South Africa: Zuma and the new barons of BEE

There will be some big losers among those who benefited from the

first waves of black economic empowerment as the economy enters rougher

waters and President Jacob Zuma begins to implement policy changes

As the South African economy enters a period of painfully slow growth, which experts predict will last for two or three years, the outlook will be particularly bleak for those dependent on state patronage for their survival. It will be particularly tough for those business luminaries who enjoyed prime-mover status in the country’s now-faltering ’empowerment’ drive through their cosy relationship with former President Thabo Mbeki and members of his inner circle.

With President Jacob Zuma now in office, a new business brigade is edging its way forward, especially in the nouveau riche Black Economic Empowerment (BEE) business fraternity. There has certainly been no purging on a large scale along the lines of past factional alliances, or at least not yet. In terms of race, ethnicity and gender, as well as ideological affiliation, the balance within Zuma’s cabinet is impressive. There is also some equity regarding provincial representation within the cabinet.

However, the questions lingering in most minds remain unanswered. Is it time for the changing of the business guard? Who are those men and women eagerly waiting in the wings to assume the role of the new ‘randlords’? Are Zuma’s fellow travellers on the cusp of cashing in on their ‘investment’ since their man has ascended to the highest office in the land? Those likely to curry favour were certainly tenacious in their support for him when he went through his earlier trials and tribulations.

Fighting for the inside track

Those most clearly on the inside track include Durban-based businessman Don Mkhwanazi, empowerment luminary Sandile Zungu and information technology mogul Robert Gumede (see Winners box). Such individuals have every reason to move ahead with confidence. Conversely, the flow of deals will visibly dry up for those at the other end of the political spectrum, particularly those members of the breakaway Congress of the People (COPE). At the same time, it is also the case that the era of blatant dispensation of political patronage is nearing its end. According to Reg Rumney, head of the Centre for Economic Journalism in Africa at Rhodes University, patronage will not be dispensed as extensively as it was in the past, particularly because BEE deal-making is becoming more broad-based. “The landscape has changed tremendously. There is a swing from narrow-based empowerment to the use and design of models promoting broad-based empowerment,” Rumney says, citing the recent R6bn ($735m) deal by international brewer, SABMiller, in which the beneficiaries are diverse, including black retailers and employees who were not required to pay for their shares.

Rumney does not wholly dismiss the likelihood of preference being given to businesspeople closely connected to the current political establishment. “We have to keep our minds open,” he says. “Political patronage will not just vanish. But it is difficult to predict who the new beneficiaries will be.” Rumney is concerned that there is an increasing use of trusts in most empowerment deals. These, he cautions, can be used to hide ownership of shares and stakes. “There is always potential for abuse and corruption where faceless ownership is in place,” he explains. “In some instances, politicians may use this veil of trust companies to hide their identities as owners of stakes.”?

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Vuyo Jack, chairman of Empowerdex, a ratings agency, also believes the empowerment landscape has changed in relation to ownership. “Companies are realising that it is better to move away from politically-aligned individuals”, he says, “because their popularity shifts with the political fortunes of their alliances. Moreover, this distracts the company from focusing on its core business because it has to manage those fragile political relationships.But it is crucial to note that most deals are being concluded with broad-based consortia as partners to established companies.” Jack also notes that the currently-tough market conditions will mean a decline in empowerment transactions.

The economic scenario is similar to the bear market of 1998 and 1999, when interest rates rose and the cost of capital shot up. The BEE sector has felt the impact of the recession especially hard, according to analysis by DealMakers, a corporate-finance journal that tracks activity of all companies listed on the Johannesburg Stock Exchange (JSE). A mere 12 mergers and acquisitions, with a total value of R3.5bn, have been concluded so far this year, compared to 41 deals valued at R12.4bn over the same period last year and 35 deals valued at R30.5bn in 2007. The empowerment movement and its institutional funders are preoccupied with restructuring and refinancing earlier deals to avoid their collapse. This is being done to avoid a repeat of what befell BEE companies in the late 1990s.

Many BEE beneficiaries are asking for a bailout to keep them afloat. A figure of around R200bn has been touted, with a minimum of R50-75bn. Finance minister Pravin Gordhan is not keen to release money from the treasury – but the BEE captains, well-connected within the African National Congress (ANC), believe there is money to be had from some of the parastatals.

