.

One of the most stimulating things about living in South Africa today is watching the debate taking place on the issue of company ownership and empowerment - it's a bit like a tennis match where the ball moves back and forward between the past, where blacks were fourth class citizens, and the future where the main shareholders of local and multinational companies are the asset management companies representing small investors and pension funds, regardless of race or gender or nationality or location in the world.

The issues being faced in South Africa are the ones you can expect to find arising elsewhere, though maybe in a different guise. Instead of creating an elite of business barons a la Victorian-era mine owners, how do you get ownership transferred to the masses? Where can impoverished people find the finance to participate in capital intensive mining and energy ventures? What happens if you meet the government hurdle rate of, say, 25% or 51% black ownership and then your new shareholder goes bankrupt or is diluted through the sale of shares to a non-black or amorphous third-party? How do you classify the nationality or race or sex of an investment fund or a listed company, particularly where online facilities making buying and selling and change of ownership so easy? How do you enact transfer of ownership without discouraging foreign investors? How do you prevent previously disadvantaged figureheads fronting for companies not entitled to access to state contracts?

One of the aims of the government empowerment initiative is to have 40% of shares on the JSE Securities Exchange owned by black business. Although this target is still far from being reached, there is an increasing number of empowerment deals involving acquisitions by black empowerment entities. The deals have had positive results although there has been some criticism that these transactions serve to enrich only a few and have had a minimal effect at the grassroots level.

The downstream oil industry was probably the first major industry where all these issues came into play. Caltex was first off the mark, hiving off a group of service stations to Afric Oil, jointly owned with black-owned Worldwide Africa Investment Holdings. Worldwide then bought Zenex, previously Esso, using a loan from the banks, and then used these assets as part of buying a 20-25% share in Engen, South Africa’s largest downstream oil company. Thebe Investment Holdings, another black-owned oil company, created Tepco, which in turn was taken over by Shell as part of an empowerment deal. Meanwhile, the government had introduced a charter committing the oil companies to having a previously disadvantaged shareholding of 25% and all the companies are making moves to realign their shareholdings to meet this goal. Since the oil industry represents a major part of foreign investment in South Africa, the net effect has been a major disinvestment by foreign companies. The industry is highly capital intensive and refinery and marketing margins are significantly lower than interest rates, posing challenges as the companies upgrade refineries to meet additional demand or cut emissions.

In the mining industry, Mvelaphanda, African Rainbow Minerals and a number of smaller companies were early beneficiaries of industry initiatives to involve previously disadvantaged players, in the process enriching a small group of individuals with close links to the ruling ANC. In 2002, the government started to play a more active role in mining industry empowerment culminating, in October 2002, in the publication of an industry empowerment charter which fosters empowerment of all types, not just ownership, and looks at the involvement of disadvantaged communities rather than individuals. Allied with the charter is a commitment to providing funds for investment by empowerment groups. Publication of the charter led to uncertainty on the part of overseas investors and the market cap of the mining sector dropped due to the uncertainty and the potential for enforced sale of assets.

Empowerment forms a key part of the South African government’s privatisation programme and an empowerment partner can expect to be a pre-requisite for new shareholders in state forestry assets, Telkom, Eskom, Transnet, CEF and others. Empowerment partners will also be essential to companies granted telecommunications and broadcasting licences.

The removal of discrimination in the educational sector now means that there is a steady stream of graduates and school leavers of all races moving into the workforce whose claim to be previously disadvantaged is going to diminish. However, even these children often experienced a deprived youth, with little formal pre-school education and a schooling system in which the best teaching staff and facilities were not available to all.

The thorny issues which we have raised in this profile are far from being resolved. The challenge is to strike a balance, redressing some of the ills of the past, while at the same time not discouraging foreign investment in the manufacturing, resource and tourism industries and the infrastructure that is key to the development of the region. The other challenge is to ensure that it is the African person-in-the-shack who benefits and not just a few wealthy cronies of the president. To our mind, while the past is important, South Africa has to face the future firmly with the view to making the economic pie large enough to be shared efficiently by the locals, disadvantaged or not, and by the foreign providers of capital and expertise. The rules need to be in place to ensure a partnership of willing participants who all benefit from the association.

A number of organisations have been formed to monitor and promote the process of black economic empowerment (BEE). The Black Economic Commission was formed in 1998 with the mandate to evaluate the direction and pace of the process. The Black Business Council comprises a number of organisations working together to promote empowerment.

Reference Resources

Employment Equity Act

Promotion of Equality and Prevention of Unfair Discrimination Act

Empowerment Companies