Saturday, December 5, 2015

Black Industrialists Programme: Help or handouts

From: Financial Mail
By: Sikonathi Mantshantsha and Phakmisa Ndzamela, December 03 2015, 07:14

Government’s long-awaited initiative to launch 100 major black industrial companies is expected to be unveiled next week by department of trade & industry (DTI) minister Rob Davies and his deputy, Mzwandile Masina.
The idea is to expand SA’s industrial base and change the skewed ownership and control of the economy, still largely in white hands two decades after apartheid.
It springs from President Jacob Zuma’s misgivings, expressed on various occasions over the past four years, that there are “no visible black industrialists [or] large factories or mines that are owned by black people or women”. The aim is to fund at least 100 black-owned companies, transforming them into large concerns which, in Zuma’s words, “manufacture goods the market requires”.
Government also realises SA needs to move, and fast, beyond the first wave of black economic empowerment (BEE) of the past 20 years. There have been important achievements in diversifying the economy and bringing the previously disadvantaged black population into the mainstream economy. The black middle class has grown significantly.
Early last year the African Development Bank put the number of South Africans who can be described as middle class at 19,8% of the population, or about 9,8m people. In 1993 the figure was 3,6m, of which 116000 were black. Today the black middle class numbers 4m.
But with economic growth slowing to just under 1% (annualised) in the third quarter, the ANC knows it has to crank up the growth rate — partly to keep the black middle class on side but also to improve the prospects of the poor, unemployed masses. Past successes don’t guarantee loyalty to the incumbent government forever.
While the SA economy has more than doubled since the transition to democracy, the growth rate has slowed.
In the decade since 1994, GDP growth averaged 3%/year to 2005, peaking at 5% in 2007, according to a paper by Stellenbosch University professor Stan du Plessis and Prof Ben Smit of the Bureau for Economic Research.
With mining and commodity prices in the doldrums and shedding jobs, the need to find alternatives cannot be overstated.
Government, however, puts another spin on the matter, choosing instead to term its newest initiative an attempt to redress the economic imbalances of the past. “In this context (of historical apartheid), the state has a moral obligation to creatively harness national resources towards the resolution of the historical injustice of racial, gender and class exclusion in all spheres of life,” reads a paper prepared for the DTI’s Black Industrialists indaba held earlier this year.
“In the realm of economic life, this implies the need to transform the patterns of asset ownership in a manner that reinforces the national objective of building a society that truly belongs to all who live in it,” says the document, echoing the Freedom Charter.
Countries that grow the fastest are those that include the majority of the people in the economy, says Malebo Mabitje-Thompson, deputy director-general for industrial development incentive administration at the DTI. “And for the economy to grow and create jobs, SA’s industrial sectors need to open up to include entrepreneurs who were previously disadvantaged.”
Enter the black industrialists programme.
Government has said it will set aside R1bn during its first year to fund the companies concerned. The state hopes to use its procurement muscle to give these companies a leg-up initially, says Ajay Lalu, MD of Black Lite, a consultancy that also owns a controlling stake in a photovoltaic manufacturing company.
The black industrialists framework is in the process of being gazetted, following approval by cabinet last month. Among other things it will officially define what a black industrialist is, who qualifies, how this class of business people will be chosen and which sectors will be targeted.
“The state is to use its procurement might to create something that did not exist,” says Lalu, who has played an advisory role on various BEE initiatives. His consultancy has been involved in framing the policy. “These will be the first opportunities and they will be linked to government procurement programmes and public partnership procurement programmes.”
While the R1bn may be too small to effectively facilitate a capital-intensive industry, it is just the start. “The way it has been termed is that the R1bn will grant funding to 100 companies during the first year,” says Lalu. It should be the first of many funding initiatives, he adds.
That start-up capital is expected to unlock more sustainable, co-ordinated and vastly larger sums of money, initially estimated at R10bn-R30bn from funding institutions like the Industrial Development Corp (IDC); the National Empowerment Fund (NEF); the Public Investment Corp; and commercial banks.
