The Brenthurst Initiative

Summary - The Brenthurst Initiative launched recently by the Oppenheimer family is both good news and bad news. On the positive side, it signals a commitment to black economic empowerment by South Africa’s leading corporate dynasty; it will reduce political risk and deliver higher growth. On the negative side, it is a setback for our young democracy in that it constitutes an elite pact between economic and political giants, who are defining the rules with which others must comply. Since 1999, transformation of the top echelons has been the ANC’s number one priority, and in that context the initiative is both logical and inevitable. There are several reasons why it will be accepted. First, South African corporations do not have the stomach to fight for free-market principles and property rights. This is probably wise, as capital generally loses battles against determined regulatory regimes. The only thing business can do is warn about the consequences, as Anglo American CEO Tony Trahar did after the meeting. Trahar cautioned that the economy could suffer if empowerment costs create ‘an investor-unfriendly scenario’. However, the government is undeterred and its message to corporations is clear: if they want to do business in South Africa, they must be willing to act as agencies for ‘delivery’. Most companies have accepted this and factored it into their costs, while saving money where they can (often by downsizing their work force). Secondly, the government’s delivery record to date is unimpressive and unless business helps it to deliver some major rewards soon, the country risks political instability and even more aggressive demands for restitution. The Oppenheimer initiative faces the issue of costs squarely. Accordingly, it makes four linked proposals: 1) companies that comply with the initiative would pay lower corporate tax rates; 2) corporate costs would be moderated further by government promotion of all available sources of equity and debt funding; 3) government would keep a realistic and clear transformation scorecard and not keep changing the goalposts; and 4) the policy should be subject to a sunset clause of 10-15 years (though this is unlikely to be accepted). The initiative’s architects believe this is a win-win formula for business and government, which offers predictability, decreased political risk and greater investor confidence. If tax rates become the sole form of political leverage on business, the corporate world would probably rejoice. The risk is that the government will accept the deal but retain all its current additional requirements for state contracts. Drawbacks include a lack of emphasis on skills training and relatively high compliance costs for small companies (though the proposal recommends flexibility). A deeper drawback is that the government is moving away from grass-roots development in favour of empowerment of its more wealthy supporters. This sort of elite pact puts South Africa closer to corporatist or ‘illiberal’ democracies. Liberal democrats have to face the fact that here as elsewhere, top-level deal-making is more alluring than the untidy creativity of political freedom and market competition.

On August the 5th I attended a function that was simultaneously very good and rather bad news for South Africa.

The event was the launch of the Brenthurst Initiative by the Oppenheimer family. Significantly it signalled a commitment to black economic empowerment by the country's leading corporate dynasty on condition that the government provides tax incentives and longer range predictability to boost investment and growth to around levels of 5 per cent per annum. If accepted, it will in effect be an "elite pact" aimed at mutual damage limitation, and one that by lowering our political risk profile will deliver some of the higher growth that the country needs so desperately. Therein is the good news. The bad news is that our nascent liberal democracy will suffer yet another setback as our economic and political giants set the terms that others will have to honour.

Make no mistake, however, in the prevailing political circumstances, this initiative is a logical and inevitable move, wise in its judgement and impeccable in its diplomacy. Since 1999 it has become apparent that of the many urgent and supposedly equal priorities of the ANC leadership, one goal seems to be more equal than others. This is the drive to re-engineer and transform the visible face of the top echelons of business, sport and institutional leadership in the country. Respect for diversity, non-racism and the outcomes of free endeavour and competitive market forces is there, but at a lower level of priority. Transformation is the watchword in virtually all decisions involving the public face of the nation, seen most recently in formidably muscular state-initiated "transformation charters" for major sectors of the economy.

Will government buy in? The presentation had the flavour of potential consensus about it, and even minister Alec Erwin who has always opposed tax incentives claimed to have an "open mind" on the initiative. This may well become South Africa's new "reconciliation".

Three imperatives behind the initiative

There are three wider contexts in which the initiative by the Oppenheimer family is inevitable, necessary and perhaps the only game in town.

First it has become increasingly clear that corporations in South Africa do not have the stomach to fight for the basic principles of market freedom and the prerogatives of ownership, and perhaps wisely so. Only a Marxist-Leninist who has been asleep for the past five decades believes that corporate capital has the capacity to openly oppose political forces and determined regulatory regimes. Capital has power but it lies in its economic outputs. For good or ill, for example, the formidable corporate capital of much of Western Europe has had to patiently endure stifling regulation and all the compromises involved in "social market" economies since World War II. Only in the last decade have these governments been so stung by unemployment and the loss of economic competitiveness and investment that they have started to listen seriously to business once again. The British economy was spared some recent damage not by the influence of corporations but by a politician, Margaret Thatcher. A former trade unionist prime minister did the same for the Netherlands.

Corporate capital in South Africa has realised that the more things change the more they stay the same, or deepen. Just as it had to police job reservation and group areas laws in the apartheid era, it is now expected to police racial transformation. It is ironic that so many of our current political watchdogs who hold it against corporations for co-operating with the old National Party machine are the first to expect it to behave in exactly the same way in respect of new political priorities.

Remember Chris Ball, the leading banker who did confront the old regime in the eighties? He once told me that he believed that corporations had it in their power to summarily end apartheid. Sadly I knew that he was wrong, simply because business is not a coherent strategic organisation. In most conflicts, government will prevail, if not by edict then by exploiting otherwise healthy competition and differences of interest in business. Chris Ball eventually had to stand down.

All business can do is warn about consequences. Shortly after the Brenthurst meeting, Anglo American Corporation CEO Tony Trahar recorded the excessive costs of doing business in South Africa, among which are the many costs of facilitating empowerment: "There is a scenario where a combination of these changing tides could create an investor-unfriendly scenario… a great pity for the South African economy…" (Business Day, August 11, 2003).

