BEE a temporary hedge against populism

2015-08-10 09:28

Black economic empowerment (BEE) and affirmative action (AA) have been successful in creating a new generation of South Africans entering the middle class and becoming wealthy. This new grouping has much to lose from policies like land redistribution and nationalisation and can offer a temporary hedge against populism. However, to offer long-term protection, we need to meaningfully increase opportunities to the disadvantaged, create a massive increase in employment and generate sustainable economic growth at above recent trend levels.

When SA entered its new dispensation, it was faced with the challenge of dealing with a long history of legal and legislative discrimination that left in its wake a very unequal society, largely defined by race. The new government made a very important choice at that time, not to force increased equality through the direct disenfranchisement of the previously advantaged. They chose not to adopt populist policies such as land redistribution and nationalisation. Instead they chose a more gradual and sustainable approach to dealing with past inequalities.

At the time, it was a priority to protect the strong economy and the associated tax base of our country. It was important to maintain our mining, agricultural, manufacturing and financial industries. The hope at this stage was to utilise these industries to grow the economy and create sustainable jobs and in the process reduce poverty and inequality over time. Unfortunately, this policy has failed dismally on the job-creation front.

The direct approach used to achieve quick wins in the inequality battle was the public sector and it was a two pronged attack. Firstly, public funds were used to drive the roll-out of services and the provision of grants to the poor and secondly, the public sector became the vehicle for employing previously disadvantaged individuals. However, government needed to find a way of encouraging increased representation and redistribution of wealth in the private sector. This is where AA en BEE became the most important strategies.

The private sector in SA was not unhappy to comply as far as AA and BEE went. Most companies were very happy to increase the representation within their employee corps and to involve successful black businessmen in their business, having come from a history where their ability to do this was seriously limited. They were also happy to foster strong relationships with the new government, who provided them with a surprisingly business-friendly environment in the new dispensation and who were now holding many of the purse strings.

AA over the next 20 years was very effective at increasing representation within the private sector and together with the transformation in the public sector helped to create a large black middle class in our country. BEE was very successful in creating black wealth, although it has been skewed towards creating wealthy individuals and could certainly have been more broad-based in nature.

After a difficult start to BEE transactions in the 1990s where many deals collapsed due to high interest rates and underperforming share prices, the 2000s offered an ideal environment for BEE to flourish without undue disruption to the economy and without the previously advantaged having to suffer too much. Most BEE transactions did contain an element of value transfer (offering shares for purchase at a discount to the ruling level), but the vast majority of BEE value creation resulted from the favourable environment in the 2000s. Consortiums were able to borrow cheaply (in a falling interest rate environment), to purchase shares at low levels and to see a spectacular rise in share prices over the following years.

Any South African, regardless of race would have benefited from this environment and many did. Everyone who borrowed money to purchase a property benefited from the low interest rates and rising property market and have become much wealthier as a result. Many employee empowerment schemes created wealth for all their employees, regardless of race.

We were extremely fortunate in SA that BEE was implemented at the time that it was. It would be almost impossible to recreate if it were to be implemented for the first time today. Asset prices are simply too high and interest rates are rising. If the large BEE transactions of the 2000s, including in the telecoms and financial sector, had to be constituted today, they would most likely have led to unmitigated failures.

For broad-based BEE to progress from where we are today, sacrifices would be required and only gradual success could be wished for. An important area of sacrifice would have to come from the beneficiaries of BEE over the past 15 years. It would be unfortunate for individuals and consortiums to simply take the meaningful wealth created, sell out and leave companies with reduced empowerment. BEE beneficiaries should be encouraged to reinvest a healthy proportion of their proceeds in broad-based BEE schemes or in new businesses with a focus on job creation. They should be discouraged from simply selling out by implementing vehicles like a BEE tax.

It is true that broad-based BEE offers challenges for us today and it is also true that AA disadvantages certain parts of our society (those not classified as previously disadvantaged). These issues can become less painful if we can reinvigorate our economy and aggressively create jobs. What is very important though, is that the successes of BEE and AA have created a temporary hedge against populism in our country. It has bought us some time to deliver a better outcome to the masses.

The black middle class and the wealth created through AA and BEE has left us with a large and influential group of South Africans that have much to lose if populism were to rise and result in policies such as land redistribution and nationalisation. This is a group that has much to lose if the current government does not improve its delivery. It is this group of South Africans that may help us to resist the pressure of populist parties such as the EFF. It is the group that needs to put pressure on the current government to resist corruption and deliver better outcomes. It is the group that is most at risk of defecting to alternative business-friendly parties like the DA, driving the political competition that we so desperately need.

I am therefore thankful for AA and BEE and so should you be. I am not happy with the state of SA, with the lack of delivery on education and electricity provision, with rising corruption, with cadre deployment at the expense of delivery, etc. However, we are in a much better place than countries such as Zimbabwe where populist pressures led to the decimation of the economy and I am very hopeful. We have a strong and large economy, an abundance of natural resources and beauty, great infrastructure and standards, a youthful population, freedom of speech and expression and healthy political discourse. And we have a middle class that is much more representative than before, have much to lose and have much to gain if we are successful as a country.

Do you believe that our large middle class is an important asset in our strive to become a better country? Do you believe that our large middle class can help to influence our government to achieve better delivery? Do you believe that they can help us to avoid damaging populist policies? Are you hopeful? I would love to hear your feedback.

In the mean time, keep your talking straight!


Marius Strydom is the CEO of MLAX Consulting

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