ADDRESS TO THE ABSIP CONFERENCE
SANDTON CONVENTION CENTRE, 08 NOVEMBER 2016
TREVOR A MANUEL
ABSIP Executive Members
Thank you for the invitation to share a few ideas with you, at a time that is likely to prove itself a watershed for change in this country. The events of the last few months have created so much flux; hopefully future generations will look back on this, the year 2016, and mark it as important. It is during this year, the twentieth anniversary of our Constitution when the institutions of our democracy were tested and when they demonstrated their worth.
When Chief Justice Mogoeng said on 31 March, “public office-bearers ignore their constitutional obligations at their peril. This is so because constitutionalism, accountability and the rule of law constitute the sharp and mighty sword that stands ready to chop the ugly head of impunity off its stiffened neck”, it proved to be the jolt that South Africa needed, and a crisp reminder that the Constitution defines our rights and responsibilities.
Thus it is also the responsibility of our generation to ensure that the events of this period are etched in the collective memory of our nation. What needs be remembered is the fact that our Constitution was tested repeatedly and extensively in 2016 and emerged time and again as the solid anchor for our democracy.
I emphasize that our generation must take responsibility to ensure this because I am of the view that we were negligent in the period after we adopted our Constitution in 1996 to ensure that each young South African understands the constitution and internalizes its values. This matter is fundamental as the basis for the discussion being held here on empowerment, which in my view is itself the product of our constitution, in a different way.
Firstly, there is a distinct remit in S9 of our Bill of Rights that articulates the responsibilities we have for Equality not only as a snapshot of the present, but also as a correction of past injustices. Secondly, there is the injunction in the Preamble that requires of us to, " Improve the quality of life of each person and free the potential of each person." The importance of such reading of the constitutional values is that it compels us to ensure that we never isolate the need to advance the transformation of business from our broader responsibility to leave nobody behind. The premise of our Constitution is on social solidarity to ensure that we collectively guard against the old 16th century idea, "It's every man for himself and the devil take the hindmost."
So I want to state the obvious that empowerment is a critical imperative for South Africa to reverse the injustices of the past and that its implementation is therefore a constitutional requirement. I also want to restate the obvious that in spite of 13 years of legislation and regulation and eight years since the introduction of the first BBBEE codes, and an even longer history of discussion of empowerment charters and vast sums of money committed to BBBEE, the evidence on performance suggests that the best endeavours have produced patchy outcomes, at best.
We must all also agree that to succeed at improving performance of both the 'all of society' and the business sector transformation, it is necessary to measure, evaluate performance and make the necessary adjustments. This is so because there is no textbook prescript for a project as large and complex as our transformation imperative. We must do all in our power to avoid the "Christopher Columbus effect". You may recall that he sailed from Spain to Asia, 'found land' in what is now called Barbados, and swore that they'd discovered a short route to Asia.
So, if we don't measure and evaluate, we too could end up in quite the wrong place and insist that we've reached somewhere else. It is necessary to emphasize that if we to stay the course, then we will need channels and institutions focused on such constant, open and honest conversation across many different segments - old , new and prospective owners, managers in training, organisations representing various sectoral interests.
We cannot resolve this matter by shouting matches, or poorly-advised social media campaigns. Nor can we resolve this through additional legislation and regulation which are frequently adopted with great fanfare, and not adequately monitored and deviations addressed. We simply have to learn again to persuade each other and not merely threaten or intimidate.
The responsibility of building society and coalescing around important norms is delicate and progressive - we have to persuade some to give of what they have and others to benefit responsibly; for this to be successful the rules must be transparent and easily understood. But, it needs to happen in an environment that is trusted because the dialogue is open, honest, informed, focused on problem-solving and whose outcomes bind the constituents.
There is a huge lacuna of intellectual leadership in transformation, and I want to appeal to ABSIP to consider how it could step into the breach.
Perhaps one of the most immediate challenges is to ensure that we have an agreed survey method, survey frequency and an approach to measurement that is uniform and binding on all. There are at least four survey reports available and generally in use - the Jack Hammer Executive Report; the Alternative Prosperity Report; the NEF Ownership Survey and the Empowerment Trailblazers Survey.
In addition, there are the empowerment ratings undertaken for individual companies and the occasional studies performed by KPMG. I know that the DTI has attempted to ease the burden of measurement with the transition to revised codes; but yet I experience profound difficulty in traversing across these and seeking a common method and agreed outcomes.
I often pause while using these reports to question whether the analysts are even using the same raw datasets. There is also no agreed frequency of survey and reports. Regrettably thus all of these reports are treated with a dose of cynicism and they are considered unreliable. Users are then left to "report shop", choosing to use results from whichever survey appears to best answer their specific purpose. I will revert shortly to asking the tough questions on how this untidy situation gets neatened up.
