Annexure 8 Praxis
1. Introduction to Praxis
This section sets out the concept of a new form of social development endowment fund that was first outlined briefly in the introductory chapter and referred to further in the discussion and conclusion chapters of this thesis. The concept draws from the idea of a sovereign development fund (“SDF”), a variant of the more common Sovereign Wealth Fund (“SWF”) which was described in Chapter 3. It also draws from both the theoretical aspects of the B- BBEE element of share ownership, and the practical experience of implementing such structures that the researcher has enjoyed through his employment in a South African Financial Services company. The aim is to combine these aspects in a practical yet innovative manner that benefits a marginalised group of the South African population: a group referred to as those Not in Employment, Education or Training (NEETs), numbering as many as 5.5 million people.
Annexure 8 Figure A: A Profile of South Africa’s NEETs
SA NEET Youth Aged 15-24
53% Women 59% in Urban
Areas 82% are 20 – 24 Yrs 87% Black
55% have less
than Matric >52%
unemployed
Research conducted in recent years in South Africa16 has highlighted that a key issue affecting a significant proportion of NEETs is income poverty: that their (or their family’s) economic circumstances are such that obtaining funding to complete their schooling to an adequate level (the school leaving or “matric” certificate) if they have dropped out, or to enter and complete a form of tertiary education, is extremely difficult.
This research also highlights the importance of completing education milestones (such as matric) as important building blocks towards securing lasting and regular employment. Other studies have noted that the economic potential of the county’s demographic profile17 (the
“demographic dividend”) will not be realised if young people are not properly equipped for the workplace. Thus the creation of a basket or package of services (modelled on a similar programme developed in the European Union for marginalised young people there) to assist NEETs in breaking out of their poverty cycle, would be a valuable intervention.
Regardless of the intervention however, the aforementioned studies have shown that due to the country’s socio-economic structure, it is the lack of funding that is one of the major constraints inhibiting the ability of NEETs to break out of poverty and become productive economic agents (recognising equally that the country’s economic policies need to be revised to encourage investment, growth and importantly, labour absorbing job creation). The prototype described here aims to address this funding need. In so doing it also addresses the following key issues with current corporate BEE ownership structures, which emerged from the research findings:
16 See the 2019 Siyakha Youth Assets Study by the Centre for Social Development in Africa
17 See StatsSA, “Whither the Demographic Dividend”, referenced in the main text
Annexure 8 Table A: Key issues with current B-BBEE ownership designs
These factors, together with the “neglected” Base of the Pyramid (“BOP”) group of the population defined previously, form the rationale for an entirely new approach to B-BBEE share ownership in South Africa that can address the above factors. At its heart, this model is intended to facilitate wealth generation at the BOP through funding for education and skills development, as opposed to the current ownership concept of wealth transfer from existing
Key issues Description
1. Failure to fully consider the Base of the Pyramid beneficiaries
The precarious economic predicament of many of the most vulnerable people in South African society has not been directly addressed (whether inadvertently or by design) by Financial Sector Charter (and the B-BBEE Act more generally) despite their being deliberate interventions to try to address the economic imbalances inherited from the pre-1994 apartheid system
2. Narrow definition of beneficiary
B-BBEE ownership transactions specifically, whether in the Financial Services sector or in other sectors of the South African economy, have tended to define their base of beneficiaries quite narrowly (particularly in respect of ownership deals concluded before 2004) – often employees and connected strategic partners are beneficiaries 3. Community groups,
where included in deal structures, are a small component
While more recent deals announced by companies have offered either a “community” component or even broad public participation, such participants are predominantly in the upper and middle economic classes
4. Failure to produce value for participants –
transactions “under water”
Some B-BBEE ownership transactions have failed to produce any meaningful value for their participants. Market conditions (for example driven by a fall in commodity prices) have caused the share price of the companies to underperform the cost of funding the deal; or the availability of dividends on the underlying shares to be insufficient to service the interest costs of the funding
5. Unresolved Once Empowered, Always Empowered principle
After the lock-in period of an ownership deal ends, black participants are able to sell their shares on the open market (for listed companies) resulting in the level of black shareholding diluting away from the
“high water mark”. With government having walked away from the once empowered, always empowered principle, companies either need to “top up” their deals or look for alternative ways of making up for the loss in black shareholding
6. Cost and complexity of ownership deals
Companies are reluctant to pursue further rounds of ownership deals as this “transfer” of existing wealth often comes at a high cost to implement and is subject to a degree of risk that the deal may not perform, creating no value for the new black participants, as noted above. Regulatory requirements (e.g. awarding new licences) in some industries may trump such concerns
7. Rules and structures favour larger companies
Many small companies are reluctant to pursue ownership deals to increase their scorecard points as they lack the resources to pay for advisory services to negotiate, set up and monitor complex deal arrangements
shareholders to new (typically black) shareholders, many of whom already occupy the middle and upper strata of the economy.
Consequently, this funding model, called Shares in Society, is aimed at South African business, starting in the Financial Services sector. It is also aimed at policy makers in government to illustrate that new, more creative options should be available for companies to explore instead of the “one size fits all” approach to B-BBEE ownership designs.