By Anthea Jeffery
A recent research report compiled by independent analysts for the National Treasury shows that foreigners own 38% of the JSE’s market capitalisation, while institutional investors (often in the form of retirement funds) own 48%. Between them, foreigners and South African institutions own 86% of JSE-listed South African companies.
Only 14% of JSE-listed shares are directly owned by individuals, trusts, or firms and are thus (notionally) available for BEE ownership deals. This casts doubt on the practicality of the 25% BEE ownership target in the generic codes, let alone the 30% required by the 2017 mining charter and the 51% demanded by Eskom of its coal suppliers.
As Treasury’s report points out, the retirement funds, long-term insurance firms, and other investment management companies which own 48% of listed shares are also ‘the main vehicles through which millions of ordinary South Africans save for retirement and manage risks to the well-being of the household’.
In 2015 there were some 16m members of retirement funds in South Africa: some belonging to occupational funds (where membership is a condition of employment), and some to retirement annuity (RA) funds of their own choice. (Some within the 16m belong to both types of fund, which means there is an element of double counting in this figure.)
According to Treasury’s report, about 6.5m people currently belong to occupational retirement funds. Of these members, 67% are black African, 12% are ‘coloured’, 4% are Indian, and 17% are white. Equivalent figures for RA fund members are not provided, but the demographic spread may be much the same.
Black South Africans already benefit significantly from their indirect investments on the JSE. Perversely, however, they are often prejudiced by BEE ownership rules, as empowerment deals done at a discount generally dilute the shareholdings of existing investors, including institutional ones. Many of the costs of enriching a small political elite are thus being borne by ordinary pensioners and savers, both black and white.
BEE ownership targets overlook this high level of institutional ownership and seem to assume a high level of direct ownership by wealthy whites. This might have been true many decades ago (and particularly so in the days of the wealthy mining magnates dubbed the Randlords), but it overlooks modern realities.
The Treasury’s report also inquires into major shareholdings, defined as beneficial stakes of 5% or more. According to the Treasury, most JSE companies have one or more major shareholders, who together hold an estimated 33% of the total market capitalisation of the Top 25 listed companies.
However, it is not wealthy white individuals who predominate here. Rather, the single largest major shareholder in JSE-listed companies is the Government Employees Pension Fund, which accounts for around 11% of the market value of the Top 25 companies. The combined major shareholdings of foreign companies also amount to 11%. By contrast, private individuals with major stakes account for only 1%.
Against this background, the Treasury report suggests that more emphasis should be given to the management control and employment equity elements in BEE. However, the targets here (though the report overlooks this) are equally impractical.
Targets for black representation at board level (50%) and among senior managers (60%) and middle managers (75%) cannot easily be met when more than half the African population is under the age of 25 – and only 6% of Africans hold the post-school qualifications often needed or advisable for these important positions.
A the same time, two comprehensive opinion polls commissioned by the IRR show that only about 15% of Africans benefit from BEE, while 85% do not. In addition, the people left out in this way are not simply overlooked. Worse still, they are harmed by BEE’s unrealistic and ever shifting requirements, which have served to deter investment, reduce growth, limit jobs, and encourage corruption and crony capitalism.
If South Africa is to bring about positive transformation, it needs to shift away from BEE to a far more effective empowerment policy. This alternative policy is being developed by the IRR and is called ‘economic empowerment for the disadvantaged’ or ‘EED.’
EED recognises the vital importance of economic growth in expanding opportunity and helping to generate jobs for the 5.5 million Africans now unemployed. It also envisages a very different scorecard: one which no longer penalises firms for failing to meet unrealistic ownership and other targets, but rather incentivises and rewards businesses for their vital contributions to South Africa’s economy.
Under an EED scorecard, companies would gain EED points for capital invested, goods and services generated, profits earned, dividends declared, and contributions made to tax revenues, export earnings, and R&D spending.
These contributions to empowerment are the most important ones that companies can make. Without these fundamentals, the most impenetrable barriers to upward mobility – low growth and high unemployment – will never be overcome. Jobs are also vital to dignity and provide the surest path out of poverty.
Some seven years ago, then finance minister Pravin Gordhan acknowledged the failures of BEE, saying: ‘BEE policies…have not worked. BEE policies have not made South Africa a fairer and more prosperous country. They have led to a small elite group benefiting, and that is not good enough.’ It is time to heed this assessment and to call a halt.
As the Treasury’s report has confirmed, the ownership requirement is unrealistic in overlooking the high levels of foreign and institutional ownership on the JSE. Moreover, even if modern-day Randlords directly owned large chunks of the bourse, shifting this ownership stake from a small group of wealthy whites to a small group of wealthy blacks would do nothing to help the great majority of disadvantaged South Africans.
What the country needs is an empowerment strategy which (in the words of DA leader Mmusi Maimane) breaks down the current ‘insider/outsider dichotomy’ and works for ‘the unemployed, the shack dwellers,…the social grant recipients, [and] the single mothers’.
As Mr Maimane so graphically puts it, ‘economic transformation which is truly radical would see the economy being opened up to those who have been left out’. EED would achieve this, whereas BEE is too damaging – and too unrealistic – ever to succeed.
*Anthea Jeffery is Head of Policy Research at IRR, a think-tank that promotes political and economic freedom.
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