SWELLING THE RANKS OF SA’S BLACK IN­DUS­TRI­AL­ISTS

BY MONDE MAOTO

Finweek English Edition - - INSIDE -

With the boom days over for big em­pow­er­ment trans­ac­tions with listed com­pa­nies, gov­ern­ment is in­creas­ingly us­ing state spend­ing pro­grammes, in­cen­tives and leg­is­la­tion to drive its em­pow­er­ment agenda.

The new Broad-Based Black Em­pow­er­ment (B-BBEE) Amend­ment Act and Codes of Good Prac­tice have been de­signed to place a much big­ger fo­cus on black own­er­ship, and also crim­i­nalise of­fences such as fronting. The idea is to en­force a change in spend­ing by gov­ern­ment de­part­ments and state-owned en­ter­prises like Eskom and Transnet (see box)

he depart­ment of trade and in­dus­try (dti) has com­mit­ted to cre­at­ing 100 black in­dus­tri­al­ists by 2017, in­clud­ing through the es­tab­lish­ment of its own fi­nan­cial support pro­grammes and al­ter­ing leg­is­la­tion to en­force change in spend­ing and the award­ing of li­cences by gov­ern­ment de­part­ments and state-owned en­ter­prises.

Sec­tors that have been iden­ti­fied in or­der to reach this am­bi­tious tar­get i nclude cloth­ing man­u­fac­tur­ing, re­new­able en­ergy, car man­u­fac­tur­ing, in­dus­trial chem­i­cals, agro-pro­cess­ing, forestry and ad­vanced man­u­fac­tur­ing.

The dti de­fines a black in­dus­tri­al­ist as a black per­son who is di­rectly in­volved in the orig­i­na­tion and cre­ation, sig­nif­i­cant own­er­ship, man­age­ment and op­er­a­tion of an en­ter­prise that de­rives its value from the man­u­fac­tur­ing of goods and the in­ven­tion of so­lu­tions and the pro­vi­sion of ser­vices on a large scale. This is with the ex­press aim of form­ing glob­ally com­pet­i­tive, risk­tak­ing ven­tures that re­sult in the cre­ation of jobs within the lo­cal econ­omy.

The jury may still be out as to whether the dti would be able to help build black in­dus­trial con­glom­er­ates, but there are al­ready black-owned in­dus­trial com­pa­nies ‘f ly­ing be­low the radar’ that bear tes­ta­ment to gov­ern­ment’s stated in­ten­tions to en­hance black par­tic­i­pa­tion in South Africa’s econ­omy, says Ajay Lalu, man­ag­ing di­rec­tor of black lite con­sult­ing.

Ex­am­ples in­clude Swifambo Rail Leas­ing, which was awarded a R3.5bn con­tract by the Pas­sen­ger Rail Agency of South Africa (Prasa) for 70 lo­co­mo­tives, and New Africa Rail and Ubum­bano Rail, part­ners of the Gi­bela Con­sor­tium, win­ners of a R51bn, 10-year con­tract to de­liver 3 600 coaches to Prasa.

A num­ber of black com­pa­nies will also ben­e­fit from Transnet Freight Rail’s R50bn con­tract for lo­co­mo­tives. While the con­tract was awarded to China South Rail, Bom­bardier, Gen­eral Elec­tric and China North Rail, 60% of lo­co­mo­tive com­po­nents must come from lo­cal sup­pli­ers.

Th e nu mber s in­volved in gov­ern­ment’s in­fra­struc­ture spend­ing pro­grammes are huge. It has bud­geted R208.4bn for in­fra­struc­ture spend­ing on lo­gis­tics, en­ergy and wa­ter next year and R222.4bn for 2016. .

Lob­by­ing by the BlackT Business Coun­cil for t he for ma­tion of a gov­ern­ment depart­ment that sup­ports the de­vel­op­ment of small busi­nesses also high­lighted a grow­ing ap­petite by en­trepreneurs to ac­tively par­tic­i­pate in the op­er­a­tional ac­tiv­i­ties of the com­pa­nies they invest in.

This i s op­posed to t he arm’slength ap­proach that en­tailed board rep­re­sen­ta­tion, which in some in­stances en­tailed non-ex­ec­u­tive di­rec­tor­ships,

that where adopted in pre­vi­ous BEE trans­ac­tions.

