No easy money here.

Read this brilliant article about BEE. In it, BEE is likened to masturbating, “it only gives you the illusion of the real thing.

I think that the sooner we wake up and realise, as a country, that there is no such thing as a “quick buck”, the better. BEE, just like the sub-prime market in the US is heading for the rocks.

In the sub-prime market, banks were prepared to lend money to even the unemployed to buy houses because they knew that with residential house prices increasing at double digit percentages, even if the borrower never even managed one single repayment, they’d be fine, because the capital appreciation of the house would more than offset the lost interest. This all went well for a while while prices (you notice I don’t say, values) were increasing at 15-30% per annum, but when the worm turned and prices started dropping, the banks equity in these deals started looking rather bleak.

South African BEE deals are no different. Here is a simple little example;

Koos owns a company that has dealt with a local authority for years. Suddenly out of the blue, he is advised that unless he becomes BEE-compliant, he will lose this lucrative contract. Sipho, who has worked at his side for many years, is offered a share in the company in order to meet the BEE targets. The auditors of the company value the business at R10M and Sipho takes over 51% of the company at a price of R5.1M. He obviously doesn’t have this kind of money available in cash, so a loan account is opened for him in the company, ie. his loan account is debited and Koos’ is credited. The loan account attracts interest at 10% PA, so that the loan is not deemed a donation by SARS.

Koos and Sipho continue to draw their normal salaries relative to their jobs and let’s assume that they spend it all every month. Now let’s say that they have a good year and make R1M profit. Sipho gets R510 000 and Koos gets R490 000. Sipho has to pay the interest on his loan account (ie 10%PA) so in this “good” year he ends up paying his R510 000 “profit” back to Koos as interest. All is not doom and gloom, because let’s say that at the end of this good year they get an offer of R12M for the company and accept it – remember the auditor only valued it at R10M, but hey, it’s been a good year for the company. In this scenario, Sipho gets R6.12M, repays his loan to Koos of R5.1M and pockets a cool R1.02M just for being the right guy with a black face in the right place.

Now this is all very well, but what if the economy turns downwards (which it has) and they only make R500 000 profit? Well Sipho gets 51%, ie. R255 000 but still has to pay Koos R510 000 interest on his loan. He is short of R255 000, which he clearly doesn’t have, so the loan account just gets hit again, taking his commitment to Koos up to R5.355M. They decide to sell and get out while they can and the best offer they get is R8M which they take before things get even worse. Sipho gets R4.08M, but he owes Koos R5.355M and ends up indebted to the tune of R1.275M and suddenly being a “black diamond” doesn’t seem like so much fun anymore.

In this little example, the banks aren’t even involved, Koos lends the money to Sipho personally. Once the banks get their claws into these deals (and the numbers are in billions and not just millions) the numbers just get stupid and I know that there are hundreds of BEE deals unravelling right now, as the economy turns, inflation rises and the Reserve Banks notches up the interest rates.

Have we achieved anything by BEE or have we just been jerking off pretending to be rich?

The author of the article suggests that aspiring young (or not so young) blacks rather enter a trade and start up their own small businesses from scratch, an idea that I whole-heartedly agree with.

There is no easy money here.



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