• Patrice Motsepe: Major beneficiary as leqader of Sanlam's BEE strategic partner. Picture: SUPPLIED

  • Stuart Theobald: 'The clearest and most important determinant is the performance of the overall JSE. The most successful deals were naturally where the share price performance was very positive. Also, the longer the term of the deal, the more likely the deal was to have delivered value.' Picture: BUSINESS DAY

SINCE it took root in our political and economic lives, the success of black economic empowerment has been impossibly controversial to quantify. Despite score-cards, definitions and revised definitions and a mushrooming industry of BEE measurement practitioners, consensus has yet to be reached on how to assess the real size and scale of black empowerment.

Into this politicised context, consultancy Intellidex has put forward what it argues is an objective measure and has come up with a number: BEE is R317bn big, says the firm, if the value transferred to black beneficiaries by the Top 100 on the JSE is totted up and finance charges are taken into consideration.

The Intellidex research analyses every empowerment transaction of the Top 100 undertaken since 2001.

The aim of the study was to get a handle on the value transferred to black beneficiaries and to discern the trends: which deals worked best; what difference the structure made; to find the relative value that accrued to black individuals or strategic partners vs broad-based groups, communities and employees; and to analyse the key drivers of value creation.

The findings are a counter to some of the popular misconceptions of BEE on both ends of the spectrum and are particularly relevant to the direction in which debates over the future of BEE are headed.

Among the myths dispelled are: that BEE has benefited only a few; that BEE has become so broad and diluted that the few (black entrepreneurs) no longer benefit; and that real value hasn’t been transferred into black hands due to onerous financing arrangements and debt or due to a great many deals being under water.

Intellidex chairman Stuart Theobald says that the R317bn in total value attributable to beneficiaries "is net of any debt or other financial obligations attached to the deals."

It also includes "live" and concluded deals as well as deals that have since unwound and where the black beneficiaries have sold out.

The information was gathered from company circulars and from the Stock Exchange News Service, which provided various levels of detail including the financing arrangements. Where detail was lacking, Intellidex says that it requested more information from the company but in some cases — where this was not forthcoming — it was forced to make assumptions. The net value was arrived at by subtracting the finance costs from the price at the time the deal matured — on average, after six years. For deals that were still live or had funding or lock-ins still in force, the net asset value as at December 31 was used in the calculations.

The eventual value of live deals will be subject to market performance subsequent to the valuation date.

Of the R317bn, R196bn (62%) was attributable to strategic investment partners, R52bn (16%) was attributable to employee schemes and R69bn (22%) to broad-based community schemes, often structured as trusts to which black beneficiaries can apply for benefits.

"In the context of the huge debate over the BEE codes in recent weeks, the claim that broad-based schemes have received no benefits is false," says Theobald. "In FirstRand’s R23,2bn empowerment deal, which was also the biggest deal done on the JSE, the single-biggest pay-off of R14,6bn went to a broad-based trust."

Equally, he says, there are other transactions in which strategic partners have benefited handsomely. So, in the case of Sanlam, which at R14,3bn was the third-biggest empowerment transaction on the JSE, more than half of the value went to its strategic partner, led by Patrice Motsepe. In the case of Aspen, the entire R8,6bn will be attributable to strategic partners when the deal matures.

"So the claim that broad-based deals are being done to the exclusion of deals with individuals or potential black industrialists is also false," says Theobald.

While the structure of deals has changed over time, a typical deal now involves all three beneficiary groups: a strategic partner; employees; and a trust to which beneficiaries can apply for benefits such as bursaries.

Analysed from the point of view of sectors, the mining sector has been the largest generator of value for empowerment beneficiaries, with R101bn. Mining has also generated the most value of any sector relative to its market capitalisation and includes the biggest three companies, by market cap, to undertake empowerment transactions: Exxaro, Northam and Impala Platinum.

When it came to the drivers of value creation, the structure of a deal mattered far less than stock price performance and less than the length of time that partners remained in the deal, says Theobald.

"The clearest and most important determinant is the performance of the overall JSE. The most successful deals were naturally where the share price performance was very positive. Also, the longer the term of the deal, the more likely the deal was to have delivered value."

Though lock-ins that prevent BEE shareholders from trading their shares for specific periods have been highly controversial, Theobald says they had a hidden benefit.

"In a sense, locking people in creates a forced saving, which has worked in favour of the beneficiaries.

"This is not surprising because it is how financial markets work. The longer you stay in, the better you do."

The research shows that deals that lasted eight years or longer delivered an average return of 4,5% of the market capitalisation of the investee companies, while those that lasted less than eight years showed a return of 3,2% of value. Because BEE share acquisitions are typically funded through using the returns on equity to pay off debt, it is the difference between the JSE’s average return over 20 years (17,2%) and the average prime interest rate (13,7%) that has been the source of asset creation.

The ups and downs of the market have meant that at certain periods a substantial number of deals were valueless. But a strong rally, towards the end of the period reviewed, meant that only seven of the 136 deals undertaken by the Top 100 were "out of the money" by the end of 2014.

The Intellidex research provides useful quantifiers of BEE and its achievements. However, the question of whether the amount of value transferred into black hands over the past 15 years is impressive or sufficient is a political one.