Empowerment equity sales and buy-ins only add value to a company's operations if they add key expertise, expand technology or boost commercial goodwill in the market. Empowerment partners seldom bring these benefits because they are new to the game. As Moeletsi Mbeki has said, they simply do not have the appropriate networks. Empowerment is not a model for creating entrepreneurs but a vehicle for "fulfilling a political agenda" (quoted in Business Day, August 11). A supermarket chain may gain some politically-based goodwill, and there are politically contrived advantages in gaining state contracts. But for export-oriented companies and serious international producers there are few benefits in empowerment to offset the costs. More importantly, there are risks in underwriting empowerment loans and sometimes even selling to empowerment partners at less than market value.

But these misgivings are academic. Through wide-ranging legislation on myriad aspects of business operations, including the nationalisation of minerals, government has sent a powerful and cumulative signal to business that its rights and prerogatives are conditional on government approval. Amidst all government's specific justification, the message is clear: if you want to do business in South Africa you have to simultaneously serve a government objective or constituency. Business is being co-opted as an agency for "delivery".

Most corporate boardrooms today probably realise that the process is unstoppable and that wisdom requires that they absorb the costs, take the losses and rationalise operations to save where they can. The cost of rationalisation over and above what would have occurred anyway is seen in rising unemployment.

The second context that makes the Brenthurst proposal both inevitable and necessary for business is that the administration and delivery record of government is not impressive. Unless business helps to deliver some large-scale political rewards, the economy might face a further disincentive for investment, namely the danger of eventual political instability or even more aggressive demands for restitution. This is pretty compelling leverage.

The trade-offs

Most of the corporate sector has accepted these political realities. Some have even begun to internalise the inevitable - manifest in bursts of new South Africa enthusiasm uttered by publicity conscious executives in the services sector in particular. To its credit the Oppenheimer family, however, has taken stock and said hang on - there are no free lunches and there is a cost to the economy.

There are four linked proposals:

• One is to balance the immediate costs of empowerment with lower rates of corporate tax for complying companies - which will also attract new investors that believe that that they could meet the compliance requirements.
• The second is to moderate the costs of empowerment to companies by a government plan to promote all available sources of equity and debt funding to close the gap in empowerment funding. For listed companies it is estimated to be some R200 billion if the targets set for mining sector are to apply.
• The third is to secure predictability for the sake of investor confidence by instituting a realistic, clear, and easily audited national transformation scorecard, with targets that will not be changed.
• The fourth is that the whole transformation policy should be subject to a sunset clause in ten to fifteen years time. Experience of affirmative action in Malaysia, India and Sri Lanka would suggest that this proposal is least likely to gain acceptance.

In return the proposal would commit companies to resolute empowerment programmes. It estimates that the members joining the initiative could expand by some six per cent annually, and goes as far as to suggest tax penalties for non-compliances after a period of grace.

By encouraging a system that is agreed to by both business and government, and from which both business and government benefit, it is hoped to demonstrate a stable pact - a formula for predictability, for lowering political risk and hence for raising investor confidence.

If the initiative were to succeed in establishing company tax rates as the sole form of political leverage on business and the government were to relax its other interventions on behalf of empowerment, large sections of industry subject to state procurement formulae might rejoice. This, however, is a very remote possibility.

The downsides

There is a risk that government may accept the deal but retain all its current additional requirements for state contracts and manipulate them to raise the thresholds of empowerment outside of the "scorecard". But since it can do that anyway, and has plans to escalate these requirements over time, this risk cannot be laid at the door of the Brenthurst initiative.

If the "scorecard" retains the weightings in the current guidelines of the Broad-based Black Economic Empowerment Strategy, skills constraints will become even more of a hidden cost in doing business. What is missing from the initiative, therefore, is an emphasis on incentives for training and human resource development. Already employment equity is scraping the bottom of the barrel of scarce experience and ready-to-apply skills.

Smaller companies, and particularly new start-up ventures, for which tax incentives are not a major issue, may be subject to the agreed transformation requirements. For small companies the relative costs of compliance will be higher than in the corporate sector. In fairness, however, the proposal recommends flexibility that will allow these kinds of drawbacks to be minimised.

At the presentation there were warnings by FW de Klerk, Mangosuthu Buthelezi and Tony Leon that important priorities are not covered, some of which, like crime and corruption, affect investor confidence at least to the same extent as empowerment. I got the impression, however, that these warnings were not felt to be helpful by some of the already empowered guests. The proposal merely makes mention of these other priorities for later debate.

But these drawbacks are correctable. There are deeper costs that are not easily reversed - the bad news to which I referred at the outset. These deeper costs are political and in the longer run they will cap the economy as effectively as current risk ratings.

Without intending it, governments are attracted by what they are good at. Our government is not very good at grass roots development and already much better at symbolic transformation and the empowerment of its non-poor supporters. The sheer power of the Brenthurst proposal drags it further towards elite and upper level empowerment and further way from our most critical mass problems like unemployment.

At the same time this form of business-government "pact" draws the country as a whole closer to those countries in which vital issues are decided in top-level deal making. These systems are often called corporatist or "illiberal" democracies. There are more of them in the world than liberal democracies. Hence there is very little joy in the Brenthurst Initiative for liberal democrats, or dedicated socialists for that matter. Liberal democrats have to face the reality that in our society as in many others, deal-making and cartel formation is much more alluring than the untidy creativity of political freedom and market competition.

While I fully understand the need for and the inevitability of the Brenthurst initiative, I left the event with both pessimism and hope.