Here, they will come up against the unions, who want any bailout to be a broad-based one that helps workers rather than bosses. Particularly militant at present is the National Union of Metalworkers of South Africa, which draws its support from the ANC heartland of the Eastern Cape, a poor region that sustains the auto industry – to the tune of 500,000 jobs, now threatened by a global downturn in demand for cars.

Both groups believe that Zuma owes them – either because they financed his campaign or because they provided the political groundswell and manpower. This coincides badly with the new fiscal reality for South Africa – a crunch in export markets which means it has less money to throw at problems, even after a decade of conservative spending.

Some of the major companies reassessing their BEE deals include financial services giant Absa (its BEE partners, the Batho Bonke consortium, led by Tokyo Sexwale, must raise cash within three months to exercise their options to acquire 10% of the bank), MTN (there have been delays in implementation of its BEE deal), Barloworld (in August 2008, it re-priced its shares for the purpose of its deal, from R102.87 to R83.31 a share), energy giant Sasol (the cash purchase price per share was R336, although the price had fallen to R290 by July 2009), transport and logistics group Super Group (after the share price dropped 94%, it introduced a R1bn rights offer to rescue a 25.1%-stake acquisition by a BEE group in 2004) and Mvelaphanda Resources (it refinanced the R2bn mezzanine debt of its investment in Goldfields).

A call to banish BEE

The most scathing criticism of empowerment comes from Moeletsi Mbeki, the brother of the former president, who has consistently doubted the empowerment brigade’s entrepreneurial abilities, even though he is himself a beneficiary of empowerment. In his latest book, Architects of Poverty, he calls for the dumping of BEE, which he interprets as a master plan by white business to entrench its longevity within the mainstream economy. “BEE was, in fact, invented by South Africa’s economic oligarchs, that handful of white businessmen and their families who control the commanding heights of the country’s economy, that is, mining and its associated chemical and engineering industries and finance,” says Mbeki. “The object of BEE was to co-opt leaders of the black resistance movement by literally buying them off with what looked like a transfer to them of massive assets at no cost. To the oligarchs, of course, these assets were small change.”?

In its formative years, it was the investment bankers who smiled all the way to the bank after employing sophisticated financial engineering structures that left the empowerment beneficiaries in heavy debt when the markets imploded. In particular, the ‘special purpose vehicle’ financing structure has not fared well. While Mbeki’s commentary is probably too acerbic, there is plenty of evidence that BEE has been in trouble for some time now. Besides the convoluted sophistry that underpins the financial arrangements, the original jewels on the BEE crown – the New Africa Investments Limited and Real Africa Investments Limited – which were the first ‘black chips’ to list on the then ‘lily-white’ JSE are no more. After being unveiled with much fanfare, they delisted and folded after less than a decade of their debuts on the JSE, much to the chagrin of empowerment aficionados.

However, the Zuma presidency is not all about the blackness of the beneficiaries. Mainstream ‘white’ business entities that have made politically-correct decisions may also reap some rewards. Financial services groups Absa and Firstrand lead the pack. The former has Maria Ramos and Gill Marcus as group chief executive and chairman, respectively, while the latter has Sizwe Nxasana at the helm as CEO. All these personalities are trusted by the ruling ANC and cut their teeth in the public sector.

Watching the rising stars?

Other individuals whose fortunes may soar are Leslie Maasdorp and Bobby Godsell. Maasdorp, vice-president of Absa Capital and Tokyo Sexwale’s partner in the Batho Bonke consortium, has been rumoured to be heading for Transnet, the state-owned transport utility. He is a former interna?tional adviser with investment bank Goldman Sachs International, was special adviser to Reserve Bank governor Tito Mboweni and economic policy adviser in the ANC’s economic planning department.

After more than 30 years in the mining industry, some of which were spent as CEO of mining group AngloGold Ashanti, Godsell moved to become chairman of the lobby group, Business Leadership SA and the ailing state-owned energy utility Eskom. Godsell’s comprehensive understanding and consummate skills in industrial relations may come in handy if the recent wave of strikes begins to escalate. Godsell could also provide much-?needed advice on how to navigate the simmering brouhaha relating to the ownership of mines.

