Author:  Sipho Ngcobo|

12 February 2010 10:46

BEE: A man-made disaster

Sipho Ngcobo dissects the problems with BEE.

JOHANNESBURG - I would really hate to say I told you so.

The brutally frank pronouncement by Deputy President Kgalema Motlanthe about a week ago that black economic empowerment has failed is an amazing vindication of what I have been trying to argue.

Often times I felt like a raving lunatic hell-bent on rubbishing a noble cause.

But that's what most elements of broad-based black economic empowerment (BEBEE) are, - rubbish.

Maybe let's begin where we are supposed to begin: What was the original, genuine objective behind the BEE policy?

A simple and direct answer is:

BEE was seen as a key government policy intended to redress the wrongs of the past that left South Africa's black majority economically disenfranchised. BEE was supposed to better the economic lives of our people.

That is the short and simple answer.

But have black people been better-off economically since the policy was implemented in the mid-1990s? Has BEE made an impact on the lives of our people? The answer is no!

A survey by the University of Cape Town's School of Economics has revealed that it is, in fact, the blacks who are still the poorest of the poor. In short, blacks are in trouble economically.

Don't get me wrong. Initially the idea was noble. It was well intentioned.

But BEE as it is currently is like a mirage. It's an illusion.

BEE is failing blacks on a number of fronts. First, the structures are wrong.

The notoriety and weakness of the deals that were based on the upside of the share price proved their shoddiness between 1997 and 1998 during the South East Asia financial crisis, which saw prices collapsing and rendering those deals obsolete. It also became a double whammy with interest rates ballooning to around 25%. So the BEE deals collapsed. But the underlying structural issues were to blame. It was a disaster, a man-made disaster.

Another notorious element is the vendor funding model. This is a major headache. Because BEE participants are capitalists without capital, there would be a demand on the white partner to vendor-fund the deal. In other words, the white partner buys (or something like that) a stake in his business for his black partner using his own resources. He who has got capital calls the shots. In this context the white partner calls the shots and the black partner is just a token, a non-entity.  A black partner can't possibly be assertive in a relationship like this one. At least, that would be the psychological effect in this partnership.

In some cases black partners would buy a 26% stake in a white-owned company making the white-owned company black-empowered.

But then these black partners would not be directly involved in operations. Firstly because they are hands-off operations, they would know very little about the business and therefore no skills transfer would take place.

And because there would be no transfer of skills, the black partners would never be able to add value. Because they won't be adding any value, they would be considered weak and useless. Then their uselessness would cause resentment and tension, and eventually a big fall-out. As we know, business fallouts are usually costly and distracting, and therefore destructive to the business.

These fallouts are often traumatic and emotionally taxing. White partners would end up genuinely believing: "These people, these blacks are useless." Blacks on the other hand end up internalising the belief that: "These whites are bad. They don't want to embrace change. They have always been like this anyway."

Obviously when two bulls fight, the grass suffers. In this case, empowerment gets a very bad name.

The other problem is that these BBBEE deals have not translated into real economic benefit to members at the tail end of the so-called broad base. It's often the few blacks leading the deal that get rich.

Take for instance, MKVA representing 45 000 Umkhonto WeSizwe Veterans and their immediate families. MKVA has participated in a number of BEE deals. But what have been the real economic benefits to these members? Out of the 45 000, what has been the benefit in rand terms to, for instance, the 13 000th member of MKVA? What has been the economic benefit to the family of say, the 29 000th member of the veterans' group?

The fact is thousands and thousands of Umkhonto freedom fighters struggle every day to make ends meet. In fact, some of them are penniless and broken men and women. It's a fact.

Now, be honest and tell me what BBBEE has done for these people? Nothing! We know these MK Vets. We have friends and family members in their midst. They have nothing.

The fact of the matter is instead of blacks benefiting it is the investment banks and corporate law firms that have made obscene sums of money from these deals. After all, they are the ones who call the shots, from start to finish. They have defined these deals.

It's abominable.

But also our leadership has failed black people. Government took its eyes completely off the ball to find creative ways of economically enfranchising the people. They hung on to BBBEE which, as things stand, is definitely not the answer.

Even the language our leaders use is wrong in this context.

Addressing the inauguration of the President Jacob Zuma's BEE Council last week Deputy President Kgalema Motlanthe is quoted as saying: "The percentage of black-owned companies on the JSE is disappointingly low."

That on its own is a wrong measure. Do not even go there for now. Don't try and measure the effectiveness of black economic enfranchisement by which black company is listed on JSE.

There is a lot of wealth outside the JSE. Start there. By way, we must first understand why companies list.

Minister of trade and industry Rob Davies is said to have told the BEE Council inaugural meeting that his department would be analysing the impact of the implementation of broad-based BEE on an annual basis.

Minister, forget about it. There is nothing else to analyse. We already know what is wrong. Just act on it. For crying out loud, just correct it.

My fear is that this BEE Council is going to continue pussy-footing around the issue. There is no time. Remember this is exactly the same as service delivery.

 So, deliver the service.

*Sipho Ngcobo is former deputy editor of Business Report and ex-managing editor of Enterprise Magazine. He was one of the original team members of Business Day when the paper was launched in May 1985. He was a correspondent at international news agency Dow Jones where he reported on markets and companies in the early 1990s. He has also written for such publications as the Sunday Times, the World Paper in Boston and was employed by the New York Times Group in the US between 1989 an 1991.

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