“For­get about what they have done. Let’s look at what they have achieved over the years to be­come op­er­a­tionally in­volved,” says Lalu.

As the avail­abil­ity of black cap­i­tal re­mains a chal­lenge, it is also us­ing its f inance in­sti­tu­tions, such as the In­dus­trial De­vel­op­ment Cor­po­ra­tion (IDC), the Na­tional Em­pow­er­ment Fund (NEF), the De­vel­op­ment Bank of South­ern Africa (DBSA), Land Bank and the Pub­lic In­vest­ment Cor­po­ra­tion (PIC), to help drive change

While a num­ber of ma­jor JSE-listed com­pa­nies still haven’t done em­pow­er­ment deals, for ex­am­ple ArcelorMit­tal South Africa (Amsa) and a num­ber of re­tail play­ers, it is largely play­ers in un­reg­u­lated sec­tors that are not hugely re­liant on gov­ern­ment spend­ing.

Oth­ers, no­tably min­ing com­pa­nies, have been un­der more pres­sure to com­ply with B-BBEE leg­is­la­tion. The Min­ing Char­ter, for ex­am­ple, re­quires 26% black own­er­ship by year end, lead­ing to a f lurry of re­cent deals as com­pa­nies try to build up points, no­tably Lon­min and Northam Plat­inum.

Although the past 20 years have seen a num­ber of heav­ily en­cum­bered em­pow­er­ment part­ner­ships be­ing formed, there is also ev­i­dence of black-owned en­ti­ties that have mor­phed their share­hold­ings into value-cre­at­ing as­sets to cre­ate di­ver­si­fied in­dus­trial groups, Lalu said.

Ex­am­ples in­clude Shan­duka Hold­ings, Kag­iso Tiso Hold­ings and Royal Bafo­keng Hold­ings, which used the op­por­tu­ni­ties cre­ated by B-BBEE leg­is­la­tion to di­ver­sify their hold­ings. Shan­duka and Kag­iso Tiso have also been ex­pand­ing out­side SA, lever­ag­ing their strong bal­ance sheets.

While the new B-BBBEE rules have been widely wel­comed by black in­dus­try bod­ies, crit­ics say that it will add to the reg­u­la­tory bur­den and may stif le much-needed di­rect in­vest­ment.

Nige­rian Aliko Dan­gote, Africa’s rich­est man, has been one of the high­est-pro­file in­ter­na­tional crit­ics of the

coun­try’s BEE laws, com­par­ing it to a “forced mar­riage”. In an in­ter­view last year with Business Day, Dan­gote said it cre­ates an ob­sta­cle to in­vest­ment into SA from the rest of the con­ti­nent while it fails to cre­ate real broad-based eco­nomic em­pow­er­ment. Only about 5%-10% of South Africans ben­e­fit from B-BBEE, Dan­gote said.

Anthea Jef­frey, re­searcher at the South African In­stit ute of Race Re­la­tions and au­thor of the re­cently pub­lished BEE: Help­ing or Hurt­ing, said that the new leg­is­la­tion is un­likely to bring about rea l broad- based em­pow­er­ment while cre­at­ing more un­cer­tainty for in­vestors. The def­i­ni­tion of fronting, for ex­am­ple, is very vague and the of­fence car­ries heavy penal­ties, but it is not clear how the rules will be en­forced in prac­tice, she said.

“If you look at South Africa cur­rently, where we sit with labour in­sta­bil­ity, poor growth, poor skills and then on top of that you place very strict em­pow­er­ment rules – that is a bad mes­sage to send out.”

The fo­cus should in­stead be on eco­nomic em­pow­er­ment for the dis­ad­van­tages, look­ing at key in­puts such as ed­u­ca­tion. “If you give par­ents a voucher of R12 000 a child to pay for ed­u­ca­tion, which is roughly what gov­ern­ment spends a year, you will sud­denly see schools com­pet­ing to at­tract learn­ers and the qual­ity of ed­u­ca­tion go­ing up.”

SIPHO NKOSI

Es­ti­mated net worth: $163m

Min­ing

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