Let me turn to the BBBEE scorecards. The revised scorecards have produced a situation where the three priority elements- ownership; skills development and enterprise & supplier development now account for about 80% of the potential B-BBEE points.
Let us examine the operation of these three pillars in a bit more detail:
The ownership targets appear easier to attain because they can be measured quite easily (if they are direct) and can be implemented quite unintrusively. A company merely has to agree on a stake to be sold at a discount, debate the depth of the discount, identify a group of prospective 'partners' and then proceed to negotiate the mechanics of the transaction. The new shareholders could make the acquisition without too much effort, (since frequently excitement trumps caution ) - that is done by the lawyers and financiers, at great cost to the transaction, with costs raised by complicated funding structures.
The chances are that this happens without any offer or expectation of meaningful participation at a board level; or any tested mechanism or opportunity to influence the direction of the company, yet remain subject to all of the fiduciary duties and thus liable, notwithstanding the limited power they are able to exercise. I am advised that because shareholders feel enriched for little effort (did I even hear the expression 'money for jam' in this context?), and would not wish to jeopardize this newfound dividend stream, they tend to silence.
Having just declared that the ownership targets appear easier, I want to provide some perspective by drawing attention to some of the real difficulties experienced. The first example is that because empowerment shares are availed at discounted rates, there frequently is an attached lock-up period.
The period of the lock-up has the effect of varying the rights of the BEE shareholders vis-à-vis the other shareholders in the sense that there are those who can trade and those who cannot, and the distinction is frequently racially defined. This is obviously outside of the norms of the Companies Act because it diminishes the equity in the hands of a class of shareholders, without actually creating a separate class of shareholders, it has such effect in practice.
The second, and related example is that since the shares are discounted, the fact of the discounting diminishes the shareholder value, and leaves the pensioners or contributors to retirement, the majority of whom are black South Africans poorer each time a discount is availed. Consequently, there is an understandable resistance to repeating the discounting after a group of shareholders has cashed out.
The third aspect of the ownership challenge is that of funding - the limitations in the pool of available BEE equity capital hinders the transfer of real economic value, the funding structures are almost always highly-geared, and may themselves be structured to enforce a lock-in ; and the value transferred is dependent on asset price appreciation or refinancing. Too frequently the new BEE shareholders end up with the transactions under water, and themselves highly indebted. Furthermore, we observe that increasingly external finance is no longer available.
For this reason there needs to be an examination of the 25% ownership interest. It is estimated that the cost of empowerment is 30% of empowered share. So who actually benefits? I want to repeat, that whilst the ownership element appears easier than the other two, it has a huge “CAVEAT EMPTOR”, OR “LET THE BUYER BEWARE” scrawled all over it.
I was quite taken aback a few weeks ago when a seasoned entrepreneur, who has benefited from BEE in mining, made a statement at a conference along the following lines, “Of the more than R 300 billion of BEE transactions in the mining sector, what do we have to show for it?”. I later queried this statement with colleagues who calmly informed me that the number is actually much closer to R 400 billion. And the question, “what do we have to show for it?” remains apposite.
So sure, some of the investment would have been written off in stock exchange plunges or significant depreciations – and this hurts when these are the consequence of uninformed decisions, loose talk or idle threats. But beyond this, there has obviously been a too-hasty extraction of capital, then converted into personal shareholder wealth that has left companies unable to finance expansion or new growth. If we extrapolate the same point across all of the empowerment arena, the numbers will have to be staggering.
The second set of targets, skills development, is also marked by slow progress. In fact the points for management control; have decreased since 2007, whilst significant progress is being made at the level of non executive directors. (The circumstances of competent non executive directors requires its own examination because increasingly they are needed to serve on multiple boards and the resulting conflicts of interest need to be managed).
It is imperative that we get to the root of this problem and address it. In general, the career path of most professionals follows a similar trajectory - the individual emerges from university with a particular skill set, they find employment where such skills can find application and be honed and later, they take on additional leadership and managerial learning, frequently in the workplace first.
So, the feature that will first distinguish a professional is excelling at their particular craft - engineers engineer, accountants account and audit, financial managers learn to manage funds etc. Acquiring such skill and gaining experience takes years. I repeat that there is no short cut through this route. However, what tends to happen, especially in the financial services industry, is that it appears easier for young black professionals to leave the rigours of life in large corporates for a more entrepreneurial style in fund manager boutiques, that they either establish or join. I am advised that the pay grades are significantly higher than in corporates, while the funds flow, and before the performance fees are capped.
As a consequence of this trend we have created a situation where the talent pool available to financial sector corporates is incredibly shallow for a country with a sector as large as we have. So we have a skills mismatch - black with all manner of technical financial skills abound in fund management whilst corporates try and make do with a dearth of skills for all of the rest of management. This has to be a matter of deep concern to all of us. I would hazard that if we surveyed large corporates to assess their development pipelines to evaluate succession, we are likely to have a rude awakening. The slowness observed may not always be a result of a reluctance by companies to train professionals for management, but perhaps as a consequence of a more general societal pressure to admire more rapid gratification.
