By Soria Hay, Head of Corporate Finance, Bravura
As South African elections creep closer, the issue of black ownership continues to be a dominant aspect within the country’s transformation landscape. This was clearly articulated in the ANC 2019 election manifesto address by President Cyril Ramaphosa when he reaffirmed government’s commitment to working with the financial sector to increase industrial and enterprise financing for black industrialists as well as small businesses and cooperatives.
The Broad-Based Black Economic Empowerment (B- BBEE) Strategy is now going into its sixteenth year of existence, with the first B-BBEE codes having been published over a decade ago in 2007. Protracted negotiations on the various industry sector empowerment charters took place and vast sums of money have been committed to B-BBEE. Despite this, the evidence on performance suggests that the best endeavours have produced patchy outcomes, at best.
Black economic empowerment policies have not lived up to the expectation of bringing fundamental economic transformation to corporate South Africa. Although there are a number of B-BBEE success stories, many of these 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 of directors in the entity.
Director-General of the Department of Trade & Industry (dti), Lionel October, has said that this country’s BEE policies have “resulted in empowerment partners becoming ‘junior’ partners in other people’s companies”.
Thus, there is now a strong drive towards black entrepreneurs owning ‘real assets’ rather than minority stakes in enterprises they did not establish. In support of this, the dti is putting significant effort into its black industrialist incentive programme to achieve what B-BBEE empowerment policies have so far failed to achieve – genuine and sustainable transformation.
The dti’s multibillion-rand Black Industrialist Policy was established in 2015 with the stated intention to promote the creation and long-term sustainability of black industrialists. It describes black industrialists as black people directly involved in the origination, creation, significant ownership, management and operation of industrial enterprises.
The dti set an original target of supporting 100 black industrialists by March 2018, funding black businesses with the potential to become large and dynamic enterprises. The policy emphasises entrepreneurial leadership, majority equity shareholding or financial interest, significant influence on strategic direction, and executive participation or managerial control over operational activities.
If direct ownership of companies and active involvement in strategic decision-making are crucial to ensuring genuine economic transformation, it is important for business and government to be clear on the intent, definitions and requirements of the black industrialist programme, and how it is differentiated from overall transformation and B-BBEE drivers.
How is a black industrialist identified?
The dti describes black industrialists as “black South Africans who own and, through significant shareholding, control an enterprise whose products are significantly used and have a considerable impact on decent employment and create broad-based economic opportunities”.
As such, black industrialists must be directly involved in the strategic and operational leadership of the operation and have the requisite expertise. They should take personal risk in the business and be locked in for a reasonable time-frame to the entity. The dti policy requires black industrialists to have a high level of ownership (>50%) and/or exercise control over the business.
The dti policy targets entities or individuals that have extensive experience, operations and track record in their respective or envisaged industrial sectors and value chains. Within ten years of being on the programme, it is expected that the entities supported will expand their current operations to become major players in the domestic and/or global markets; start a new operation or business that can enable them to become major players; or acquire an existing or new business that can enable them to become major players.
How are black industrialists financed?
The challenge of access to finance has been one of the main constraints confronting black entrepreneurs. Lack of equity capital also has an adverse impact on black businesses’ cost of debt funding. A contribution to equity capital reduces the risk profile of a black business and thus unlocks funding opportunities for banks to participate in a more meaningful way. Access to requisite equity and loan funding at appropriate terms is therefore paramount to the successful implementation of the Black Industrialists Programme.
The dti set aside R1 billion to invest in seed capital into qualifying black manufacturing enterprises so as to equip them with the necessary equity capital to gain access to the private banking funding sector.
The Black Industrialist Scheme (BIS), the incentive component of the policy, offers a cost-sharing grant ranging from 30% to 50% to approved entities, up to a maximum of R50 millions of project costs. This can go towards the capital investment costs, feasibility studies towards developing a bankable business plan (for up to 3% of the total investment), post-investment of up to R500 000, and business development services to a maximum of R2 million. The quantum of the grant depends on the level of black ownership and management control, the economic benefit of the project and the project value.
