TRICK OR TREAT Rethinking Black Economic Empowerment Jenny Cargill First published by Jacana Media (Pty) Ltd in 2010 10 Orange Street Sunnyside Auckland Park 2092 South Africa +2711 628 3200 www.jacana.co.za © Jenny Cargill, 2010 All rights reserved. ISBN 978-1-77009-830-5 Set in Ehrhardt 11/15pt Printed and bound by Ultra Litho (Pty) Limited, Johannesburg Job No. 001204 See a complete list of Jacana titles at www.jacana.co.za For my son Marc Contents Foreword i Preface iii Acknowledgements vii Abbreviations viii Introduction x Part 1 Decoding BEE 2 No burst in the BEE bubble … just a pop 5 Form over substance 21 Lessons of the past 35 If you’re black and you’re BEE, clap your hands 52 Sailing amidst a whirlwind 72 Part 2 Empowerment to the people 86 Mass appeal 89 Trade unions toyi-toyi for capital 102 BEE’s powder keg 115 The best of BEE 136 Part 3 Where to from here? 155 Bridging the fault lines 159 Beyond BEE 172 Appendix 198 Notes205 References 216 About the author 222 Foreword his book is the culmination of fifteen years of intensive work in the Tblack economic empowerment space: researching, advising on, facilitating and constructing BEE deals. I first got to know Jenny during those early years of intensive debates about the future of the South African economy.Through the company she founded, BusinessMap, she facilitated many discussions between business and political leaders, and herself engaged continually with policy makers, business leaders, international investors, trade unionists and the beneficiaries of BEE to ensure that she understood the dynamics of South Africa’s transition. BusinessMap produced what was arguably the most comprehensive database on BEE investments and companies. Together with her colleagues, she provided a unique account of the country’s BEE journey over many years. This book is the work of an insider who is taking stock of her own experiences, exploring the successes and challenges of BEE and looking at possible ways forward. I avoid the word ‘failures’. It is clear that, to Jenny, what looks like failure today was often a groundbreaking idea yesterday that unlocked progress and created value. Her review of Malaysia’s affirmative action experiences illustrates this – how the policy outlived its value, bringing unintended consequences that undermined the policy objectives. She argues that the time has come to evaluate new ways of going forward. As she so aptly puts it, leadership is key to breaking the confines of the current BEE policy framework and looking at newways to ensure that South Africa’s black citizens share equitably in the productive wealth and activities of the economy. She puts cogent i Trick or treat arguments forward for flexibility, innovation and pragmatism to manage the country’s transformation in the midst of a complex and unpredictable global environment. It is a courageous and balanced book about which one cannot maintain neutrality. It is courageous since it attempts to transparently and constructively analyse some of the complexities of BEE, not succumbing to the compulsion of orthodoxy. It is balanced not in the sense of looking at both sides, but of judging particular tactics and strategies against desired national outcomes. Its argument for nonracialism is compelling, though much work remains to be done to chart out the course and steps to be taken on this difficult journey. This book is an important addition to the number of voices that are articulating their concerns in one of the most important areas of our transformation. Fred Phaswana April 2010 ii Preface know from history that the world can perform acrobatically and turn Iexpectations upside down. Yet, when this book was started, I would have been loath to pay the clairvoyant who told me the following: America would have a black president; the Royal Bank of Scotland would be owned by the British government; Lehman Brothers and General Motors would declare bankruptcy; little Iceland would send shivers through the global economy twice. These unprecedented events occurred in only two years – just when I was writing about a policy that aims to change business by applying a fixed system for a 10-year period. For even longer – fifteen years – South Africa has been shaping its economy the way an emerging artist might start a painting, by laying down a background and defining the composition in bold lines to unite the disparate subject matter – people, landscape, water, buildings. Unfortunately the background is still wet and the drawing clumsy. The result is a disappointing blur. What I am really describing is the realm and subject of this book, black economic empowerment (BEE). As I write, BEE is still very much a work in progress but that was not the original intention. The ANC government laid down a grand paint-by-numbers scheme dictating clear form and direction for racial transformation in the business environment – with little room for creative diversion. As