Of all the funding institutions, the IDC is best placed to spearhead and execute the programme. It has been at the forefront of developmental funding for 75 years, during which time it has learnt from various initiatives and gained valuable experience, says CE Geoff Qhena (see page 23).
“We have the experience and know now what did not work very well in the various past empowerment exercises,” says Qhena. Most importantly, the IDC is fulfilling its mandate as it was created by legislation to fund industrial activity, he says. “We have a long-term outlook. We are long-term investors. And this is not going be to a quick process,” says Qhena.
Economic development minister Ebrahim Patel announced in parliament in May that the IDC would set aside R23bn to fund the black industrialists programme over the next five years. In addition, the IDC has committed to fund expansionary investments by R100bn over the same period. That would go to all industry players, says Qhena.
SA’s commercial banks are also having discussions at the Financial Sector Council, a platform seeking to drive transformation in the financial services sector, on what role banks can play in the programme.
So what is the definition of a black industrialist company? How different will this programme be from the existing empowerment schemes? And how did this programme come about? There are mixed views on the genesis of the term “black industrialist” and how it came about.
In September 2011, two years into his first term as head of state, Zuma addressed a Confederation of Black Business Organisations at Eskom’s head office.
He said though many black people had penetrated various sectors of the economy since the advent of democracy, “there are no visible black industrialists ... [and] we have to develop the black industrial sector. The economy must produce authentic black entrepreneurs, who own factories and manufacture textiles, furniture, metal products or whatever the market requires.” Zuma decried the fact that BEE policies had produced a number of wealthy rent-seeking black capitalists, some of whom were passive investors, or who sit on various boards as directors, or receive hefty dividends, but have no operational experience or significant control of the businesses.
The NEF, a development finance institution created to advance the participation of black people in the economy, maintains it was one of the first to call for the development and support of black industrialists. It says that through its Strategic Projects Fund, together with local and international investors, it developed 21 strategic and industrial projects worth R32bn, with the potential to support more than 80000 jobs.
“We have been doing it and it just shows we have a lot of forward-looking people in the NEF,” says CE Philisiwe Mthethwa. The NEF, though, remains undercapitalised and will battle to play a meaningful role if resources are not allocated, she adds.
Whoever it was who first came up with the “black industrialists” idea, it has now been accepted and worked into government policy. The DTI and the Black Business Council have been working together and have developed a framework that sets the tone on the black industrialists agenda.
In its concept and policy framework, the DTI defines black industrialists as: “Black people directly involved in the origination, creation, significant ownership, management and operation of industrial enterprises that derive value from the manufacturing of goods and services at a large scale; acting to unlock the productive potential of our country’s capital assets for massive employment locally.”
The DTI and IDC documents define a black industrialist as an entity that is at least 50% owned by black participants who are also actively involved in the management and operations of a business.
The programme will pay attention to new industries, such as those that service the renewable energy sector, and opportunities that may arise from the procurement of nuclear power stations next year.
The IDC emphasises that simply owning a majority stake in an industrial business does not qualify one as a black industrialist. It wants active participation at board and operational level.
“In the past we saw that only owning stakes was not sustainable. People were still left without any operational experience after we funded them,” says Qhena.
The policy has its critics, however, who feel it is not government’s role to “legislate entrepreneurs into existence”.
Political analyst Moeletsi Mbeki says the ANC does not seem to understand how capitalism works. “I am surprised it does not understand what capitalism is. The ANC was started by a capitalist class who started businesses. They were industrialists. They did not go to Paul Kruger and say, can I set up my printing and publishing business?” The capitalist system works through innovation and is driven by individuals; it is entrepreneurs who must come up with ideas, and not government. “Governments don’t innovate, they administer,” he says.
“The idea that the ANC government can create industrialists is laughable. John Dube (founding president of the ANC) did not go to the colonialists and say, give me money to set up printers for iLanga (LaseNatal, the first Zulu newspaper in 1903).”