Beneficiaries can further apply for concessionary loan finance from the Industrial Development Corporation (IDC). The IDC set a five-year target in 2016 of R23 billion in disbursements to black industrialists, with an additional investment of R100 billion for expansion over the same period.
In the IDC’s 2018 annual report, it was reported that a further R7.9 billion (for 113 transactions) in funding has been approved for black industrialists. Economic minister Ebrahim Patel noted that since the inception of the IDC’s Black Industrialists Development Programme and based on the five-year targets set in 2015, it has approved 67% of the original amount of R23 billion.
The dti announced in October last year that it has so far financed 128 projects, surpassing its original goal of supporting 100 black industrialists, resulting in investment of R11.1bn. Since its launch in November 2015, the BIS has supported 79 projects owned by black industrialists, empowering them to leverage projected investment of R7.2 billion. These are estimated to result in the retention of almost 8 000 baseline jobs and the creation of 9 459 new jobs.
Successful recipients include multimillion-rand Microfinish Automotive in KwaZulu-Natal, which last year received R13.5 million. The business manufactures and supplies valve guides and valve seats to original vehicle manufacturers and after-market service providers to a client base that extends to Europe and the Middle East.
Another example is Maneli Pet Food which was launched in Gauteng in September 2017 and has received R50 million. Limpopo-based agro-processing company, Eastern Trading (trading as Dursot All Joy) has benefited from a R48-million grant from the dti to create 800 local jobs. The grant has enabled the company, which found a niche in the agro-processing sector, to install modern technology that enables them to triple their production outcome.
Similarly, the Land Bank administrates a dti fund aiming to assist producers who are at least 60% black with the development funding on new projects.
The dti will assist a further 100 black industrialists over the next two years. Dti minister Rob Davies has said that the slowdown in manufacturing would not slow down the government-backed funding scheme, noting that even though the economy is not performing, the country can ill-afford to hold back on what is an essential programme.
Because of high barriers to entry, limited marketing capacity, lack of capacity to explore niche and overcrowded markets, high transaction costs and poor market research, many new black entrants to the industrial sector find it difficult to access relevant markets. These factors result in limited access to appropriate networks, making market penetration extremely difficult. Barriers to entry are also created in cases where already established networks block new entrants to market.
At the Inaugural Black Industrialists Roundtable Dialogue hosted by Minister Rob Davies in October 2018, beneficiaries of the BIS highlighted in particular the problems of market access and penetration of established industries as a critical challenge for most black industrialists as they seek to expand their products and services locally and internationally. And in a recent CNN International feature on the BIS, a beneficiary of the scheme, reinforced this concern by saying, “Our biggest challenge is market access. The government thinks that they can solve our problems by just giving us funds all the time.”
Besides funding and access to markets, black industrialists benefit from important training and capacity building, matchmaking and information sharing, research and innovation support, quality standards and productivity support and economic infrastructure support – including Special Economic Zones, industrial parks and clusters. High-end operational and financial management skills are certainly required to manage critical cash flows in the low margin industrial environment, ensuring that growing enterprises can be successful.
Minister Davies has stated that despite commentators predicting that the BIS would be open to corruption and favouring those who are “politically connected”, this has proven false due to the dti’s strict due diligence and strong management oversight as evidenced in the department’s clean audit for 2017/2018.
However, media reports suggest that several of the beneficiary companies that received funds from the IDC last year involve former and present executives of a range of state-owned entities, as identified from the list of beneficiaries published on the corporation’s website.
In response, the IDC has said that politically-connected people were not automatically excluded from IDC loans, but their loan applications were subjected to stringent checks. Rather, the intention would be to ensure that the integrity of the investment decision-making process was not compromised by the presence of politically-influential persons in transactions.
The role of the private sector
The long-term success of the policy will require innovative tailor-made funding solutions that address both the financial position of the entrepreneur and the economic realities of the targeted business. The business community must think innovatively about economic participation, industrialists and how we can assist to create the next level of black entrepreneurs. There are innovative ways to structure economic inclusion.