Did SA’s BEE Spark Xenophobia?

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By Iyaloo ya Nangolo

1.1 Prologue
Black economic empowerment (BEE) is a topical issue in South Africa. This issue however, proves to be a controversial one as it bears rise to much suspicion and fear, particularly among those who enjoyed privileges during the apartheid era. The concept of BEE is embodied in the definition of affirmative action and they are used interchangeably. But there exists a difference between these two concepts; affirmative action deploys reforming strategies to undo specific imbalances based on race and ethnicity in a society (Jaunch, 1988), while BEE is about the enabling of specific people to acquire means of production, through assuming risk, strategy, cost and opportunity that the economy can offer (Reddy, 2004).

According to Lipsey and Chrystal (1995) there are two reasons for government intervention in a free market. Firstly, under the circumstances where the free markets do not produce efficient results due to monopolistic power, externalities, public goods, and asymmetric information. Secondly, relates to objectives other than efficiency, such as “distributive justice” and the “need to protect some individuals” from the decisions taken on their behalf by others. The government can achieve this by deploying the tools available, such as rules and regulations, expenditure and taxes, to name but a few (Black. et al 1997). The BEE policy is a form of market intervention by the government to achieve the goals explained in the former paragraph.

Abdelal et al (2002) contends that the South African economy has been characterized by a huge income disparity defined along racial lines.

Simultaneously, the South African economy was the most centrally controlled economy amongst non-communist countries by 1994. This type of economic structure was not coincidental but systematically designed to advance the needs of the white minority, at the expense of the majority of the population that relegated to a vicious cycle of poverty, unemployment and underdevelopment. Equally, this economy was not sustainable, as the majority of the population was playing neither a meaningful nor a constructive role in the economy due to government policies.

In order to maximise economic gains one needs to create a macro-economic environment that enables the population to participate fully in economic activities at the micro-economic levels. The BEE policies attempt to provide a platform on which new players can easily be introduced into existing economic activities without disadvantaging the existing players. In so doing, the existing players’ prosperity is complemented and not compromised to the detriment of the macro-economic fundamentals, as was the case of affirmative action policies under the Reconstruction and Development Programme (RDP) (Republic of South Africa, 1994). BEE therefore deals with enabling the South African economy to increase its means of production through diversifying the demography of the natural resources of ownership; human resources, capital ownership, and entrepreneurship. This is the only way in which the economy can, in a sustainable manner, be diversified and expanded in a medium to a long term. Simply put, BEE aims at de-racialise business ownership and control through focused policies. As Southall, (2005) points to financial institutions transformation, public contracts procurement processes transformation, training, real participation and ownership of corporate to be amongst specific areas where the government policies attempt to address.

1.2 The impact of BEE on Big Businesses
There are various ways of measuring the impact of BEE in the macro-economy; for instance, one can look at salient factors that affect the macro-economy. Thus monetary and fiscal policy is brought to the fore. The first ten (10) years of freedom in South Africa saw a progressive and manageable inflation due to fiscal policy, which fostered stability (Southall, 2005). This while, the rest of the emerging markets experienced a downward spiral, driven mainly by the ‘Asian tigers’ economic slumps, coupled with a Japanese recession consequently to the 1997 global market jitters. The SA economic stability is can therefore be attributed to BEE activities which saw new opportunities and niches created in the economy that also saw the expansion of the SA corporate giants into the global stage. The South African Breweries (SAB) expansion into Africa, China, Eastern Europe and South America, before buying the moribund Miller is the good example of this. Other players such as SASOL, Sanlam amongst others also played a pivotal role. This dynamic and progressive environment lead to a significant rise in the South African economy’s purchasing power, with an inherent big multiplier effect of many developing economies, a ‘knock on effect’ was felt on various business activities, such as an increase in home ownership, which led to a boom in the property and the construction industries. A further wave of prosperity was felt in other secondary sectors such as ownership of semi-durable goods such as cars and other movable assets. Year 2004 alone saw the highest purchase of new cars since 1981 (Financial Mail, 2004).

