The gift of BEE

The time of the year associated with gift giving is upon us. Many different ways exist for giving and sharing presents but one often encountered in coffee groups, workplaces and other social gatherings is a Secret Santa, where people are expected to buy something for someone else for a certain value and to receive another present back for the same value.

A variation of this is what is known as a Dirty Santa or a White Elephant Gift Exchange, whereby each person still buys a gift for a certain value but when given the chance to receive a gift can chose to open a gift or steal an already opened one from another person. All the gifts are still for the same value, but clearly the less popular gifts are not stolen and inevitably someone receives a gift nobody wants to steal, the white elephant.

The legend goes that the King of Siam (modern day Thailand) would give white (albino) elephants as gifts – to anyone who displeased him. White elephants are extremely rare and so it was a sign of great wealth to own one. It was a status symbol and titles such as “Lord of the White Elephant” were highly sought after. The great Burmese Warrior King Hsinbyushin (try pronounce that on New Year’s eve) of the eighteenth century used the title with pride. But white elephants were sacred and protected from labour. So, getting a white elephant showed that the King’s favour, but being of no practical use, came with the costs of upkeep and not much more in reality. A white elephant could bankrupt one, and it did.

Today the term ‘white elephant’ is used for unnecessary infra-structure like bridges to nowhere, empty stadia, toll gantries and under-utilised state of the art facilities. Like the white elephants of lore, they may look very prestigious but are costly to maintain, and one has to wonder whether one really needs or wants them.

BEE can easily be a white elephant too.

Nobody is required to ‘gift’ shares in a business, but many BEE transactions are attempted with “giving” shares away with some kind of vendor-finance. The costs of maintaining this include the finance costs on a loan and the expectation of some value add. And so, the “gift” is given with an expectation of something in return. Gifts like these could be white elephants if they have no practical benefit to the recipient, especially if they come with costs.

At this time of the year, whilst reflecting on the what’s possible in 2019, we would encourage all customers to set their goals and resolutions – but to also think what they mean for others. If we could decide on resolutions, that benefit others too 2019 will be one of the best years ever.

Done correctly, BEE is a gift for us all. Done poorly it’s a white elephant.

All BEE certificates will need to be renewed in 2019 and we would encourage all companies to think not only what they can get from their BEE level, but what their BEE level will mean for the whole of South Africa. We have some ideas, but for now, let’s focus on creating gifts like legacies that everyone would want to have – and not consider to be white elephants.

Enjoy your festive season and the special people in your life. Travel safely. Rest well.

2019 is going to be a cracker.

The official stats on BEE ownership vs. what’s really going on

In this article we look at the official stats on the BEE ownership, contrast them to what we know, and see what this tells us about the ‘lay of the land’. Hint – it’s not what the BEE commission think it is…

Energy showcase:

In his recent budget speech Minister Mboweni did not paint a rosy picture of the South African economy, however his only reference to BEE looked positive: “Recently concluded power-purchase agreements will create an estimated 61‚000 jobs and enable investment of R56-billion. Through the renewable energy IPPs‚ we have secured equity for local communities‚ who will receive about R29.3-billion in net dividend income over the life of the projects. For recently signed projects‚ 53 per cent is owned by South African shareholders while black shareholders own 34 per cent of the equity.

While everyone will appreciate that it does not represent anywhere near the demographics of South Africa, it is clear that if 34% of 53% is black owned that this is approaching BEE ownership levels of 64%…on this project at least.

But what about the rest of the economy?

From the horses’ mouth – the BEE commissions own numbers:

This would be much higher than the latest statistics published by the BEE Commission, who has published BEE stats and they make interesting reading.  Their latest report (dated 31 March 2018) is available online here. For this article we’ll only be looking at the ownership side of BEE.

These statistics indicate BEE ownership levels in excess of most sector codes.  This table sets out the Commission’s reported average BEE ownership levels.

Large EntitiesQSEs
Agri Sector4%6%
Construction Sector45%21%
Financial Sector43%19%
Forestry Sector15%15%
Generic Codes34%24%
ICT Sector30%33%
Integrated Transport Sector34%39%
Marketing, Advertising & Communication Sector33%22%
Property Sector35%34%
Tourism Sector41%7%

Note that mining is covered under ‘Generics’ above – as the charter wasn’t final at the time of the report.  

The low levels of BEE ownership in Agriculture are not surprising – the issues here are twofold: (a) these are typically multi-generational family businesses (who’ve seen governments come and go and dislike external interference) and (b) ownership is tied to land rights which ties back to (a)…

Forestry too is typically a land issue, but the long life cycles of timber growing also don’t make financing forestry transactions easy. The other sectors are far more urban and far more service oriented, where it’s easier to do BEE. (A look at how the scorecards are constructed across all elements across industry sectors would offer far more insight).

