Pillar 3: Empowerment financing – targeted investment and BEE transactions

Empowerment financing is essentially the on-balance-sheet lending Standard Bank will accumulate over the charter period (balances outstanding as at 31 December 2008). There are two categories of empowerment financing, namely, targeted investment and BEE transaction financing.

Targeted investment

The commitment to originate loans under the access pillar of the charter is mirrored by a commitment to hold a portion of the originated loans on Standard Bank’s balance sheet. The only addition in targeted investment that is not mirrored in origination is transformational infrastructure.

The difference between targeted investment and origination targets (origination targets are higher) provides banks with the opportunity to on-sell a portion of their lending portfolio to other non-originating financial institutions to hold on their balance sheets. This enables institutions like insurers to qualify for charter points under targeted investment.

BEE transaction financing

BEE transactions are defined in the charter as:

• All transactions for the acquisition, by black people, of direct ownership in an existing or new entity (other than an SME) in the financial or any other sector of the economy.
• Joint ventures with, debt financing of or other forms of credit extension to, and equity investments in BEE companies (other than SMEs).

Progress made

Standard Bank has made strong progress financing BEE transactions. In time, the bank hopes to be in a position to sell portions of the finance on its balance sheet to members of the financial sector without the capacity to originate the financing of BEE transactions.

Standard Bank played an active role in the task team responsible for developing the guiding framework for BEE transaction finance. The bank will continue to play an active role as this process unfolds. A BEE Transaction Financing Committee has been constituted as a sub-committee of the Charter Council, with representatives from the following constituencies:

• Association of Black Securities and Investment Professionals.
• The Association of Collective Investments.
• The Banking Association.
• Community.
• Labour.
• Government.
• The Life Offices Association.
• The South African Insurance Association.
• The Foreign Bankers Association of South Africa.

The committee is chaired by Standard Bank. The committee has developed a range of key interpretations around the scoring of the charter elements.

Pending a final framework, Standard Bank has begun the origination of BEE transaction finance. The bank has developed a number of focus areas within its existing business divisions. To facilitate BEE transactions of all sizes, the bank has segmented its product offerings to cater for larger and smaller deals. Larger deals that require more sophisticated structuring are managed in CIB, while smaller deals are managed in Personal & Business Banking.

The majority of BEE transaction finance provided by Standard Bank to date has been conducted by CIB. Key BEE transaction finance components are:

• Strategic Equity Investments

  Venture capital equity investments into emerging black companies, providing seed capital or expansion capital.

• Private Equity

  Co-investing with black companies to effect the acquisition of established companies by BEE entities.

• Corporate Banking Division

  Working capital finance for black companies.

• Acquisition Finance Group

  A new division that ensures the co-ordination of the bank’s debt and equity capabilities in the sphere of empowerment finance.

These divisions sit in CIB and focus on direct equity investments and large ticket transactions. For smaller transactions that cannot support the cost of specialised advice, customised structures are used to facilitate financing. Partnerships have been formed with legal and accounting firms to facilitate the efficient implementation of these deals. In addition, risk mitigation facilities have been secured with external parties.

Indicators

The industry target (still to be validated by the Charter Council) for BEE transaction financing for 2008 is R50 billion. Standard Bank’s BEE transaction financing target for 2008 is R4 billion. This target was calculated based on the bank’s percentage of total designated investments in the financial sector as at 31 December 2003.

Standard Bank has exceeded its internal target as at the end of September 2005. If the bank includes its own R4,1 billion Tutuwa ownership transaction, it would exceed its 2008 target. However, achievements need to be considered in light of the following industry issues:

• The issue of scoring self-funded transactions is still to be resolved by the Charter Council. However, for scorecard purposes self-funded transactions may be counted for the 2005 financial year.
• The majority of the origination capacity rests with banks, and accordingly banks will have to sell down some of their BEE transaction financing assets to non-originating institutions if such institutions are to meet their obligations.
• It is anticipated that deal flow will decline going forward as parties conclude their BEE ownership transactions.
• The rules relating to the financing of broad-based schemes may negatively impact on these achievements, although this is not anticipated to be material.
• Guidelines have been proposed to define broad-based schemes, as well as the number of credits allocated for including broad-based schemes in BEE transactions.
• Recommendations made to the Charter Council will need to be aligned with the newly released DTI Codes of Good Practice.

Looking forward, Standard Bank will seek to automate its accounting and monitoring process with respect to BEE transaction financing, while maintaining its deal flow and accumulation of assets. The bank will also actively pursue the sell-down of BEE transaction finance to non-originating institutions.

Transformational infrastructure balances for December 2004 were not recorded due to a lack of a measurement methodology at the time of the audit.

The BEE transaction finance balance includes approximately R4,1 billion worth of funding for the bank’s own BEE ownership transaction. The balance excluding the bank’s BEE ownership transaction amounts to approximately R3,5 billion.

Empowerment finance (Rm)

Figure 10

Empowerment financing summary scorecard