By Thabile Wonci
For those who do not know, decades of apartheid and racial capitalism effectively disempowered the majority of black people politically, socially and economically. Economic exclusion was coupled with an inadequate education system and lack of opportunities. The restructuring of the economy would be incomplete if it did not succeed in rectifying this.
As such, the government adopted the broad-based black economic empowerment (B-BBEE) programme to create an inclusive economy that would meet the needs of all citizens, primarily black people who largely remain outside of the mainstream economy. The advent of B-BBEE came at a time when globalisation was at an advanced stage, which made it difficult successfully to redress the imbalances of the past.
One has to admit that in this quest the government has not given enough attention to ownership structures by historically disadvantaged persons (HDPs). Although political power shifted to the ANC in 1994, economic control remains firmly with the private sector, which is largely controlled by the white minority. In an attempt to redress economic inequality, the BEE and subsequently the B-BBEE programme was introduced with the aim of integrating the black majority into the mainstream economy.
Without doubt, the scope of the B-BBEE programme has proved to be too limited to address the full problem of racial and economic inequality. The pervasive myth about the Competition Commission’s decision to block Grand Parade Investments’ (GPI) planned sale of the local Burger King franchise assumes that the effects of economic exclusion of HDPs have disappeared. The B-BBEE programme is now seen as a bigoted practice against foreign direct investment.
The liberal thinkers who have bothered to share their dismay at the commission’s decision have argued that black shareholders must be free to sell their equity shareholdings to any investor in order “to optimise returns on their investments”. While I agree with the view that black shareholders must be free to exit their investment positions, needless to say, the major sticking point in the case of GPI and Burger King is the B-BBEE credentials of the acquiring firm.
As reported, the acquiring firm in this case is Emerging Capital Partners (ECP), a private equity firm that was founded in the US and focuses on African investments. An overarching theme of the B-BBEE programme is the empowerment of HDPs through share ownership structures, with the hope that the creation of black wealth would trickle down to the black population. A case in point is GPI, whose shareholders are mostly HDPs.
The mood within corporate corridors over the past week has been uninterested about the main reasons cited by the Competition Commission. “The commission found that the merger would lead to a significant reduction in the shareholding of HDPs in the target firm, from more than 68 percent to 0 percent as a result of the merger.” Perhaps at this point we ought to take a break from lambasting the commission and consider the unequivocal fact that the acquiring firm, ECP, has no equity shareholding by the HDPs.
Let us for once deliberate the essence of the commission’s refusal of the transaction that (a) the merger would lead to a significant reduction in the shareholding of HDPs in the target firm and (b) the acquiring firm has no ownership by HDPs. B-BBEE is the central pillar of our democratic government’s strategy for economic transformation. The ruling by the commission does not deprive or seek to deprive any investor or foreign investor (in this instance) from investing in the country.
Rather it seeks to remind us all of the journey ahead towards economic justice. Essentially, the commission is asking for economic reckoning. Black people have been excluded from full economic participation for many years. If we are to realise economic justice in our lifetime, we need to create corporate structures that are a true representation of the prevailing racial demographics, particularly at ownership level. The main source of the wealth gap in South Africa is a result of the racial and economic injustice, a legacy of past economic deprivation of black people from sources of wealth creation.
Therefore, the decision by the commission sought to help South Africans demand that attention is given to the economic plight faced by black investors, something that corporate South Africa at large can no longer avoid. Knowing that the gains of transformation have reversed over the past couple of years, it was never going to be palatable witnessing a majority black-owned company selling down its equity stake to an entity with absolutely no B-BBEE credentials. This, in my view, is the public interest concern to which the commission is referring.
What happened to the multiplier effect on wealth creation? Wouldn’t it have been a good story to tell if the acquiring firm had equity ownership by HDPs, thus creating another layer of black shareholders participating meaningfully in the economy? Situating the economic participation of black people in an economy only through procurement opportunities and skills development sounds noble, but there’s also economic value to be created through an equity shareholding structure.
If we are not going to motivate and support for black people’s equity participation in the current merger and acquisition activities, are we concluding that equity ownership in today’s sense should and must remain a privilege of the select few, which does not include black investors? Why are we not concerned by the lost opportunity for black investors to create generational wealth owing to their exclusion by the acquiring firm?
Most regrettable, some appear to be nonchalant about the significant reduction in the shareholding of HDPs in the target firm from 68 percent to 0 percent as a result of this proposed acquisition. Fortunately, the commission understands that the perpetual exclusion of black investors in transactions of this nature creates a vicious cycle of poverty. They understand that this cycle needs to be broken and that the illness of black economic exclusion needs a strong cure.
The prevailing economic landscape in the country requires that we find win-win situations. The current black investors in GPI need to be supported in their quest to exit in order to realise liquidity and optimise returns on their investments. However, it will also be responsible that the acquiring firm, ECP, appreciates the importance of equity participation by black investors. For South Africa to prosper, transformation needs to be well supported by all responsible corporate citizens. Above all, the B-BBEE programme is driven by nothing other than a high sense of duty and loyalty to the cause of emancipating the HDPs.
Thabile Wonci is the chief executive of Kogae Rainbow Investment Holdings and is a senior partner at Kogae Advisory Partners.
*The views expressed here are not necessarily those of IOL or of title sites
BUSINESS REPORT