The Commission’s numbers can be broken down into levels of BEE ownership too:

Large EntitiesQSEs
100% Black Owned13%15%
Majority Black Owned13%5%
25% Black Owned28%16%
10% Black Owned9%5%
No Black Ownership37%30%

Based on the BEE commission report, it would seem that the majority of certificates in the generic and QSE space show black ownership and that ownership levels, on average, exceed those required by the Codes and Charters.

Celebration time?

On the face of it these results suggest policy is working. But are they realistic? From a selfish perspective – if BEE is already ‘done’, what opportunity is left for Tusker if our market have already sorted out their ownership scores?

Not so fast – sample size counts:

The Commission’s numbers must be contextualised first.  Even though BEE Certificates are meant to be lodged with the Commission, its latest statistics are based on only 1 686 sector certificates and another 36 with specialised score cards (1 722 in total).

Per the Commission’s Report this shows the following compliance levels:

Large entitiesQSETotal
Total population11 87134 11845 989
Reported8718511 722
Coverage7%2%4%

The BEE commission believes that there are 11 871 large entities (i.e. Generic), and have scorecards for 871 of these. That’s a pretty low level of reporting/scorecard gathering even before we consider SARS’ vat report, which shows that there are almost 25,075 companies in SA who turnover more than R50M (i.e. Generic).

Thus the BEE commission is basing their report on about 4% of the Generic companies.

It’s a similar pattern for QSEs: the report is based off 34K QSEs but SARS VAT returns 55 873 entities with turnovers of between R10 and R50 million. So the BEE commissions ‘2%’ coverage is closer to half that.

Bear in mind that QSEs and Generic companies together contribute around R3 trillion – or 65% of South Africa’s GDP. These are the companies that drive the economy.

The Commission shows statistics for the EME space shows cover levels of less than 1%, which is maybe not so surprising given (a) the voluntary nature of BEE (b) automatic level 4 for EMEs and (c) that reporting is done by affidavit and not by a verification agency.

What’s mainly concerning about these numbers is that (a) the DTI/BEE commission doesn’t cross check their numbers against SARS and (b) policy decisions are being made off this stuff. Very small sample sizes can be very misleading.

The fish rots from the head:

How are big companies doing? What about government departments themselves?

The report shows 30% coverage by JSE listed companies (who are a special category in terms of s13G of the Act) and would be expected to better comply.  If anyone from the JSE is reading this we’d love to know the full story.

But even that is not as surprising of the state’s coverage – remembering that the state is the champion of champions for BEE.  The report states that only 4 out of 299 State-Owned Entities and Organs of State Entities submitted their annual Compliance Reports.

Yes, you read that correctly. The government doesn’t care enough about BEE to get verified.

We have to question how seriously the state takes BEE if just over 1% of state departments bother to submit returns. Maybe something opposition political parties or civil sector bodies want to take up?

In an ideal world, where government takes BEE seriously, then they wouldn’t get their budget allocation from treasury without providing a certificate, and/or every tender would have the BEE certificate of the government department included in it? Government departments need to be held to account on BEE matters too.

What if we ask the same questions of the Tusker database?

The BEE commissions’ report seems to reflect a very small sample and a 50% under-estimate of the total landscape. We know this because in Tuskers’ database we have over ±20K currently valid certificates (of which ±10K are Generic) – suggesting that analysis of our database might get some more accurate insight.

Generic ownership – analysis by Tusker 2018

 

Indeed, the graph above shows that of the nearly 10K Generic scorecards in the Tusker database, there is loads of potential for BEE ownership.

About 600 companies have 100% ownership. Another 777 have ownership higher than 52% – then there is a flattening of the curve with about 400 companies on exactly 51%. About 70 companies sit on the 50% mark exactly, and from there it drops rapidly to 30% (likely a sector requirement, or Black Female ownership only) then 25%, after which it falls off a cliff – sub-minimal ownership, or perhaps recognition for prior ownership deals.

If ownership was purely an economic thing the graph would probably be smooth and far more of a power law. Instead, the graph does clearly show the levels at which policy is set – 100%, 51%, 30%, 25%…and that ownership lower than this is rapidly worthless.

So what’s the potential?

Of the 25K Generic companies, we have scorecards for ±10K. Of these, 3.5K have 0% ownership. What about the other 15K companies for which we don’t have scorecards? While we don’t really know, we’d guess that most of them don’t have any significant ownership and that there are about 18K companies for whom BEE ownership remains mostly or entirely something to do.

What about QSEs? If one uses our database together with the Commission’s 30% of QSEs who have no black ownership then we believe there are well over 17K QSEs with zero BEE ownership – and a lot of BEE ownership deals to be done.

Plus, the existing companies can increase their ownership. The majority of those with scorecards in our DB have less than 51% – which as we’ve explored before is the ideal ownership target for any company. We also know that many of the structures used to achieve the reported ownership to date would fail to meet ‘substance over form’ tests and probably need to be redone.

We know statistics can say whatever you want them to say.  But what is clear is that there is still a massive BEE ownership need and it’s not insurmountable.

We can eat an elephant, one bite at a time…please contact us if you’d like to learn more.