LETTER: The high cost of BEE

Peter Bruce’s most recent column refers (“Waiting in vain for BEE boffins to make investment case”, June 19). Another position in need of defence is the 30% BEE ownership required to participate in government contracts. The Zondo commission documented how this rule facilitated much of state capture and a review of the Eskom financials will show that the blowout in the coal costs line item since 2008 has contributed to the need for bailouts.

I have reviewed many BEE ownership transactions, and in every case the beneficiaries were not putting up their own cash or providing commensurate security: the funding formula doing the rounds was always a combination of funding from some government entity at below-market rates (for example, the Industrial Development Corporation at prime minus 3% — less than what it paid for the money) and the company seeking empowerment (aka “vendor finance”).

The net effect on the balance sheet was similar to that of increased leverage, and the impact on the projected dividend cash flows was similar to that of increased corporate taxation. All investors — domestic and international — evaluate returns using the after-tax income stream. Tax rates and leverage underlie the meaningful differences in net profit after tax and earnings before interest, taxes, interest and amortisation multiples bandied about in mergers & acquisitions circles.

This is not trivial. Investors paying 27% corporate tax who are forced to give up 30% of their dividends are in effect subject to a corporate tax rate of 48.9%. A case can be made that the BEE ownership requirements have effectively allowed politically connected individuals to collect 44.8% of the corporate tax revenue paid by empowered firms.

What would SA’s debt to GDP ratio be if all BEE ownership “gifts” were collected by a sovereign wealth fund on behalf of all, as opposed to a few politically connected individuals?

Greg Becker
Cape Town

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