Empowerment funding could hurt Financial Institutions

Posted by Transcend
Thursday, 14 March 2013  |  Comments

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THE Banking Association of South Africa has warned that a provision in the Broad-Based Black Economic Empowerment (BEE) Bill, which will allow organs of state and public entities to cancel contracts awarded if the winning bidder had misrepresented its empowerment status, would pose risks for banks which financed the deals.

The association’s MD, Cas Coovadia, said during public hearings of the trade and industry committee on the bill on Wednesday, that the introduction of this new clause could make financial institutions more risk-averse in funding working capital, which would negatively affect empowerment financing.

"This proposed new section may have unintended consequences for financial institutions where a financial institution has provided debt or other financing against revenues expected to be generated from the contract in question. The right of cancellation creates a risk for third parties such as funders," Mr Coovadia said.

A fine or penalty would be a preferable form of sanction. The association generally supported the bill though urged that the overly broad definition of fronting be made more precise to create certainty.

Business Unity South Africa executive Vanessa Phala objected to the bill’s linking the fines of companies found guilty of fronting to turnover (a maximum of 10% of annual turnover is proposed), saying turnover had no direct relationship with the offence. A turnover-linked fine would have the unintended consequence of harming the business and discouraging investment, and could lead to job losses.

Ms Phala suggested the fines should rather be multiples of the value of the contract.

Solidarity senior researcher Piet le Roux said the bill should be withdrawn in its entirety as empowerment amounted to the political allocation of resources which was not efficient and would increase the cost of goods to consumers regardless of colour. He said the bill was "an attempt to redirect resources away from more entrepreneurial and towards less entrepreneurial recipients. It is about the replacement of consumer-led resource allocation with politically led resource allocation," he said.

Even if the empowerment beneficiary was only slightly less efficient than the most entrepreneurial firm, the accumulated additional cost of this difference to the consumer would, over time, be significant.

MPs opposed this, stressing the need to redress the politically engineered legacy of the past which had distorted the market.

American Chamber of Commerce representative Shibishi Maruatona emphasised that foreign investors required policy certainty, clarity and simplicity.

A number of the chamber’s members had decided to set up business in Kenya rather than South Africa because of South Africa’s policy uncertainty and regulatory burden, the future of which they could not quantify.

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