Black Economic Empowerment and Affirmative Action

Michael - Thursday

I’ve been thinking about this issue recently, partly in the context of a small company in South Africa with which I’m involved. And I freely admit that I have more questions than answers.

First of all, the case for black economic empowerment (BEE) in South Africa is unarguable. Starting with colonialism and followed by 50 years of apartheid (which institutionalized the racism which the previous government was implementing in practice), black people in this country were horrendously disadvantaged. That disadvantage is inherited by most black people in South Africa today, with the worst effected being the black African peoples who constitute around three quarters of the population.

When Nelson Mandela was elected president in 1994, his program included various ways of trying to alleviate that. These included restitution of land seized from people of one race to be transferred to members of another, the Reconstruction and Development Program (RDP) funded by an income tax surcharge, and an affirmative action program which would benefit black people and women on a value scale. Some of these were extremely successful – the RDP funded over a million houses.

BBBEE scorecard

So far so good. Companies in most industries needed to transfer certain minimum percentages of their equity to black ownership—not as gifts but at attractive prices. Generally this meant that the company needed to fund the purchase itself through dividend schemes and options, similar to staff share schemes. And that's where things started to diverge. A few went the route of so-called broad-based BEE and set up funds for large groups of people in communities in the area of the mines, mine workers, staff, and trusts that benefited large groups of black people. This was a difficult process involving much effort and negotiation and little payoff to the company beyond meeting its BEE targets. Most went the more obvious and lucrative route: find the key people in government or related to government, be they people who had fought apartheid and so had glowing ‘struggle credentials’ or relatives of senior government leaders or even well-connected canny black businessmen who were happy to play along, and award them the required 26% of the equity in exchange for patronage. A pretty good deal all round.

Deputy president Cyril Ramaphosa

One of the qualifiers of the latter type of transaction was one of the current front runners in the ANC to succeed Jacob Zuma—Cyril Ramaphosa. I met him many years ago when he was elected to the governing body of the University of the Witwatersrand. In those days he led a confederation of miners’ unions and had fought relentlessly against the government from within South Africa as the leader of the United Democratic Front, not without personal cost. He immediately struck me as a very smart man indeed and one who understood how to make politics work. When he was passed over by the ANC in favor of Thabo Mbeki to succeed Nelson Mandela, he settled down to make money. He was enormously successful, using his remarkable talents and hard work in the new lucrative environment. He is now estimated to be worth around $500 million.

I'm not suggesting there was anything corrupt going on. No favors were traded—at least not in Cyril Ramaposa’s case—he was merely playing the game. The point is that many black entrepreneurs became extremely wealthy on the basis of these affirmative action transactions. But most of the ordinary people didn’t benefit at all.

Zapiro cartoon on the subject

Now, in a new phase, the mining companies are asked to meet new targets, this time around a broader base. Furthermore, those who didn’t ‘get it right’ the first time and saw their ‘empowerment’ partner sell out his stake for a huge fortune to foreign or local white investors are now judged to have failed with BEE altogether. Well, in a sense they have, but they played the game by the rules. The goodwill of Mandela’s days has been replaced by resentment, especially as most deals these days have the hands of a certain president, or those of his cronies, in or near the till. International companies are quietly heading for the exit.

I’m uncertain of even the questions, let alone the answers. Was the original process too naive, too hastily implemented and badly thought out? Was it up to the companies to find genuine long-term empowerment vehicles (bearing in mind that few well-organized black structures existed at that time for them to engage with)? Was it the partners themselves who were obliged to take more care of their people—the very people they had fought for and who had fought for them—and ensure a fairer division? Or was it all of these and many other less obvious issues? Looking forward, what can reasonably be expected and achieved if South Africa is to continue to develop its economy overall? Surely not Julius Malema's solution of nationalizing all the mines. That's been tried elsewhere.

Affirmative action is thorny however it's implemented. In most places it's designed to enhance the prospects of disadvantaged minorities. In South Africa it's practiced to enhance the prospects of the vast majority, surely a much harder proposition. Despite the good will of the nineties on all sides and despite a lot of hard work and commitment, twenty years on BEE has benefited a group of black business leaders and professionals enormously, but it's done almost nothing for the black man or woman in the street.