BEE Partner, South Africa Economy Watch

There is much detail in this section. It is, arguably, one of the most important issues in the context of BEE. BEE, and particularly ownership, has developed a bad name because the wrong partners have been sought. It is all very well to have a paternalistic approach and give ownership to staff members or some unfortunate person, but is this a sound business principle? It may be, but normally it is not. The point is, if an empowerment deal is not based on sound business principles, then a sustainable relationship is unlikely.

Implications of the different types of partnerships

Black economic empowerment initiatives of recent years provide an interesting view of:

• the types of BEE partners taken on board
• the trends of partnerships that are concluded by companies
• the impact of the partnerships on the underlying operations of the business.

What are the implications for BEE presented by these different partnerships? The first is that there is no single solution that fits all. For a partnership to work, both parties must derive benefit. If either party feels there is no benefit, then the partnership or the entire business will fail.

Most businesses look for an empowerment partner who can bring new benefit to the business, such as access to political influence, increased finance, increased operational capacity, access to new markets or new product lines.

The objective is to establish a synergistic fit between business and partners. A business owner must understand the needs of the business before determining what kind of partner the business needs.

BEE partners can be categorised into three broad groups:

• influential partners
• operational partners
• broad-based groups.

Influential partners

The generation of Black people who were at their working age during the apartheid era were discouraged from entering the business arena. They channelled their energy into the political struggle. Both entrepreneurs and politicians are passionate people, one about their product and the other about their cause or ideology.

In politics, all their energy was used to change the environment. People with entrepreneurial characteristics had no outlet for those energies and were forced to expend that energy in politics until they achieved their goal and reverted back to adult movie business.

Through their struggle credentials and extensive network of contacts^,influential partners yield a considerable amount of political influence. The political influence offered is of great value to business and has the ability to generate substantial new business.

The term “gentlemen of BEE” refers to the elite Black businessmen. The gentlemen of BEE fall into this category of BEE partners.

From a QSE perspective, it is unlikely that one of the gentlemen of BEE will invest in a small business. However, the influential partner is available to QSEs in terms of influence in a more localised arena. A QSE wanting to contract with local government may find a partner with local influence capable of opening more doors than a Black person of national influence.

Using an example of a white property developer wanting to do a new township development, there are many local government issues that need to be dealt with.

Consider a Black person who has just left local politics to go into private business. The ex-politician is no longer in government and so there is no conflict of interest. However, he or she probably still has a relationship with influential people in the municipal departments who may grant approval for the project.

This relationship is not advocating preferential treatment or corruption. The ex-politician probably has the ability to fast-track the development because of insight into the system. Similar to the way that you pay your attorney for specialist knowledge of law, the ex-politician’s knowledge of the internal operations of local government has value. The authorisations are likely to go through in half the time, which in most property development scenarios is worth a lot of money to the developer.

Operational partners

Operational partners normally originate from a business background, having run their own businesses independently. In most instances they originate from the same sector as the business they merge with or buy into. These partners are classic entrepreneurs who have taken great risk in starting their own enterprises and have experienced the scars of running a business for themselves.

Operational partners have the capability of bringing new markets to Previously white-owned business. They also contribute sector expertise and active managerial or operational involvement.

The operational partner is unlikely to be a silent partner but an active participant in a business who brings value to the business. Depending on the attitude of the non-Black party, an operational partner may result in confrontation, which can be managed through taking on complementary skills rather than replicating them.

Operational partners are favourable in the QSE environment.

Broad-based partners

Broad-based BEE partners comprise broad-based structures such as development trusts, union funds and business association funds. They use investment management companies to effect BEE transaction_s. These types of structures have a wider base of beneficiaries who are not involved in the running of the funds. Employee share ownership schemes fall into this category as well. Examples of these broad-based structures include Kagiso Trust, Women Development Bank and Nafhold. They are essentially public benefit organisations.

Broad-based groups offer little operational benefit to a QSE apart from a stronger public image. However, consider an example of a local building materials supplier wanting to increase market share. The supplier initiates a BEE deal with a public benefit entity whose beneficiaries are the residents of a local Black township. The profits derived by that broad-based group are used to build parks, schools, facilities and even subsidised housing for the local community. The brand recognition and loyalty is likely to result in new clients from that community. The ownership structure becomes an elaborate marketing scheme to the benefit of everybody.

Broad-based partners include employee share schemes. Many QSEs tend to favour the use of employee share schemes as empowerment partners. The logic behind it is simple. The owners would rather include their employees than unknown people in their business. On top of this, a master-servant relationship exists between owner and employee, making it easier for the owner to retain unchallenged control of the business. The business owner must consider the benefit to the business of incorporating an employee share scheme ownership strategy. The obvious advantage is that ownership participation encourages productivity and profitability. Beyond this, the benefit to the business of employee ownership schemes is questionable.

I do not want to undermine broad-based groups and employee ownership schemes. Correctly implemented they both have the ability to grow a business. However, in most circumstances, they are abused and offer limited benefit to both the business owner and the BEE party. From a business perspective, it may be favourable to split the ownership between broad-based ownership and an operational partner, giving the business the best of both worlds.

Both broad-based groups and employee share schemes are complicated structures to set up. Businesses should take advice from someone who has had extensive experience in successfully structuring these schemes.

Structuring

In many scenarios a combination of the above partners is used. Combinations are not as prominent in the QSE sector, but they should still be considered. White business owners have a tendency to dilute the benefits allocated to operational and influential partners because they have the ability to challenge the original owner. Where insufficient financial reward is available, these partners are unlikely to add any real value to the business.

The level of involvement in the underlying business varies between the different partners. The operational BEE partner is more intimately involved in the operation as opposed to the level of involvement that is seen from the broad-based BEE partners and the influential BEE partners. Both the entity and the empowerment partner need to consider whether they would like to engage in active involvement or not before a deal is established.

Arguably the most desirable partner would be an operational partner who has derived political influence through business achievements. An insightful understanding of the business operation used in conjunction with political influence is a powerful tool in business. Partnership with a Black woman operational partner who has political influence offers the highest reward in terms of BEE points.

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