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The legislation around Black Economic Empowerment (BEE) is considered in some quarters to be the the real cancer that has eaten into the South African economy. Instead of improving the fortunes of the genuinely disadvantaged, BEE has helped a rich elite get richer – and that includes white individuals who have benefited from deals with BEE partners and fronting operations. BEE has been the smokescreen behind which gargantuan state capture deals have been struck and executed. Just this week, President Cyril Ramaphosa flagged up wide scale tender corruption in mega projects like the Giyani Water Project – which involves about R2bn – as putting the nation’s water security at risk. For Sara Gon and others of her school of thought, race should not be a proxy for disadvantage. BEE in its current format should be scrapped in favour of a new system that genuinely helps uplift the poorest in our communities. As most of these people are inevitably black, the new system should favour black people. Gon looks at the Khumalo Ince deal as a case study to examine the issue. Her article is published here on BizNews, with the kind permission of the Daily Friend. – Jackie Cameron
A better route to empowerment
By Sara Gon*
On 27 November, investor marketing agency Ince Communications Agency entered into a deal with media entrepreneur Andile Khumalo, significantly transforming its shareholding structure.
Ince was a family-owned company formed over 100 years ago. KhumaloCo is an investment firm with interests in technology, media, telecommunications, financial services and venture capital. Khumalo has been appointed chairman of the Ince board. He replaces Caxton’s Piet Greyling, who remains a director.
Khumalo is an accountant who has worked for Investec, Deloitte and the SA Institute of Chartered Accountants. He is best known as a former host of Power 98.7’s Power Business talk show. He was also treasurer of the Black Business Council as well as a non-executive director of South African Airways from 2012 to 2014. In 2007, he joined MSG Afrika Group, headed by Given Mkhari, as an equity partner.
Employee investment scheme, IsiQhingi Communications, will own a further 4% stake, lifting Ince’s total black ownership to 30%. isiQhingi was formed in 2017 to empower previously disadvantaged Ince employees. It is a 51% BEE and majority female-owned “black empowered” agency that provides specialised products and services to assist public sector organisations in their quest to adopt the process of integrated thinking and reporting.
The partnership is projected as seeking to ‘allow us to leverage Ince’s depth of experience and expertise in the field of stakeholder communications in order to serve the communication needs of the public sector’.
The two other major Ince shareholders, the Atkinson Family and JSE-listed Caxton, disposed of 16% and 10%, respectively, to KhumaloCo.
Ince lists Old Mutual, Sasol, Absa, Nedbank and Liberty as some of its biggest clients. It aims to improve communication between companies and the global investor community, using mainly digital products to create an interconnected community of informed contributors and a more inclusive investment ecosystem.
In a heartbeat, the deal with Khumalo has raised Ince’s Broad-Based Black Economic Empowerment (B-BBEE) rating from Level 8 to Level 2.
Black Economic Empowerment (BEE) is the race-based initiative by the government intended to redress inequalities inherited from apartheid. B-BBEE is the process to be followed to achieve BEE. It ‘seeks to offer Africans, that is black, Asian, and coloured citizens of South Africa, equal opportunities accorded to whites as an affirmative action’.
Level 2 provides 85 to 99.9 points on the BEE scorecard. Level 4 is considered to be fully BEE-compliant. Compliant businesses benefit in various ways, including, and probably most importantly, by being able to offer services to government and large corporates which require their service providers to be B-BBEE compliant in order for them to be B-BBEE compliant themselves. Higher BEE scores also come with favourable tax gains.
Five elements contribute to the BEE score:
- Equity Ownership comprises 25% of the weighting. It concerns voting rights and shareholding. When calculating the score, black ownership and black female ownership especially is considered. Youth and age are also an advantage when an equity ownership score is being assessed.
- Management Control comprises up to 15% of the weighting. It concerns the extent to which voting rights on the board are held by black members, the control of the executive board, and what percentage of senior management is black.
- Skills development accounts for 20% of the weighting, with a 5% bonus for certain criteria. These include the extent to which a company invests in its workers and works towards improving the skills and competencies of its black workforce.
- Enterprise development comprises 40% of the weighting, with a 4% bonus for certain criteria. This focuses on support and development extended to small, black-owned companies.
- Socio-economic development accounts for 5% of the weighting. This concerns social investment initiatives.
In the case of the KhumaloCo deal, even without knowing the number of employees each entity employs, one can probably safely say that it should make good business sense without the partners having to strive for the rainbow offered by BEE compliance.
This deal however mirrors the many BEE deals which, 25 years into democracy, represent the pressure placed on private companies to make up for the deprivations of apartheid on terms set by government, which largely benefit the poor not at all.
Generally, the beneficiaries are either long empowered, and even, arguably, ‘over-empowered’. Those people benefit who are already in an advantageous position because they have achieved reasonable middle-class status by virtue of skills and secure employment.
The system fails to offer equal opportunities to the majority of South African citizens who are poor. In fact, the growth of the class that does actually benefit is responsible for the increasing inequality gap in our society.
The Institute of Race Relations (IRR) has received a lot of criticism for taking the position that race should not be a proxy for disadvantage. When the Democratic Alliance had to face up to its lapse from classical liberal convictions, this issue was front and centre of the whole debate.
We believe, however, that qualifying for empowerment should not be based on people’s membership of groups.
Society is made up of individuals whose worth is not simply defined by an attribute common to others. If South Africa is to prosper, and overcome the disadvantage inherited from apartheid and perpetuated since 1994, something much more effective and fair than race must be considered.
In terms of the racial profile of beneficiaries, the IRR’s Economic Empowerment for the Disadvantaged (EED) would hardly differ from the intended noble objective of BEE. The primary beneficiaries of genuine empowerment would be black people, since they make up the greater proportions of the poor and the jobless.
Integral to EED would be a system of government-funded vouchers available to all means-tested South Africans earning below a certain amount, which they could use to access education, healthcare, and housing of their choice, giving lower-income families options many middle class people take for granted.
The EED scorecard would reward businesses for the investments they make, the profits they generate, the jobs they sustain or create, the goods and services they buy from other suppliers, and the innovation they help to foster. Businesses could enter into effective public-private partnerships to improve education, healthcare, and housing, and maintain and expand essential infrastructure. They could be rewarded for the contributions they made to tax revenues, export earnings, and foreign currency inflows. They could also score by topping up employees’ vouchers.
EED would not, however, be an artificial basis for justifying which entity a company could or could not do business with. This approach is a pathway to manipulation and graft.
The expanded Ince could surely achieve the same or more without being bound by the BEE scorecard: it would be more autonomous in determining whom it does business with and whom it benefits.
The government should leave business and individuals to do what they deem best for themselves, with some positive incentives to achieve a desirable societal result.
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