The saying goes that lightning never strikes the same place twice. But does history not repeat itself? I say this because money is supposedly now too tight to mention for our distinguished and much-vaunted BEE brigade. Gone are the days when BEE deals were rising at a blistering pace. It is second time around; exactly a decade ago the picture on the empowerment radar was also bleak.

With the cost of capital soaring, while asset prices simultaneously fall, credit markets have, as a consequence, been tightened. Against this background, structured financing models, so long beloved by the BEE brigade, have proven ineffectual at weathering the current financial markets turmoil. Moreover, for most companies cash retention is crucial. This is partly manifest in the form of dividends reduction or postponement. The JSE Securities Exchange’s All Share Index has lost an estimated 40% year-on-year, a factor which has aggravated the situation for the BEE brigade and its funders.

According to rating agency, Empowerdex, an estimated R41bn worth of BEE deals were decimated in the past two years due to unconducive market conditions spawned by the ongoing economic recession.

Last year, empowerment deals sealed by JSE-listed companies declined fivefold to R13bn, compared to R66bn the previous year.

The current brouhaha is reminiscent of the empowerment deals bubble implosion in 2000 when the ill-fated Special Purpose Vehicle (SPV) was invented with the sole purpose of promoting BEE funding. Unfortunately, this structure came under heavy stress because the dividends from the underlying investments were insufficient to cover the debt hurdle rate of the loans used to fund the deals when the market turned bearish and interest rates hit the roof.

The dissembling slowdown in the momentum of empowerment deal-making has prompted enlightened financial engineers to raise serious concerns about the prospects of this important drive.

For Itumeleng Kgaboesele, CEO of Sphere, the Achilles’ heel for empowerment remains the funding mechanisms employed in the acceleration and implementation of this drive.

“One of the key characteristics of BEE is funding models. BEE partners have traditionally relied on structured finance instruments that allow them to borrow money to invest with little or no equity or collateral of their own. This historic landscape of BEE deal making has yielded mixed results for third party funders and recipients of funds.”

He advises empowerment companies to improve their balance sheet fundamentals.

“BEE companies need to raise the bar. They need to build equity, manage their costs and ensure that deals balance the sharing of risks and reward and are sustainable. BEE companies with healthy operating cash flows, sound management, and financial expertise will be best able to navigate the perfect storm.”

However, the perils that potentially plagues the empowerment deals due to the devastating effects of the credit crunch is explicitly pointed out by Cliff Zephyrine, Absa Capital’s head of empowerment.

“The BEE party is at risk of losing all the wealth that it has created. The banks will end up owning assets that may or may not be sold.”

Given the adverse impact of this problem, Werksmans Attorneys, a legal firm that specialises in the construction of empowerment funding models, calls on the government to bail-out beleaguered empowerment companies.

Says Morne Van Der Merwe, senior director in the law firm’s department: “Many of the BEE deals struck in recent years after painstaking negotiations may have to be renegotiated. The government should consider a bail-out package to ensure no BEE deals fail.”

He adds that Government can use funds earmarked to promote broad-based BEE and those at the disposal of development finance institution allocated for infrastructure development for this purpose.

Absa Capital agrees with Werksmans, arguing that corporate groups should also enter the BEE financing terrain and absorb the loans of their empowerment partners.
 
Prominent actors within the empowerment fraternity do not sing from the same hymn sheet, however. Mathew Phosa, the ruling ANC‘s Treasurer-General, is adamant on the issue of bailing-out ailing empowerment for fear of “creating a precedent and that would amount to punishing those who were doing well in business.”

This position is supported by Jimmy Manyi, a leading commentator on empowerment issues who also chairs the Commission on Employment Equity (CCE).
 
Both Phosa and Manyi are against the extension of life boats to beleaguered empowerment companies, especially because BEE was implemented in an elitist manner and for far too long was not a broad-based economic development endeavour.

“When the deals went north, they benefited. So they must also be able to take the strain when the deals go south,” says Manyi.

Maybe a fresh approach is needed and all the endangered deals should be renegotiated with the intention of making them broad-based. Moreover, these should fully comply with the nascent empowerment legislation - the sectoral charters and the Codes of Good Practice respectively.

Instead of throwing the BEE baby out with the elitist bathwater, this period should be seen as a window of opportunity to rectify the errors of the past. Of course, stringent measures should now be applied comprehensively and each deal should be evaluated on its merits, particularly on how it enhances the democratization of the empowerment landscape in line with the Government’s enabling legislation.

Lest we proceed to the undesirable path of economic perdition, as those who fail may provide case studies as to why there is no need to de-racialise the economy and accelerate BEE.

Sello Mabotja writes in his personal capacity