Viewed as a percentage of the tradable (domestic) market capitalisation of the JSE, which is estimated to be around R4,2trillion, this amounts to 7,5%. It is important to note that the Intellidex study does not attempt to measure black ownership of the JSE but looks at the value created over time. The debate on black ownership of the JSE, which has been fraught and confused by different definitions and political posturing, is best left for another day.

Measuring against the JSE is helpful, however, in so far as it gives a sense of the relative scale of the headline figure of the value of BEE put forward by Intellidex.

Another way to assess the size of R317bn is to consider what it could buy. R317bn is more than double what has been spent on the entire stock of low-cost housing (R125bn in 2010 prices) since 1994, and almost four times what has been spent on land reform and restitution since 1997 (R79bn in 2014 money).

So BEE value constitutes a very considerable transfer of assets without — as is the case with social spending — putting direct pressure on the fiscus. The economic cost of BEE, says Theobald, lies in the risk that a company takes in doing a transaction in which the partners’ debt is to be paid from future returns on equity. This risk can depress the share price (though equally, not doing a BEE deal might do the same).

While government says it acknowledges the progress made, the answer on whether BEE has done sufficiently well so far is a firm "no".

A third wave of BEE has just commenced, with tough new codes of good practice coming into effect on May 1. These will make it significantly harder for companies to reach the ratings levels they did before and will penalise those companies that choose not to do equity transactions or procure from black suppliers.

There has also been an unofficial shift in emphasis in ANC and policymaker circles. During the second phase of BEE — from 2007 to 2014, when the codes were drawn up and the scorecard approach introduced — the emphasis moved away from transactions with high-profile individuals to ones of a more broad-based nature. Now, the pendulum has swung back. Though official government policy is still that BEE should be broad-based, the idea that government must create "black industrialists" now dominates the political context.

The prevalence of this thinking explains the sudden appearance last month of a shock "clarification notice", gazetted by the department of trade & industry (DTI), which downgraded the value of broad-based deals on the scorecard, stating that these would in future only count for a minimal number of ownership points.

The argument behind this — strongly supported by the Black Business Council — is that it is only "active shareholding" by individuals that can shape and build economies. Broad-based ownership is too passive and dispersed to have an influence on either the economy or on the strategic direction of companies.

The furore that erupted from business and trade unions, which are typical broad-based vehicles, as well as the fact that the "clarification" was certain to be challenged in the courts, resulted in a rapid reversal. However, the new policy bias is now clearly inscribed on the wall.

Empowerment consultant and MD of Black Lite Consulting, Ajay Lalu, says it is clear the next phase of BBBEE will be substantially different from previous phases.

"Through the revised codes government has sent a clear signal to the market that it will prefer black-owned or black women-owned companies to traditional companies when it procures. Secondly, the black industrialist policy — in which SAA, for example, will procure R10bn from black-owned business and in which Transnet’s fuel procurement from black-owned businesses will reach R22bn — are a clear indication that the implementation of these policies is following a different route to previously," says Lalu.

DTI director-general Lionel October says that 10 years on from when most sector charters were done, it is time to increase the pressure on sectors where little or no empowerment has been achieved. The worst performers were in the retail sector. Because they do little direct business with government, they had no incentive to engage in empowerment.

Of the 10 companies in the Top 100 that have done no BEE at all, six — Famous Brands, Lewis, Pick n Pay, Shoprite, Foschini and Truworths — are retail groups. Another three large retailers — Massmart, Woolworths and Mr Price — have done only schemes involving their staff.

Sandile Zungu, vice-president of the Black Business Council, says the black business lobby has the retail sector clearly in its sights. "Retail has been the biggest beneficiary of government policy towards the poor. Social grants and wages are all spent at retailers. As the biggest beneficiaries of government policy we expect them to be conscious corporate citizens. There is surely a moral obligation on their part to deracialise the economy?" he says.

October says government expects the retail sector "to move quickly towards 25% black ownership" and will bring to bear whatever moral persuasion it can muster. In some other sectors, government has already found additional levers to push for more BEE.

In the manufacturing sector, where black ownership is also very weak, it has raised the stakes by making it compulsory — since May 1 — for all beneficiaries of the Manufacturing Competitiveness Enhancement Programme to attain a level 4 on the new codes.

Talks are beginning with motor vehicle manufacturers which benefit from government incentives to do some form of BEE and regulators have been briefed to make BEE scores a mandatory element in licensing.

"People have asked if there is a sunset clause to BEE. But we can’t have sunset if we haven’t had sunrise," says October. "The point is, BEE hasn’t happened yet. The problem with the critics is that they want the status quo; they don’t want a nonracial economy. We are not going to do a Mugabe, but we are upping the pressure now."

Where there is still scope to negotiate on sector charters — in the case of telecommunications companies, which government believes got off lightly in the charter process — or to push to reach compliance levels already set, as in the case of agriculture and agribusiness — government and black business are preparing to put up a fight.

State-owned companies, too, now front-load tenders with a range of "localisation" requirements in order to get around preferential procurement rules that limit the weight given to BEE in tender evaluation.

Accompanying all this is enormous political pressure in the ANC’s ranks for "radical economic transformation" which, rather than radical macroeconomic change, has come to mean more and faster BEE.

The stage has been firmly set for a new round of black economic empowerment.