So how would rising black businesses overcome the challenge of access to funding and markets if government did not intervene? “We need our financial institutions, private financial institutions, to come to the party,” says Mbeki. “The public development finance institutions have a trail of politicians behind them and you have to give shares to aunts or uncles.” If entrepreneurs are not getting loans from commercial banks then this is an opportunity to set up other financial institutions, to meet the needs of the neglected entrepreneurs, he says.
The IDC’s Qhena counters the insinuation of political influence, saying the IDC has processes and policies in place to guard against influence-peddling. But more importantly: “If it is not a commercially viable idea, the IDC does not and will not fund it,” he says. The IDC’s strong balance sheet, with total net assets exceeding R120bn in the year ended March, is evidence of its strict commercial practices.
GT Ferreira, who famously co-founded FirstRand with just R10000, says he supports the principle, but a lot depends on how it is implemented. “It’s a good idea to be able to put some risk money behind people, but you’d like to see that they’ve proven themselves in even a little way first. Because not everyone can become an industrialist or entrepreneur,” he says. The trick is to find the right “filtering” mechanism to ensure that even if there are a few failures, you’ll end up with some successes.
“You need this, because to just give money to people and say, go and become an industrialist, simply won’t work. It’s never worked anywhere in the world.”
Ferreira should know — he spent a decade on the board of the IDC, both before and after democracy in 1994. “The IDC is probably the best institution to roll out that kind of plan. Also companies like Business Partners (now owned by Remgro) have been very successful,” he says.
When contacted, leading businessman Johann Rupert said he had no comment, other than to say he had never had anything but antagonism from the National Party government.
Many compare the plans to promote black industrialists to the support given by the National Party to Afrikaner businessmen. This dates back to 1939, when the Afrikaner Broederbond held an Ekonomiese Volkskongres (Economic People’s Congress) which made dramatic declarations about the need to push for Afrikaner industrialists.
At the time, future finance minister Eben Dönges said the economic plan was “to increase by tenfold the number of Afrikaner employers in commerce and industry”. By the 1960s, prime minister Hendrik Verwoerd was bragging that the Afrikaner share of the financial sector had more than doubled to 13% from 1948 to 1961. The principle was of “favouring” Afrikaner business over “English” business, mainly, while doing its best to eradicate business run or owned by blacks, coloureds or Indians.
There are questions over how the 100 black industrialists will be chosen. “The biggest threat to this scheme comes from politicians masquerading as entrepreneurs. We have to vigorously guard against that,” says Lalu.
There is concern that billions of rand in government resources will be used to dispense patronage to people who may not meet the requirements.
The DTI’s Mabitje-Thompson says the economy pays a price for the “exclusion” of people who have no access to credit opportunities. “We will have a fairly open and transparent process [and] no politician will sit in on it. This is not a government pension scheme for the rich.”
She says the black industrialists incentive programme will be run in a similar way to the DTI’s other incentive programmes, which have benefited many, including multinational automakers and other manufacturers. Those incentive schemes allocate about R5bn a year to beneficiaries in sectors such as clothing, auto and film.
Supporters of the plan are dismayed at the way the debate has unfolded and feel the criticism smacks of hypocrisy by those who do not want to advance transformation.
“Just because it’s going to benefit people who were previously excluded does not make it synonymous with patronage,” says Mabitje-Thompson.
Black Business Council vice-president Sandile Zungu says: “The worthiness of the applicant’s business, the vision and the positioning must account. If someone wants to start a shoe factory in the face of cheap imports from the East they have to be looked at with a jaundiced eye. The business advisers must be cushioned from influences that have the potential to make the black industrialists programme inefficient and a drain to resources.”
Zungu says people who are not needed are those who win state contracts, then pass it on to bigger established industrial players and simply wait for a margin without getting their hands dirty.
It is hoped that the launch of the black industrialists programme next week will answer some questions. But most importantly, it is how the programme will be executed that could determine whether SA can sustainably move to a higher gear in the growth and developmental stakes.

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