Krysha, struggle tax and the trouble with our BEE

2011-11-26 10:31

SA is fast catcing up in figuring that revolutionary tax is part of doing business where oligarchs call the shots, especially when money is too tight to mention.

After more than a decade of ­reintegrating into the world ­economy – as global credit tightened, commodity prices plunged, demand withered and growth shrank by 1.8% – “we have to talk” requests induced headaches.

Regarding Black Economic ­Empowerment (BEE), we have to press beyond the “not tonight, dear” excuses as debt threatens to overwhelm the edifice of equity transfer transactions.

The cracks in the mode are ­heralded by the debt collectors at the door.

Reg Rumney, the chair of ­economic journalism at Rhodes University, writes: “Moreover, the hidden flaw in the way in which equity transactions have been structured because of the lack of black capital is not fully understood.

“This may come back to haunt South Africa in future when it is discovered that the equity stakes of say 25% are never transferred in full because of onerous financial requirements.”

The model has already piled up costs. Factor in 3% of the total ­market capitalisation of the JSE. Currently, market capitalisation of the JSE stands at about R4 trillion. The 40 top firms account for 83% of the value of this market.

There have been other costs too, more specifically the costs of living with the current BEE model.

A colourful international saga, played out by Russian oligarchs in British courts, has tickled funny bones in many emerging markets and received top billing as Britain’s best drama.

Watch as Roman Abramovich, owner of Chelsea FC, and former Kremlin insider Boris Berezovsky demonstrate the cost of patronage gone wrong and teach the world the meaning of the word Krysha.

Berezovsky accuses the politically connected Abramovich of engineering a deal that saw Berezovsky sell his assets for less than they were worth.

South African chuckles must have been muted by discomfort.

Abramovich explained: “My ­Krysha relationship with Berezovsky could be described as a relationship with someone who could use his political connections to solve certain problems and get compensated for his efforts.”

He also said: “So long as one’s protector provides the services necessary to maintain the business, you were expected to pay whatever he asked, whenever he asked.”

Krysha, he said, was Russian for “roof”. But in the murky economic transition of the post-perestroika 1990s, the word gathered a kaleidoscope of meanings synonymous with extortion, political protection costs, attempts to appropriate ­assets and resources without adding value or creating wealth.

Sound familiar? Like the “revolutionary tax” of the Maoist guerrillas of Nepal or what the Irish Republican Army often used to fund its coffers, or the protection fees levied by the Mafia in Sicily or the Chinese gangs in New York’s Chinatown.

What has this to do with us? Jenny Cargill, economic analyst and ­author of Trick or Treat, says: “All in all, the reallocation of rights to BEE parties has undoubtedly led to extensive rent-seeking activity.

It does not follow that corruption and rent-seeking will block economic growth. East Asia has many examples of political corruption and spectacular growth.”

But the point is that South Africa set out to link BEE to economic growth and the creation of value.

Deputy President Kgalema Motlanthe declared a few years ago: “BEE should be linked directly to the expansion of the economic base and the restructuring of society. Rather than being a cost, BEE should become a driver of new growth.”

With our growth model underperforming and the current BEE model moribund, a disconnection is evident between policy and ­implementation on the one hand and BEE and the macroeconomic framework on the other. Regarding costs, Rumney says:

“Equity transactions are particularly problematic. While these in some cases converge with broader corporate aims, they can also be seen increasingly as a tax.”

These are seen by companies as not part of the normal value-adding business activity but part of a politically driven cost of doing business.

The trouble with fostering an economic environment in which rent-seeking and political patronage are rampant is not just the grave moral hazard involved. In the long term, the aggregate of rent-seeking behaviour results in social costs and losses.

Russia demonstrates that such an environment creates the kind of state that political analyst Aubrey Matshiqi calls a “Deep State”, in which a triangular co-dependency between business, the state and the business underworld develops. Such a troika acts against the ­economic interests of citizens.

This lends credence to fears ­expressed by Cosatu’s Zwelinzima Vavi this week that patronage and corruption “are the biggest threats to our revolution and attempts to create a better life for all”.

Organised business outfit Busa agrees with Vavi. Busa spokesperson Masego Lehihi this week quoted the Global Competitiveness Report of the World Economic Forum, which listed corruption as one of the four most problematic factors for doing business in South Africa.

To mitigate the costs of uncertainty, and to create a new economic consensus and framework, we have to start talking.

» Gqubule is a journalist and lecturer at Monash SA, campus of Monash University Australia. She writes in her personal capacity

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