Business Day / 22 SEPTEMBER 2017 - 04:05 / GHALEB CACHALIA
Treasury's submission points to the danger of deterring investment
At one overexposed level, the argument about black economic empowerment (BEE) is characterised by considerations about doing the right thing to foster equality and provide equal opportunity. BEE proponents are encouraged to use it as a marketing tool to hone their competitive edge.
At a more crucial level, away from the hype and moral imperatives, are issues of how to stimulate higher growth that can lead to increased employment creation and more competition, and the longer-term outcome of increased empowerment and wealth creation for the previously disadvantaged.
Rich man, poor man: The poor majority are witness to already privileged black recipients receiving most of the advantages, while the working class and the unemployed remain stuck at the bottom. Picture: ESA ALEXANDER
In this regard, a Treasury submission to the portfolio committee on trade and industry set out a series of important features of the economy. It asked four key questions:
• Why do we need investment?;
• Who funds government debt?;
• Who funds corporates in SA?; and
• Who owns companies in SA given the dependence on foreign and institutional funds?
The Treasury’s note points to the need for circumspection on BEE, lest proposed changes to it compound the cumulative effect of past policies and choke off investment, hobble economic growth and worsen the unemployment crisis.
Investment for growth and employment is sorely needed. This requires savings and since domestic savings are low, the gap is filled by foreign investment. Foreign investment is crucial in the bond and securities markets. The government issues bonds to raise capital and commercial banks hold much of this. Stability is, therefore, paramount as sovereign downgrades lead to banking downgrades.
Due to the important role foreign investment plays, SA should attract and not alienate it. Investment growth in 2016 was -3,9% and -1.6% in the first quarter of 2017, underscoring the gravity of the matter. The tension between economic growth and transformation objectives has to be managed. If it isn’t, there will be disinvestment and both objectives will be undermined.
The focus should be on foreign investment for companies (and the government) and their pivotal role in economic growth. In SA, companies are funded by listings, through direct investment and bank loans.
The nexus between listed companies, which account for 57% of all tax revenue (excluding VAT, excise and fuel levies) and foreign investment, which owns 38% of the equity on the JSE, is clear. These companies are responsible for most employment in the country.
Regarding ownership, the Treasury report states that "BEE deals tend to favour direct owners over indirect owners. This inadvertently undermines the objective of increasing net asset wealth of black households".
South African retirement funds account for 24% of ownership of the JSE and are thus an important channel through which long-term domestic savings are directed to economic sectors that require capital.
Long-term insurance and collective schemes own 10% and other investment managers, 14%. The Government Employees Pension Fund constitutes about 40% of total pension funds. The report states that "BEE deals have not benefited retirement funds even though many of the beneficiaries are black households".
BEE’s role should be examined. The new codes add expenses and enlarge the administrative burden. This is on top of an imperative that pushes for increased black ownership — despite compelling research comparing inflows of foreign investment into SA with other emerging countries of a similar level of development indicating broad-based BEE (B-BBEE) is diminishing SA’s ability to attract foreign investment.
The Department of Trade and Industry is tasked with implementing, regulating and enforcing compliance with the laws and makes use of a "balanced scorecard" to measure progress towards B-BBEE compliance by enterprises.
The scorecard measures three core B-BBEE elements: direct empowerment through ownership and control of enterprises and assets; human resource development and employment equity; and indirect empowerment through preferential treatment in procurement processes.
Although the scorecard is the standard for measuring B-BBEE compliance, sector-specific charters have been developed for industries such as mining, financial services and tourism — many with more stringent requirements for black ownership in particular.
This heady mix of ostensibly well-intentioned social re-engineering is reminiscent of the 1932 Carnegie Commission on Poor Whites, which showed 30% lived like paupers, moving the commission president to say that "there was little doubt that if the natives were given full economic opportunity, the more competent among them would soon outstrip the less competent whites". The white government of the time embarked on significant intervention in the economy to protect white business and white people. After 1994, the ANC embarked on a programme of racial tit-for-tat.
It has, moreover, created along the entire value chain of B-BEEE a deep trough for BEE fat cats to drink from.
Surely, the time has come to end this and to focus on higher growth to increase employment? The costs of BEE policies have been legion. They may have broadened the black middle class, but they have not assisted the poor black majority. Far from providing and delivering redress, the ANC has used BEE to reduce private sector autonomy at the expense of the market economy to bolster state power and control.
This broadening of the black middle class has been achieved largely through employment equity in the public service and this has to be measured against a 125% increase in the public sector wage bill, from R195bn in 2007-08, to R439bn in 2014-15.
How can this foster a productive economy? As pointed out by economist Iraj Abedian, incompetent and inexperienced public servants fail "to generate the human resources, infrastructure, policies and education systems that businesses depend on to grow".
As John Kane-Berman and Anthea Jeffreys point out, white job reservation began to crumble in the 1970s and the political liberalisation that began in 1990 further fast-tracked black advancement into senior and managerial posts.
When the ANC government took charge, the scene was set for further organic expansion — granted, with fewer black billionaires — that would have delivered a sustainable, resilient and more robust black middle class. This would have resulted in self-generated advancement and not get-ahead schemes at the behest of government intervention that add insult to injury to black people and their accomplishments.
The poor majority are witness to already privileged black recipients receiving most of the advantages, while the working class and the unemployed remain stuck at the bottom.
This has been ameliorated by a redistribution of revenue through the budget for housing, cash grants, free schooling, free health, free basic water and electricity to indigents.
While the underlying quality of this spend, which absorbs about 60% of government expenditure, needs to be assessed, it has assisted the poor more than all the racial quotas mandated by BEE. The continuation of this social spend depends on sustained and increased economic growth.
If the stimulation of higher growth, more competition and concomitantly increased levels of employment is the goal that will deliver the fiscal wherewithal to fund racially blind grants to the poor, and that will fire the engine that builds an organically grown (largely black) middle class, what needs to be posited about BEE policy?
The time has come, perhaps, to halt BEE.
The new lodestars, as punted by Jeffreys, need to be economic growth, excellent education, employment and entrepreneurship. All of these depend on growing the economy and encouraging investment, and on the responsible allocation of resources and management.
A focus on mentorship at all levels would be crucial, as would a focus on small business development, the minimising of administrative red tape, and a trade environment that champions free trade.
• Cachalia is DA trade and industry spokesman. He writes in his personal capacity.
LINK - https://www.businesslive.co.za/bd/opinion/2017-09-22-how-bee-has-failed-to-uplift-the-indigent/