anyone knows, numbers are to painting what statistics are to the real world – nowhere near the living reality. Everyday life calls for a truly creative, spontaneous approach accommodating chance and the recognition that people and the environment are not putty or paint. This is the core theme of my book. iii Trick or treat In my view, the policy framework for BEE is a form of social engineering – particularly the Codes of Good Practice, through which black empowerment is expected to find expression. The Codes are essentially templates for business, based on race, containing scores of arithmetical formulas devised to calculate the achievement of black participation in the economy to fit predetermined targets. The ANC government has yet to devise another policy that so crucially intervenes and impacts on society. My concern is that it may actually undermine what it sets out to achieve – systemic economic change to enable black citizens all the freedoms, choices and opportunities of a well- functioning economy. There are many powerful voices within black business to disagree with me, arguing for more and not less state intervention. Understandably distrustful of white business to do more than the minimum for black empowerment, they believe arm wrestling a necessity. A conviction that any social policy should incorporate flexibility is based on my experience as an exile working for the ANC in Zimbabwe and many subsequent years of involvement as a researcher and consultant in empowerment. One of my tasks in exile was to draft strategies to advance underground operations and collect information for those involved. For several reasons the strategies were rarely adhered to or the intelligence acted upon. A major factor was uncertainty. Controlling the outcome of an operation was extremely difficult; a single arrest could unravel years of work or the loss of an entire network of operatives; information on border security, gathered painstakingly over a long period, might be rendered worthless when passed on to a double agent. As a matter of course I would annually shred former strategies and set about crafting afresh. This might have been frustrating if it were not for the eventual realisation that wise planning accommodates the permanence of uncertainty, the necessity for flexibility and the complexity of human interactions. Working in BEE has only confirmed the wisdom of this approach. Black empowerment came together fast in the post-1994 era and unravelled at an even greater pace, with no one involved at fault. South Africa, like many other countries, failed to escape the impact of the iv Asian crisis of 1997/8. At that time, BEE was about the sale of corporate shareholding to newly formed black investor groups to ensure black ownership in the hitherto white-controlled private sector. No one had money to buy shares, and so they borrowed – there were willing lenders because this seemed the right thing to do in the political circumstances. Had uncertainty been properly factored into the financial arrangements, there might have been a different outcome – instead, the BEE deals were, on the whole, structured for the good times. The many years spent advising on BEE transactions and in negotiations between BEE buyers and corporate sellers have given fly- on-the-wall insight into the enormous complexities of what we are aiming to achieve. Not only is South Africa trying to apply a national racial mix to ownership and employment, it is also facing the pressure of operating in an increasingly unpredictable and fluid global economy –a challenge escalating with climate change. With this in mind, ‘nanny- knows-best’ forms of state intervention to control our socio-economic environment are not only outdated but potentially harmful. Today’s challenges can only be addressed out of the box with innovative thinking, flexible style, high levels of personal commitment and dynamic partnerships. The rigidly packed BEE Codes preempt such freedom. I am aware I might be accused of focusing narrowly on only one aspect of BEE – ownership. Of course BEE encompasses much more: employment equity, training, enterprises development, preferential procurement and corporate social responsibility. In part, I am writing about ownership because that’s what I know. However, policy affords much more importance to BEE ownership than meets the eye. Each element of the Codes has a composite of scores. Black ownership is a requirement in three elements – BEE ownership, as you would expect, and procurement and enterprise development. In aggregate, ownership accounts for almost 40% of the total BEE scorecard, and not the 20% usually cited. Additionally, far more capital has been invested in the sale of shareholding to black groups than in other key areas of socio-economic transformation, such as low-income housing and land redistribution – at least R500 billion as against less than R150 billion on housing and land.