With the ANC Youth League, the Congress of South African Trade Unions (Cosatu) and the Young Communist League calling for the nationalisation of mines, the ANC insists that this has in effect already happened with the implementation of the Mineral and Petroleum Resources Development Act of 2002. After a respite that saw the implementation of the mining-royalties law fine-tuned to address its concerns in the budget earlier this year, the mining industry appears braced for yet another bumpy ride, especially after the onerous BEE codes were aligned to its transformation charter. The codes demand favourable funding terms for empowerment partners. Vuyo Jack of Empowerdex says this will bring the mining industry in line with other sectors in the economy. The changes being rung in by the Zuma administration look like being somewhat more than cosmetic as heads begin to roll among different agencies. An interesting case has been that of Malose Kekana, CEO of the powerful and relatively successful Umsobomvu Youth Fund (UYF), an agency charged with arresting the spiralling scourge of unemployment among the South African youth. He now serves as interim chairman of the recently unveiled National Youth Agency, which came into existence after the merger of UYF and the National Youth Commission. Kekana can be credited with successfully branding the UYF in its formative years and also shaping it into the recognisable entity that it is today, a fact that seems lost to Julius Malema, the towering ANC Youth League president, who heaped calumny on the agency’s leadership for doling loans out “to their girlfriends and boyfriends”.?

The envisaged role of development-finance institutions – whose mandates the ANC intends to review – is also likely to prompt changes in two of the largest state-owned, resources-laden institutions – the Public Investment Corporation (PIC), headed by Brian Molefe, and the Industrial Development Corporation (IDC), headed by Geoffrey Qhena. Both CEOs could be seen to be too close to the former establishment and could make way for technocrats trusted by the ruling party.

Accusations have been flying fast and furious that the PIC and IDC have funded deals involving members of Thabo Mbeki’s inner circle and key figures in COPE. Cases cited to back up these allegations are PIC’s funding of the Elephant consortium’s acquisition of a 7% stake in Telkom involving Smuts Ngonyama, former head of ANC presidency during Mbeki’s tenure, and loans advanced to former IDC chairman Wendy Luhabe, who is married to former Gauteng premier and COPE MP, Mbhazima Shilowa. Worse still, the Elephant consortium is among the beneficiaries from the offloading of Telkom’s 15% in cellphone giant Vodacom to the UK-based Vodaphone for R22.5bn. The consortium held 2% in Vodacom but was precluded from trading in the shares until 2011.?

Already, Molefe’s powers have been extensively trimmed with the transfer of an estimated 90% of assets under PIC’s management to the Government Employees Pension Fund. Moreover, organised labour prefers the funding of infrastructure develop?ment to investment in listed companies.

A further litmus test for the Zuma presidency will be the appointment of the Reserve Bank governor. Tito Mboweni’s contract as governor is up for renewal in August this year. During his two consecutive five-year terms, Mboweni has had an acrimonious relationship with organised labour, especially because of his inflation-targeting policy, which has kept interest rates high. Not surprisingly, Cosatu and its affiliate, the National Union of Metalworkers, are lobbying that Mboweni’s contract should not be renewed because he is “arrogant and aloof”.

The government could yet heed labour’s call for Mboweni’s head. Daniel Mminele, who headed the central bank’s financial markets, was recently elevated to the position of deputy governor, join?ing two other deputy governors, Xolile Guma and Renosi Mokate, in a move that bears all the hallmarks of delicate succession planning.

Another looming problem is the difficult financial condition of many state-owned enterprises that have been queueing up for bailouts from government. These include loss-making entities like the South African Broadcasting Corporation, Eskom, South African Airways and arms manufacturer Denel.

Sipho Seepe, the president of the South African Institute of Race Relations, wants the government to take a proactive stance on the problems of these parastatals. “They should become serious players in the challenge of job creation,” Seepe says, “and we should avoid taking ideologically-driven decisions when dealing with these entities. They should be run efficiently.” Notwithstanding Seepe’s proposals, these entities have historically been areas where successive ruling parties have deployed their cadres. The trend is set to continue under Zuma, but it appears the approach will be more cautious, given the dysfunctional state of some of them.