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OPINION: Private sector must capture BEE mandate from SA’s corrupt state

Business Day / 28 SEPTEMBER 2017 - 05:51 / PETER ATTARD MONTALTO

Real transformation can take place only if business drives clean and meaningful empowerment programmes, writes Peter Attard Montalto

The scandals slowly consuming firms associated with the Gupta-parastatal nexus are well reported. Companies are alleged to have overly close relationships with quasi-political actors, overlooked or even actively covered-up corruption and patronage, and utilised suspect partners to the same ends.

All this seems plainly illegal and immoral. Yet a deeper truth is missed in all this coverage, particularly around black economic empowerment (BEE) and the country’s partnering requirements.

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It is not just a legal requirement as part of broad-based BEE for partnering by foreign firms to occur when doing public sector business, but also a simple factor of doing business in SA. More than this, however, it is well known that preferred partners have often been pushed by government departments and state-owned enterprises (SOEs) themselves.

Understanding this reality of doing business is key to seeing that reforming the system will be impossible as long as politically connected preferred partners exist, and the potential damage to the system if expert external advice and services are not available because of increased due diligence and reputational risk requirements of business services companies. This risk has indeed been raised by the Reserve Bank in its concern over the effect of the shake-up in the auditing sector.

There is little scope for change as long as patronage remains a key political tool within the ANC, the government and SOEs, and as long as the existing BEE framework encourages partnering for partnering’s sake rather than genuine empowerment.

When it comes to partnering agreements, ownership is fetishised over skills or employment. Yet a young black consultant working for a foreign firm who eventually goes on to set up her own firm is surely a more powerful transformational tool than simply "borrowing" someone else’s black ownership.

As I have said before in this space, corporate SA has started to wake up (slowly) in the past year or so to the inadequacies of broad-based BEE when it comes to driving real and deep transformation. Yet with all the talk of necessary social compacts, offerings from business have not really shifted the status quo on empowerment.

We got into this situation because the BEE ownership lobby was highly effective in getting ideologues and the Department of Trade and Industry to cover for the creation of an elite over genuine empowerment. The corporate sector was then quiet on the issue for 15 years, afraid of raising a hand and being labelled counterrevolutionary. Until recently, few voices spoke out about the lack of real transformation in SA.

It is important to consider how SA got into this policy dead-end – lessons need to be learnt by everyone from the corporate sector to nongovernmental organisations, to political parties and policy makers.

But it is also crucial because there is a bigger question of how state capture was allowed to occur, which has not really been answered in the flurry of disclosures. As the narrative has now settled and not really shifted, it is time to look at this.

I have been talking (somewhat in code) about "patronage systems" and "rent extraction" (basically state capture) from at least 2012 and I still believe it was widely known about within the ANC and the government at that time. Corporate SA cannot have been deaf to the same noise, but did not have the courage to say anything pre-Nenegate. Yet there was probably a widespread view that state capture was "just how things worked" and there was no real evidence in public at the time. Corporates need to ask where the balance of evidence has to be – they are not courts of law and can, therefore, work to a much lower evidential standard.

There are several reasons why this is crucial. First, it is a fantasy to believe patronage and rent-extraction volumes (some notional number of the amount extracted from the state) are going to change meaningfully after the elective conference in December. They will morph and change form, certainly, possibly passing to new actors, but they are not guaranteed to decline. Patronage is too embedded in institutional and political structures for that to happen.

In this sense, the focus on the Gupta family is unhelpful. Who are the next ones in the patronage line? This is the question that needs to be asked now, not after the transition occurs.

The Organisation Undoing Tax Abuse and others have done an amazing job of exposing the state-capture nexus and then starting the process of mopping up the players, but they need to be aware that the next round of the battle may begin before we know it.

Second, state capture and scandals around private businesses associated with it will be used by the left to push an anticapitalist agenda that calls for more state control, regulation and government meddling in the economy.

This entirely misses the point that such alleged corporate actions are totally against a free and competitive market and are more akin to corporatism. But it also risks compounding the problem by putting more power in the hands of the state, which in turn makes patronage easier and harder to dislodge and state capture more attractive.

This is the same lens through which South African Airways (SAA), Eskom, Bank nationalisation and even "white monopoly capital" have to be viewed. There are genuine, important and interesting debates to be had on each issue, but they are clouded by ulterior motives and capture potential.

Should a well-run, clean Eskom get a 20% tariff hike if it needs it? Quite possibly, yes. Should a genuine turnaround strategy for a clean SAA have a state equity injection? Possibly, yes (if there is a long-term strategy for the state to make money and eventually privatise it). Is nationalisation of the Bank an issue fundamentally? No. Is the private sector in parts too concentrated and does it need to transform more? Yes (even the IMF says so).

However, with each of these issues wrapped up in state capture, rent extraction and inefficiency, the debate becomes very different. Eskom as is, does not deserve to be subsidised by consumers; SAA should not be saved from business administration if rent extraction just continues; the nationalisation of the Bank needs to be seen as a possible route to greater political influence; and "white monopoly capital" debates lead nowhere but to politics and further state capture.

Business needs to learn fast to cut through the fear of speaking out against what they see and know is going on — to call a spade a spade when it comes to state capture and transformation and be ready to come up with more creative policy alternatives to drive real transformation themselves rather than being directed by the state.

• Montalto is senior emerging markets economist at Nomura in London.

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LINK - https://www.businesslive.co.za/bd/opinion/2017-09-28-private-sector-must-capture-bee-mandate-from-sas-corrupt-state/

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