Edition: June - August 2015


Billions in benefits

A case study in what works, and works well. Something that works,
and can be shown to work well, should not need to be ‘fixed’
by government again wanting to change the rules.

Take a breather from the current hullabaloo over broad-based black economic empowerment and share ownership schemes, suddenly demoted from scorecard favour, to gain a little perspective. Consider whether one of the better schemes, of the FirstRand group, can be faulted.

But first, some arithmetic. A billion rand is a thousand million rand i.e. R1 000 000 000. Picture the number in terms of what R1bn can buy.

For ease of reference, use the cover story of a recent Financial Mail edition on the prices of SA residential property. Illustrated by the photograph of an elite Cape Town suburb, it asked: “Would you be prepared to pay R160m for this Clifton view?” Well, yes; with R1bn you can pay for six of them and keep the change. Pictured differently, at an average of R20m per house, R1bn would get you big chunks of Johannesburg’s posh Sandhurst.

That’s just by way of introduction, to offer a feel for what R1bn represents. Then it becomes easier to conceive multiples of it, specifically the R22bn in value unlocked by the FirstRand B-B BEE transactions.

In a presentation last year, 10 years after their inception, FirstRand chairman Laurie Dippenaar calculated that the total value created by the transactions was R22bn. To place this number in context, he used a theoretical illustration: “It is sufficient to buy the whole PSG group. It is definitely sufficient to buy more than 51% of Pick n Pay or 70% of Telkom.”
Participants from inception were:

  • The National Union of Mineworkers. Of its shares in the transaction, 60% are held by a trust created for the benefit of mineworkers (all NUM members). The trust focuses mainly on the provision of bursaries and scholarships for mineworkers’ children;
  • Kagiso Charitable Trust. It works closely with various provinces to improve the quality of education in SA;
  • WDB (Women’s Development Business). Its main beneficiary and shareholder is a trust which helps women in rural areas to establish micro enterprises.

Together, these three entities had invested not more than R81m in the transaction. Today their combined shareholding is worth some R10bn. Add to them:

  • FirstRand Empowerment Foundation Trust, a charity with an independent board of trustees chaired by FirstRand chief executive Sizwe Nxasana. Main objective is to help improve the quality of education in SA. With a R4,5bn endowment, it is able comfortably to invest R200m a year without reducing its capital;
  • FirstRand Staff Assistance Trust whose shareholding is now worth R600m. Main activity is to assist the group’s African, Coloured and Indian employees pay fees for their children’s education;
  • Black directors on various boards of the entire group. Total value of their shares is R400m, the amount accruing to each board member depending on seniority and years of service;
  • All 13 000 African, Coloured and Indian staff members. Total value of their shareholding is R5bn. When the transaction terminated at the end of last year, almost 400 employees would each have received shares worth R1m or more, and 700 employees between R0,5m and R1m. Allocations again depended on seniority and years of service, working out to R10 000-R50 000 per employee at the most junior level.
Hunter Dippenaar . . . huge value created

Dippenaar hoped that staff would retain their shares to entrench the ownership philosophy. “From experience, we know this is unlikely,” he admitted. In fact, it turned out that staff participants sold most of their shares once the terms of the transaction allowed it.

All the rand numbers cited are pre-tax. Staff pay tax on their gains at the normal rate. This resulted in the fiscus collecting a windfall of just under R2bn for which it hadn’t budgeted.

Also, in the case of the Mineworkers and WDB shareholders, about 60% and 80% respectively of the benefit accrued to their philanthropic trusts and the balance to their investment companies. These trusts are also the biggest shareholders in their respective investment companies.

Now, for the sake of comparison, relate this R22bn to the R1bn that government intends setting aside to facilitate the creation of 100 black industrialists. Imagine that government’s new policy of narrow-based empowerment were followed.

Then, instead of the R22bn going to broad-based beneficiaries, it went to 100 aspirant black industrialists. Each would have pocketed R220m, significantly more per aspirant than government wants taxpayers to fund.

The question that begs is why then a potential black industrialist, with R220m in his bank account, would risk it by starting a business to manufacture in competition with say the Chinese. He might be tempted rather to indulge a few luxuries for R22m, invest R200m in a diversified share portfolio, draw down only 5% a year to receive an annual income of R10m -- while not only keeping intact his original R200m but actually growing it.

Something, somewhere in government’s new approach doesn’t make sense. Even less sense would be resort to the early BEE days when the R22bn could have gone to perhaps five politically-connected black individuals at R4,4bn each.

For good reason, this narrow approach was eventually abandoned. Its reared head, in the form presently mooted, should be too.


Consider these also:

  • Sandile Zungu, a prominent member of the Black Business Council, was reported in Business Day to have responded to government’s proposed change in the BEE rules: “We also want to create our own GT Ferreiras....You are not going to create these through broad-based ownership.”

In the early 1980s GT Ferreira, with Laurie Dippenaar and Paul Harris, co-founded what’s become FirstRand. They began with capital of R120 000 in today’s money. Clearly, a shortage of start-up capital did not constrain their success.

  • Also in response to government’s proposal, FirstRand shareholder Mineworkers Investment Company put out a statement: “The clarification notice issued by the Department of Trade & Industry may have the unfortunate unintended consequence of potentially excluding genuinely active black-owned investors that have a broad beneficiary base. We do not believe that this was the DTI’s intent, and will engage with the department vigorously to clarify its position.”

The MIC is represented on the main FirstRand board, as are Kagiso and WDB.