Like most people, I was shocked by US President Trump’s unexpected cut in foreign aid, writes Shaun Smit, director at Transcend Capital.
I knew South Africa would be affected but was curious about just how far this could go. I was surprised to find out that a massive proportion of US 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 US.
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.
US aid to South Africa doesn’t just involve 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 afford to fill the void left by a US aid freeze by itself. 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. One of which is 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 undertaking initiatives which promote socio-economic development or alternatively 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 to Black-owned businesses in various forms. No doubt a cut in US aid will impact enterprise-development initiatives. Investment in Enterprise and Supplier Development may counteract 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. This means 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, there is potential B-BBEE-linked opportunity to mitigate lost or at-risk US aid 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.
While 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. Broad-based ownership is obviously beneficial in terms of providing support which is desperately needed.
It is also, arguably, a strong approach to achieving B-BBEE as such beneficiaries are often people 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 a 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. This 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 concerns 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.