Closing BEE loopholes raises the stakes - 16 January 2005

closing bee loopholes raises the stakes

johannesburg - it is going to be more difficult to enter into black economic empowerment (bee) transactions when the broad-based bee code of good practice on ownership and management and the scorecard become operational, analysts believe.

the minister of trade and industry, mandisi mpahlwa, is expected to gazette the code and scorecard in march.

the scorecard has weightings of 20 percent for ownership and 10 percent for management control. the code spells out in detail how to measure the ownership and management elements of the scorecard, including delineations of the various elements of ownership, such as economic interest and voting rights.

to eliminate any uncertainty about the use of share options and other derivatives, clear definitions and formulas are provided.

in an explanatory note to the code, the department of trade and industry says: "to ensure that the underlying financial arrangement is sustainable, it [the code] recommends that ownership points should be divided between restricted and unrestricted portions of equity ownership ...

"the points allocated to the restricted portion of equity ownership are limited, and additional points are obtained as and when there are no restrictions on ownership.

"this will ensure that companies are rewarded for the initiation and negotiation (facilitation) of the empowerment transactions as well as the sustainability of the transactions.

"this system will ensure that the financial bubble and speculative bee transactions of the 1990s are not repeated."

the stress that has been put on ownership has been attacked by commentators who feel that it is over-rated.

ajay lalu, the director of bee strategic services at ernst & young, said the code and scorecard would make it harder to finance bee transactions. however, this was good for bee in the long run and it would eliminate fronting, ensuring genuine black empowerment.


colin reddy, the director of bee research at businessmap foundation, agreed.

"it is a good thing if one considers if the bee partner has actually taken the risk in the funding of the deal that he or she has entered into. one needs to evaluate which party carries the risk of financing default to fairly analyse the restricted equity ownership in its proper context.

"if the vendor is carrying the risk of non-delivery of value due to its new bee status, provided also that the performance criteria are fair, perhaps restricted equity ownership must be considered in this context.

"but it makes for a nightmare to evaluate such deals."

reddy said deal complexity had arisen partly because of the lack of direct capital from black people. as a result, established white businesses were trying to maintain control.

he felt the solution lay in altering the weightings.

"currently, equity ownership has double the weighting of management control, when it should be the other way round.

"the consequence of weighting management control higher is that bee deals will be forced to achieve both equity ownership and management control, since the power dynamics are such that one may not achieve management control without owners that can exercise their rights.

"considering our history, skills development, enterprise development and employment equity should in fact weigh more strongly than ownership.

"it seems that the underlying issue is one of trust, especially by the current owners and operators, to achieve transformation.

"if this is so, black management control could weigh more heavily than ownership."