In respect of the third pillar, from my perspective, the 40 points available on enterprise and supplier development remains an exceedingly difficult target to attain. The intention in the Codes is absolutely correctly focused, but its attainment is elusive. The targets are very clear ~ 40% and 12% of the 'included' spend has to go to companies that are >51% black-owned and > 30% black-women owned businesses.
The truth is that the suppliers are in need of genuine support. We are painfully aware of the instances where ‘empowering’ firms split of parts of the firm to create supplier development, creating significant leakage and gross inefficiencies. Yet we are likely to encounter huge information gaps, the difficulty of such SMME's supplying to specification and the diversification of the risks of purchasing non-compliant components for a specified finished product. As with skills development, there cannot be a short-cut through this. Supplier chains will have to learn on the slow-track since there will be manifest issues that present difficulty - complex tendering, cash flow management, and a lack of capacity generally.
Again we must embark on genuine consultations about how we develop the SMMe sector, and merely having an expectation reflected in the scorecard without a genuine support system sets the entire system up for failure. We must recognise that this system imposes enormous additional costs that will have to be borne in the interests of broadening and diversifying the base of our economy. We are aware that it will prove exceedingly costly in the long run, if we do not disrupt the ‘traditional patterns of accumulation. But such tolerance is not boundless since entrepreneurs are likely to find alternatives to improve on the cost efficiencies, and that such alternatives are generally unlikely to produce the same developmental outcomes as the intended enterprise and supplier development.
Beyond these three sets of concerns relating to the core pillars of the Revised Codes, I'd also want to raise a few matters relating to apparent contradictions in the application of norms and standards. Firstly, there is the matter of ownership requirements in the ICT sector.
Firstly there is the Electronic Communications Act, governed by ICASA that sets a 30% B-BBEE ownership requirement; and then the ICT sector code that sets a 25.1% ownership requirement. As confusing as such divergence is, there are also different definitions of who 'black participants' are across the two codes. The second matter I want to draw attention to, in general application, are the divergences between the participation and recognition requirements for Employment Equity and B-BBEE.
Just last week I had a discussion with a senior executive in a company, who was born in Zimbabwe, first arrived in South Africa in the 1990's but was only naturalized after 1994. Despite the fact that he is married to a South African and their children are distinctly South African, he does not qualify as Black for Employment Equity purposes. It is also important to raise the sensitive matter , perhaps now settled in the courts, of the distinctions between national and regional demographics.
The question we have to answer is how we can meet the twin objectives of inclusion and the advancement if the historically excluded, whilst maintaining a focus on training for excellence. Against this reality, when I read the "State of Capture" report last week, I observe that the owners of Tegeta have no such impediments, in fact it appears that the Gupta family who arrived from India much later have never had any B-BBEE qualification issues. There is something seriously untoward about this contradiction.
In provocative conclusion, let me firstly remind you of the “Christopher Columbus effect”, we do not want to justify ending up in the wrong place because we failed to read the signs along the way. I want to repeat that we have a constitutional imperative to produce an inclusive economy and that we have to do this in a risky environment without a textbook first having been written. This means that we have to pursue a path not unlike that described by Deng Xiaoping as “crossing the river by feeling the stones with our feet.” This means that we have to commit to a more intensive and interactive governance model, one that interacts closely with ‘the governed’ and does not merely rely on tomes of legislation, regulation and codes.
We need a new listening and response. In so doing, we need all interests to be represented together on a continuous basis. We must recognise that because we are dealing with an essentially capitalist enterprise, self-interest will be represented by all of the main contending parties – let us not pretend that self-interest is diminished because the one interlocutor is black and the other white – but the conversation will need the guidance, support and probing of an accountable, concerned and ‘uncaptured’ government.
Honesty will have to be the key order – we have set out to deal with many of the injustices through BEE, we have applied our best minds, and produced amazingly clear law and regulations, but still we can mark a significant deviation from where we’d want to be as a country. This is not the moment to give up the fight. We must engage fully and continually, understanding that ours is an experimental path. We must get into nooks and crannies of what has failed to produce the desired outcomes and where major contradictions have arisen.
We must always stand above the issues to examine our traverse in order to better understand where there are unintended consequences or repugnance between one law and another, and appreciate the route already traversed and what remains undone. In doing all of this we must remain mindful of the fact that many other countries are watching us, and rooting for our success, and that in South Africa, our actions must be such that they properly manage the expectations of many. Failure is not an option, stumbles will have to be followed by very rapidly by new rises that demonstrate that we have learnt from the stumbles. We cannot do without a new governance model.
Thank you very much.