Black Economic Empowerment (BEE) remains a focal policy instrument of the government to achieve economic transformation in South Africa. BEE has evolved through various phases from the pre-2000 narrow-based empowerment to the post-2007 Broad-Based BEE (B-BBEE). Narrow-based BEE focused on strategic partners who were often politically connected. It was met with widespread criticism from various groupings of society. B-BBEE fosters a more inclusive approach to empowerment that seeks to include not only the majority of historically disadvantaged South Africans, but also the marginalised in society such as women, the disabled, youth and rural communities.
However, some sentiment exists that BEE policy has not brought about fundamental economic transformation. While there have been many BEE success stories, the majority of BEE transactions have resulted in black people acquiring minority equity stakes, with little or no operational control or management input and little influence over the board. It is for this reason, in addition to perceived “fronting”, that the Department of Trade and Industry (DTI) issued a ‘clarification’ notice in May, which was subsequently retracted, to try and deal with the perceived abuse of broad-based schemes. Following the announcement of a task team, it is anticipated that the DTI will closely scrutinise BEE structures and evaluate the economic impact of broad-based schemes.
In response to the challenge of not “creating” black people who own and manage businesses, the DTI is championing a Black Industrialists Programme, which aims to ensure meaningful participation of black people in the South African economy in a fundamental way. The black industrialist is not only an entrepreneur but the protagonist to accelerate South Africa’s economic growth and sustainability through structural economic reform, innovation and the creation of new industries, utilisation of the under-utilised labour market, and stimulation of entrepreneurship, all of which will be underpinned by a policy driven for economic transformation. Government seeks to create at least 100 black industrialists over the next three years. The question is how these industrialists will be identified by government.
Critical success factors to the policy lie in the definition of a black industrialist, availability and access to funding, access to markets, technical and manufacturing competitiveness in a global context, as well as collaboration between the public and private sectors. The DTI has, by in large, identified all these factors in its draft policy framework.
The draft policy framework emphasises entrepreneurial leadership, majority equity shareholding or financial interest, significant influence on strategic direction, and executive participation or managerial control over operational activities.
Equity control brings with it majority voting rights, the ability to exert influence over boards, and managerial control which includes the ability to influence the strategic direction of an entity. Equity control may not always be feasible as the black industrialist may need to include other shareholders to retain or attract relevant managerial skills, to source equity capital to fund expansion and to increase operational capacity. The level of shareholding by a black industrialist will have to be relaxed as this may present a problem in some instances. It could, for example, trigger the mandatory offer requirements, or breach the prudential/counterparty limits and industry concentrations of most financial institutions. Thus, the focus should shift from absolute shareholding levels to a more meaningful proportionate financial interest or industry value. In general, industrialists do not necessarily have to control the business throughout its life cycle.
An emphasis on executive participation or managerial control should be cautioned as, in reality, industrialists don’t necessarily have to possess majority voting rights or control over boards. By wielding managerial control over a business or its key assets, direct executive responsibility can in itself achieve government’s objectives of black entrepreneurial wealth and the grooming of black management talent.
Access to requisite funding at appropriate funding rates is paramount to the successful implementation of the Black Industrialists Programme. The DTI has earmarked R1bn of seed capital to assist the black industrialists to raise the necessary equity required to access the private sector/banking market to access debt funding. This capital would be complemented by development finance institution (DFI) funding. The Black Industrialists Programme will require support from not only state-owned enterprises (SOEs) such as the Industrial Development Corporation, National Empowerment Fund and the Public Investment Corporation, but from the broader capital markets including banks. DFIs, banks, institutional investors (including pension funds and asset managers) and private equity will all have to participate to make this vision a reality. The success of the policy will require innovative tailor-made funding solutions which address both the financial position of the entrepreneur and the economic realities of the targeted business.
The lack of equity capital will have an adverse impact on black business’ cost of debt funding. The cost of debt funding has to be subsidised or concessionary by its nature in order to align it with the targeted business’ strong balance sheets which are underpinned by legacy assets and relatively low gearing.
Furthermore, as black business will largely be emerging start-ups or expanding businesses they will require generous loan tenures. An emerging or black business also requires flexible and concessionary working capital and trade finance facilities. Many of these businesses will require concessional import/export finance and will require the contribution of domestic and foreign export credit agencies (ECAs). However, ECAs usually have tied funding and a maximum exposure of 75% to 80%, leaving the business to raise the balance of the capital required.
In order to deliver true economic value transfer, the state (including DFIs) may be required to provide more risky capital in the form of equity funding and capital investment grants. Furthermore, the state will likely have to make available funding subsidies and credit enhancements. This would reduce the perceived or increased risk profile of black business and thus unlock funding opportunities for banks to participate in a more meaningful way and de-risk the perceived lack of equity contribution from the black entrepreneur.
An emerging business also faces the challenges of access to markets. Key to reducing market barriers and improving access is the state’s own procurement policy which extends to supply agreements with SOEs, the largest of which are SAA, Eskom, SANRAL, Transnet, Prasa and Denel. Procurement policy amendments are likely to emphasise increasing the existing components of BEE. Before accessing international markets, black business will need to demonstrate competiveness in the local market and develop a strong local track-record.
As with all government policies, the success of the Black Industrialists Programme hinges on a transparent, collaborative and mutually beneficial relationship between stakeholders. Government will have to continuously align the interests of the black industrialists, financial institutions and corporate representatives for policy fulfilment. More importantly, the government (through its various departments) will have to start aligning the various policy instruments to the National Development Plan for a more sustainable and coherent economic transformative agenda.
Ernest Kwinda (left) and Puso Manthata (right) and are senior corporate finance executives, BEE Coverage at Rand Merchant Bank.
*This article first appeared in the DealMakers quarterly magazine.