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There are certain concerns that are expressed that BEE is a heavy cost to the economy. It

is therefore interesting to quantify the costs of BEE by focusing on the ownership

element. The analysis shall focus on the banking sector especially on the big four banksas the have all concluded BEE deals. The circulars sent to the shareholders details two

types of costs associated with BEE deals. The first type relates to the costs that are paid

out in cash to third parties and the second type to the broad concept called the economiccost. The paid out costs are easy to quantify as they relate to amounts paid to advisors,

publishing costs and taxes paid as a result of the deal among other costs. The economic

costs vary for the different companies and will be explored below.

Absa was the first of the big four to announce a BEE deal and their deal resulted in the

issuance of redeemable preference shares which had an option attached to them. The

value that was attributed to the option using the Binomial Pricing Theory was R10.67which translated to R858.6 million being 2.8% of Absa market capitalization at the date

of the deal. This was the only factor taken into account is arriving at the economic cost.

The actual costs paid to third parties for the proposed transactions amounted to R13.5

million. These costs comprised professional fees, publishing costs and statutory feeswhich are all not tax deductible. Furthermore a once-off taxable bonus of R19.8 million

was paid to qualifying employees. Therefore the total paid out costs incurred by ABSAamounted to R33.3 million.

Standard Bank had much extensive disclosure in their circular around the costs incurredfor their BEE deal. The circular stated, Standard Bank Group has estimated the

economic cost of the scheme, black ownership initiative and the General Staff Scheme,

both incurred and potentialusing recognised financial risk pricing methodologies and

assumptions, to be R1 605 million. This cost translates to 2.8% of the marketcapitalization as at 9 July 2004. The actual costs paid out to third parties amounted to

R34,4 million and related to publishing costs, professional advisors and taxes. The taxessuch as stamp duty and uncertificated securities tax amounted to 59% of all costsincurred.

Firstrand estimated the economic cost of its BEE transaction to be arising from a dilutionof 2.1% arising from the specific issue and the present value of the opportunity cost for

FirstRand of funding the Staff Trusts. This was estimated as the differential between

FirstRands cost of equity and the effective return it will receive in respect of the funding

it will provide to the Staff Trusts. In total, FirstRand estimates the economic cost of theBEE transaction to be 3.15% of market capitalisation. This is based on the scheme

consideration of R12.28 per share and ignores any costs or taxes that may be attributable

to shareholders. This value also ignored the potential future value to be added toFirstRand arising out of the participation of the BEE Trusts in FirstRand. The costs of the

scheme and the specific issue, including the legal costs and printing and publishing costs

will be borne by the FirstRand Empowerment Trust. The costs of professional advisorswill be borne by FirstRand. The total estimated costs were R30 million.

Nedbanks estimated economic cost of their BEE Transaction using recognised financial

risk pricing and valuation methodologies is R968 million. This translates into 3.66% of

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the value of Nedcors South African businesses. Furthermore the actual costs incurred

that are not capitalized amounted to R33 million, which also include the incentive fee for

the Black Business Partners of R13 million and divided declared to the trust amounting toR3 million.

It is interesting to note that the average economic cost arising from the above transactionsis estimated to be approximately 3.1% and is determined using different measurement

bases. The average costs paid out to third parties amount to R32 million. However

research on the effect of BEE deal on share prices indicate that on average companiesshows an 11.4% abnormal return in the 41 weeks around a BEE deal. These 41 weeks

takes 20 weeks before the BEE deal and 20 weeks after the BEE deal into account. These

movements in the share prices isolate other factors that would affect the price movement

in order to determine the effect of BEE deals on the share prices. This research showedthat those companies that claim first-mover advantage in their empowerment deals tend

to show greater jump in their share price.

In conclusion the average economic cost of 3% borne by the shareholders is more thanoffset by the movement of an average of 11.4% in the value of their shares. This shows

that it does pay to effect BEE deals, whether they are sustainable or not is anotherquestion.