Fundamentally however, particularly for the big businesses, BEE has been driven by an ever-increasing government and state owned enterprises (SOE) expenditures to fund their transactions. In so doing, both government and businesses shared benefits as expenditure help to fuel economic growth across the country. An example is the role of Public Investment Commissioner (PIC) in funding the BEE deals in acquiring 18.7% of MTN, 8% of SABMiller, 20.4% of Investec, and 20% of Edcon to name a few (Financial Mail, May 2003). The revenue accrued to these companies from their empowerment deals is mainly used to expand their capacity and operation through investing in human and other resources.

3.3 The Impact of BEE on SME and the General Population at large
At a micro-economic level, where businesses and the general public operate, the BEE impact is moderately felt if at all. This is owing to a rather slow pace at which the BEE policies get implemented at the micro-economic level.

There is also a lack of entrepreneur skills (Orford, 2004) and necessary capital needed to ensure the BEE deals are successful. The Global Entrepreneurship Monitor (GEM) report shows that the Total Entrepreneurial Activity (TEA) index amongst Black South Africans is approximately three times lower than that of an average developing country (Orford and Wood, 2004). Thus, black South Africans are ill equipped to take full advantage of the opportunities that are offered with BEE policies. In these circumstances therefore, the results of BEE at the micro-economic level, can only be evident in the medium to long terms. Furthermore, many a time BEE deals were not based on critical analysis of the information available before making a decision, but rather on instincts and intuitions. This was the case when Sekunjalo Investments acquired a 14% stake in LeisureNet before it went bankrupt (Financial Mail, May 2003). However, there are many examples of successful BEE deals, which empowered a broad based community such as the Bafikeng people, who are benefiting from the proceedings derived from their partial ownership of Impala Platinum, a subsidiary of Anglo Platinum.

That deal was structured to help the indigenous Bafikeng people acquire royalties from the mineral worth of their land. The liberalization of telecommunications, which lead to the licensing and operation of Cell C, which is 40% black-owned, can also be considered as a successful BEE venture. Further successes can be observed in the smaller SOE contracts procurement, on which BEE firms benefit a great deal. In 2003, for example, approximately a quarter of supply contracts to Denel, Transent, and Eskom were awarded to BEE firms (Rumney, 2004 citing Jeff Radebe, 2003). The Initial Public Offering (IPO) of Telkom before listing it in the Johannesburg Stock Exchange (JSE) can also be seen as a BEE strategy. In retrospect, any member of the public who purchased Telkom shares at a discounted IPO price, saw their shares growing to an approximated three times in value within the first two years of listing. In 2005, Network Healthcare Holding (Netcare), the biggest South African private hospital group, announced the sale of 10% of its shares to black investors and employees; approximately 45,000 people, symbolic of broad based empowerment, which is slowly taking hold, as more and more people are given an opportunity to benefit (Business Day, 22.04.2005).

3.4 Epilogue
I contend that BEE policies aimed at remedying the economical imbalances in SA are imperative for the harmonious future of the country. However, more ought to be done to address the debilitating issues such as entrepreneurships skills, which leaves space for immigrants who are empowered and capacitated to take advantage of the bourgeoning South African economy. Needless, the BEE policies must seek to address more than anything; technical skilling, entrepreneurship skilling at SME level, job creation, rural development, poverty alleviation, as well as create specific measures to empower black women, and promote meaningful ownership and access to capital. However, BEE have been perceived as a process of putting members of the previously disadvantaged groups into executive positions in companies and selling shares to elite blacks in big companies must be reviewed and refined. Albeit; there is nothing wrong with these practices, as the opposite will create a further racially biased income disparity that could lead to political or economical instability in South Africa in the medium to long term. The emergence of a black middle class is inevitable and has come at a cost because it does not empower the majority of the black population. But in the long run there will be a multiplier effect of the emerging black middle class into the majority of black population to enable them to get out of poverty. Until then, however, the xenophobic attacks by the poorest of the poor should only be seen as an ill guided effort of the desperate populace, which has neither skills nor initiatives to be taking part in what could be remembered as a defining and remarkable moment on the economical history of their country. It is therefore appropriate to invoke wisdom in the words of the late American President John F Kennedy “it is not what your country can do for you but what you can do to your country.”

Iyaloo ya Nangolo is a Registered Professional Quantity Surveyor, a Partner at Jordaan Oosthuysen Nangolo Quantity Surveyors and Tulive Capital Private Equity. He holds an MBA in Finance and Entrepreneurship from the University of Cape Town Graduate School of Business and the London Business School. He writes in his own capacity.

References
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