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As a result of some inquiries of how do you measure the wealth created through BEE forblack individuals, I would like to explore the dynamics of BEE wealth creation in abroader context.

With the BEE deals that get concluded the legal ownership of the shares is typically

transferred to the black shareholder purchasing that stake and the financing is providedeither by the company or a third party financier. The financing that is provided by thecompany whose assets are being bought by the black shareholders is called vendorfinancing. The debt that is used to pay for the shares is repaid over a period of time afteraccounting for key factors such as the cost of financing and the rate of return on thoseshares that would be used to pay the financing cost and the original debt owed. What hasmade BEE deals to fail in the past was that the cashflows arising from the shares wereless than the cost of financing those shares, which meant that there was not enoughmoney to pay the original debt leading to a situation where the portion of the unpaidinterest accumulated over a period of time. Therefore any future payments made by theblack shareholder to the financier would first be applied to the previously unpaid interest

with the remaining portion applied to the current interest and the original debt.

The failures of the past has led to a new approach to structuring BEE deals, which nowtakes into account what is the wealth that is created for the black shareholders. Thiswealth is contained in the age-old concept known as net equity. In simple terms netequity is the current value of assets less the current value of liabilities. When anindividual has more assets than liabilities they would have a positive net equity and if itthe other way round the individual may be technically insolvent. This net equity conceptthen becomes a true measure of an individuals net worth. For most black individualsinvolved in BEE deals this net worth is mostly paper wealth because it is not realized ascash. For this wealth to be realized as cash they would have to sell their shares however

this would make the company they hold shares in to lose its BEE credentials. Thereforecompanies have lock-in provisions which prevent black people from selling their shareswithin a certain period of time so that the company will not lose its BEE status.

The other implication of the net equity principle for BEE is that it offers a goodapproximation of the wealth that gets created for the black shareholders over time. Thismeans that the more the assets are increasing and the more the liabilities are decreasingthe more wealth gets created. A long time ago a comment attributable to Tokyo Sexwalewas to the effect of People never see the mountains of debt that are behind the billionrand deals. This comment is spot-on because in an environment where there is no blackcapital every deal that gets consummated is made possible by a combination of debt anddiscounts on the purchase price. In reality there is no such thing as a free lunch when itcomes to BEE deals because every cent that is given for free has an obligation attached toit. The bottom line is that you either pay your own cash for the full value of the asset orexchange an asset of an equivalent amount or you borrow from third parties who willimpose their own conditions.

So what is the level of wealth creation from BEE? The Capgemini and Merrill Lynchs2005 Wealth Report shows that there has been incredible growth in people (known as

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high net worth individuals) within South Africa that have accumulated more than US$1million (approximately R6.5 million) in financial assets. They show a 21.6 % increase inthe number of high net worth individuals (HNWI) from 2003 to 2004 in South Africa anda 17.3% increase in wealth for the African continent. This could mean that someindividuals included in those numbers got there because of BEE which may also include

white shareholders who sold their stakes to black people. What fueled this growth forSouth Africa was the good performance of the JSE which saw its market capitalizationincrease by 163% in 2004.

The real test of BEE wealth creation is whether the outcomes of BEE will result in blackpeople being Balance Sheet Affluent or being Income Statement Affluent and this willmake all the difference. The former ensures the building of sustainable black capital andthe latter will be a testimony of high incomes linked to high consumption leading topossibly to heavy indebtedness by black people to support the high consumption levels.