How Broad-based Ownership Schemes could mitigate the crippling impact of US aid cuts
Like most people, I was shocked by US President Trump’s unexpected cut in foreign aid. I knew South Africa would be impacted but was curious about just how far this could affect us. I was surprised to find out that a massive proportion of USA aid to South Africa focuses on HIV and Aids support, and that more than 50% of South Africa’s funding of HIV/AIDS programmes comes from the USA.
Around 17% of South Africa’s adult population is living with HIV. This is one of the highest HIV prevalence rates globally, and with closed or weakened NGOs, we run the risk of undoing the gains made and facing increased HIV infection as well as a severe escalation in mortality rates.
Shaun Smit
Director at Transcend Capital
US aid to South Africa isn’t just regarding HIV and Aids. Among other things, it extends to broader healthcare infrastructure, like training of healthcare professionals and the enhancement of healthcare services, as well as education and economic development.
In its dire financial position, the South African government can’t itself afford to fill the void left by a US aid freeze, but at the same time, for the nation’s sake, we cannot afford not to. We need to look at any and all possible solutions, with one potentially being Broad-based Black Economic Empowerment (B-BBEE) and in particular Broad-based Ownership Schemes.
B-BBEE is a core policy of the South African government to drive transformation and redress the imbalances and inequality caused by Apartheid. A company’s B-BBEE status determines its ability to tender and compete for contracts, and is measured on a balanced scorecard which addresses various pillars including Ownership, Management Control, Skills Development, Enterprise and Supplier Development and Socio-Economic Development.
The Socio-Economic Development pillar entails a company itself undertaking initiatives which promote socio-economic development or alternatively the company contributing to third-party organisations which will deliver services. The scope of Socio-Economic Development is broad, but specifically includes funding education and skills development as well as supporting healthcare and HIV/AIDS programmes.
Enterprise and Supplier Development encompasses support in various forms to Black-owned businesses. No doubt a cut in US aid will impact enterprise-development initiatives, so investment in Enterprise and Supplier Development may counter-act this.
The problem is that most companies that are addressing B-BBEE are already maximising Socio-Economic Development contributions and points, and many are doing the same with regard to Enterprise Development, so there may not be significant opportunity for additional spend that mitigates the lost or at-risk US funding. There could however be optimisation or re-direction of funding for maximum impact, but this would mean that while some beneficiaries gain, some will lose.
However, where there is potential B-BBEE-linked opportunity to mitigate lost or at-risk US aid is under the “Ownership” pillar – specifically Broad-based Ownership Schemes. Such schemes enable companies to recognise Black ownership while making contributions to a broad base of beneficiaries which are essentially selected, specifically or as a class of persons, by the implementing company.
Although benefit from such schemes almost certainly will not make up for lost US aid, it could make a real difference to many lives and families. While obviously beneficial in terms of providing support which is desperately needed, broad-based ownership is arguably a strong approach to achieving B-BBEE as such beneficiaries are most often persons that are not already empowered, thus driving true broad-based empowerment and having maximum positive impact. Broad-based ownership is also attractive to the companies that implement such structures, as Ownership is a critical area of the overall B-BBEE scorecard and has a significant impact on B-BBEE outcomes. Where there isn’t clear opportunity for value-adding strategic partnerships with Black investors, multinational companies often favour achieving Black ownership recognition via broad-based vehicles like Broad-based Ownership Schemes and Employee Share Ownership Plans (ESOPs).
While Broad-based Ownership Schemes can have named beneficiaries, they do not have to. The B-BBEE Codes allow the use of classes of persons, and this then provides flexibility in optimally applying scheme benefits over the life of the scheme, by being able to target different beneficiaries and to decide on the value of support over time.
The B-BBEE Commission historically raised concern regarding the use of a class of natural persons rather than named individuals, but a 2021 practice note from the Department of Trade, Industry and Competition clarified the feasibility of the class-based approach.
Naturally, any transaction that involves transfer of shareholding can be complex and the devil is in the detail regarding optimal transaction structuring and achieving sustainable outcomes.
Despite the inherent complexity of an Ownership deal, the benefits to the company implementing the scheme and to the targeted beneficiaries may be significant – even more so in the context of US aid cuts that could mean the difference between life and death.
About the Author
Shaun Smit CA(SA), MBA – Director at Transcend Capital – With over a decade of experience in providing Employee Share Ownership Plan (ESOP) and B-BBEE transaction advisory to multinationals and South African corporates, Shaun Smit has a proven track record in crafting and executing ownership strategies aimed at fostering growth and sustained business success.
About Transcend Capital
Transcend Capital is a specialist Employee Ownership (ESOP) and B-BBEE Ownership transaction advisor, serving South Africa’s leading listed and multinational companies. Founded in 2005, Transcend Capital has successfully advised on over 200 transactions. The company utilises unparalleled expertise and experience to structure and implement value-adding ESOPs and B-BBEE transactions.
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