Treasury study questions BEE rules’ effectiveness
‘The BEE codes don’t really reflect the complexity of ownership,’ says Ismael Momoniat
The Treasury has weighed into the transformation debate, releasing research in Parliament which shows that foreigners and South African institutions own more than 80% of JSE-listed South African companies.
It questions whether the black empowerment ownership rules in the government’s codes and charters are realistic or genuinely transformational.
The study, presented in Parliament on Wednesday, found that only 14% of the shares in South African companies listed on the JSE were directly owned by corporates, trusts or individuals. Foreign investors owned 38% while domestic retirement funds owned 24% and other South African-based institutional investors and investment managers owned a further 24%.
The Treasury commissioned the study by an independent London-based economist after it had undertaken in the February budget review to publish an ownership monitor yearly to assess progress measured against ownership targets, as part of its work on transformation in the financial sector.
The findings came in a context in which the new draft Mining Charter had gone beyond the 26% required by the government’s BEE codes to propose a 30% direct ownership target, while state-owned entities such as Eskom were demanding 51% direct BEE ownership from contractors — which the study indicated was impossible for listed companies.
It also suggested the focus on direct black-ownership deals could prejudice black people who indirectly owned JSE-listed shares via pension funds, because these shares got watered down when ownership deals were done with new black shareholders.
Treasury deputy director-general Ismael Momoniat, who presented the study to Parliament’s finance committee, said the structure of ownership was complex. For listed companies the direct ownership was very small. "The BEE codes don’t really reflect the complexity of ownership," he said.
‘’If transformation only focuses on ownership and does not look at management and control of companies, frankly it will fail," he said. Momoniat also pointed out that many BEE deals were leveraged and it was difficult to measure how much net asset wealth was held by black investors, after borrowing was taken into account.
"We are interested in a broad-based approach to transformation and the obsession with percentages often means black people don’t actually get rich," Momoniat said, warning of the "perverse consequences" of some of the ownership requirements.
The JSE’s own research has put BEE direct ownership at 10% with a further 13% in indirect ownership. The Treasury’s proposed Ownership Monitor recalculated this at 9% direct and 11% indirect ownership, but this was based on the BEE codes’ definition, which differs from other measures.
The Treasury research also served to counter the populist idea that "monopoly capital" dominated the economy, finding that dominant shareholders of any sort (owning more than 5%) held only a third of the shares in the top 25 JSE-listed firms.
The largest single shareholder on the JSE is the Government Employees Pension Fund which holds 11% of the top 25 listed companies (including by way of the Public Investment Corporation). But major black shareholders with stakes of more than 5% accounted for only 1% of ownership.
The Ownership Monitor, which was still a work in progress, aimed to feed into debates on economic transformation by providing a broader overview of the composition of ownership, illustrating progress with black ownership of South African companies as well as with the continued role of foreign and institutional ownership in delivering stronger economic growth, the report said.
The government relied on foreign investors and institutions to finance its deficit, with foreigners holding 38% of rand-denominated debt at the end of 2016, while domestic and foreign commercial banks held 17% of total government debt.