Deals off in SA as firms seek BEE clarity | Fin24
 
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Deals off in SA as firms seek BEE clarity

May 15 2015 09:25
Franz Wild

Johannesburg - New investment deals in South Africa may be scrapped or put on hold while the government completes changes to rules designed to redress the economic inequalities of apartheid, lawyers said.

The Department for Trade and Industry sprung a surprise last week by saying companies would be awarded fewer black economic empowerment points if their black shareholders are community trusts or employees rather than non-white individuals or black-owned businesses.

The points are part of an assessment system that gauges whether businesses can win government contracts. That’s created uncertainty among companies and investors about the new rules, according to lawyers.

Foreign companies “want to invest in South Africa, but there’s so much uncertainty about their structure that they can’t set up here until they’ve got certainty,” Norton Rose Fulbright LLP mergers and acquisitions lawyer Ismail Laher said in a May 12 interview in Johannesburg. “A lot of people are trying to put deals in place.”

More than two decades after apartheid ended with all-race elections in 1994, the government is still trying to help previously disadvantaged citizens get ahead in business. The new Black Economic Empowerment codes aim to refine the measures set up to achieve that goal, Trade and Industry Minister Rob Davies said on May 7.

The following day, the department said the rules wouldn’t count retrospectively and that a task team would be reviewing the measures. Completing the codes specific to different industries may take until October.

Investment impact

“It will impact investment decisions” if the reforms aren’t withdrawn, Verushca Pillay, a director at law firm Cliffe Dekker Hofmeyr’s corporate and commercial practice in Johannesburg, said in an interview. “There will be concern about what could still happen in the future. Every impacted company was on the government’s back to do something about it.”

While the award of shares to black empowerment trusts may result in some benefits, it doesn’t equate to real ownership because the stock can’t be leveraged or sold, according to Davies. He said he wanted to address that issue and ensure black people had more “real involvement” in companies, which could then enhance business skills and wealth generation.

Brewer SABMiller [JSE:SAB], furniture manufacturer Steinhoff International Holdings [JSE:SHF] and insurer Old Mutual [JSE:OML] are among Johannesburg-listed companies with employees or trusts benefiting from black empowerment programmes. At least a dozen companies contacted by Bloomberg News declined to comment on the changes, preferring to approach government directly.

Entrepreneur benefit

Community groups and labor unions will probably miss out on business opportunities and shareholdings under the new proposals, while black entrepreneurs who’ve built investment companies and personal fortunes over the past two decades could become more sought after as partners, the lawyers said.

Patrice Motsepe has become South Africa’s first black dollar billionaire having founded a company that initially bought assets from AngloGold Ashanti [JSE:ANG]. His brother-in-law, Deputy President Cyril Ramaphosa, has entered into business with companies including Glencore and McDonald’s.

Ramaphosa has, however, placed his business interests in an independently managed trust, in line with the terms of the executive ethics code.

Resource companies digging up the world’s biggest reserves of platinum, chrome ore and manganese won’t be affected - unless they supply the government. Mining companies have to comply with separate laws obliging them to give black shareholders a stake of at least 26% in their projects or equity as a condition of their mining rights.

That’s also under scrutiny as the Chamber of Mines and the Department of Mineral Resources seek a court ruling on whether companies should lose their empowerment status if their black shareholders sell their stakes.

Northam Platinum [JSE:NHM] last year announced a deal to include new black empowerment partners after their previous black shareholders had sold their shareholding.

Government engagement

South Africa is suffering from regular power cuts, a one-in-four unemployment rate and slumping consumer confidence. The economy grew 1.5% last year, the slowest since a 2009 recession, compared with 5% in sub-Saharan Africa as a whole.

Foreign direct investment into South Africa fell to R62bn last year from R80.1bn in 2013, according to the Reserve Bank.

“I’m still trying to get my head around” the changes, Jose dos Santos, the chief executive officer of South Africa’s third-biggest mobile company Cell C, said in a Wednesday interview in Johannesburg.

“Government really needs to engage the private sector more.”

* With assistance from Chris Spillane, Liezel Hill and Janice Kew.

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