Improving B-BBEE outcomes through Mixed Funding

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The B-BBEE Act 53 of 2003 (the Act) was established to create…

The B-BBEE Act 53 of 2003 (the Act) was established to create an enabling environment for black people to be effective participants in the South African economy. The aims of the Act include increasing the quantum of black individuals who have ownership and control of new and existing enterprises, increasing the number of black people in executive and senior positions and increasing the income levels of black individuals.

Over the past few years there has been uncertainty about the acceptability of B-BBEE structures and their effectiveness in achieveing the transformation goals as set out by the Act. However, the Practice Note released by Minister Patel earlier this year (see Tamela’s article titled “Market welcomes clarity on B-BBEE Codes”, May 2021) highlighted that broad-based empowerment is, and remains, part of the transformation agenda of the government and, while noticeable progress has been made, South Africa still has a long way to go towards reaching meaningful transformation.

The 2021 Sanlam Gauge report revealed that all industries are still behind their targets, with the overall average being 84.34% towards the target – essentially making South Africa the equivalent of a level 4 B-BBEE contributor in aggregate. A black ownership rating of 85% of the 25% target equates to 21.2% black ownership of an economy in which black people comprise over 90% of the economically active population. This performance is especially lacklustre considering that the ownership portion of B-BBEE not only encompasses direct ownership, but also, inter alia, the sale of assets, continuing consequences, and equity equivalents.

A common reason cited for the slow pace of black ownership is the lack of funding for ownership deals. This is unsurprising as most of the targeted beneficiaries of B-BBEE have neither the capital nor adequate collateral required to self-fund into ownership deals. Therefore, the success of B-BBEE is strongly reliant on the availability of funding mechanisms to fund deals.

Fit-for-purpose funding models that are resilient in the face of varying interest rates and company cash flows are of paramount importance if we are to solve the lack of funding challenge. The major B-BBEE Transactions Analysis report 2018/19 by the B-BBEE Commission found that in the 2018/19 period, 32% of transactions were through vendor financing, making it the dominant form of funding. However, mixed methods of financing were responsible for most funds (in value terms) pointing to their importance in fast tracking black-ownership. Major B-BBEE transactions that have made use of mixed funding models include: Transaction / Funding used Barloworld Khula Sizwe / Third party funding, vendor support, discount and equity Exxaro Eyesizwe / Third party funding, discount and equity MTN Zakhele Futhi / Third party funding, notional vendor financing, discount and equity Vodacom’s YeboYethu / Third party funding, vendor funding and equity

Therefore, mixed funding models that are carefully structured and encompass, inter alia, vendor loans, discounts, third party loans and equity have and continue to be a key enabler to fast tracking sustainable transformation and ensuring improved B-BBEE outcomes. Mixed funding models are preferred as the use of one instrument often has shortcomings. Grant funding from government alone will not be sufficient as government has limited funds. Using debt to buy shares in companies and relying on dividend payments to service the debt has proven to be unsustainable as most companies’ dividends aren’t sufficient to service the debt as dividend payments are not guaranteed and dividend yields are hardly ever equal to or higher than the cost of funding. While vendor funding does allow for the participation of a broader number of participants, companies have not always been able to provide 100% of the funding required to enable B-BBEE transactions.

How can we help?

Tamela has implemented numerous B-BBEE ownership transactions over the past 12 years and has experience in designing sustainable B-BBEE structures. The team’s deep knowledge of the B-BBEE regulatory landscape and experience in designing and implementing BBBEE deals places it in a position to advise, review and consult to corporates on their B-BBEE ownership structure needs. Furthermore, our advisory and sponsor team is using their knowledge of the JSE’s Listings Requirements and B-BBEE scheme trading and listing experience to provide valuable input into the changes required to facilitate a centralised verification initiative, adapt to fitfor-purpose regulations and assist companies to list their B-BBEE schemes on their selected stock exchange in order to facilitate trade and much-needed liquidity in their B-BBEE schemes. This holistic experience and ability to work closely with client management teams and shareholders enables Tamela to provide appropriate B-BBEE structures and funding solutions to corporates while ensuring that sustainable transformation outcomes are
achieved. For more information, please contact Lungi Gwente on 083 517 54223 / Lungi@tamela.co.za