The announcement this week by South Africa's Minister of Economic Development Ebrahim Patel (pictured) that the state would set aside R23 billion ($1.9bn) over the next five years to fund black industrialists will fuel more debate on race-based finance.
The funding will make up almost a quarter of the R100 billion that the government's Industrial Development Corporation (IDC) plans to lend out over the next five years.
The government says funding black industrialists - black entrepreneurs in the manufacturing sector - will help to transform the economy and to redistribute wealth. It includes a programme launched in March by the Department of Trade and Industry to create 100 new industrialists in three years.
While some many say the state's drive to support black industrialists is racist, others (including black businessman Herman Mashaba) believe it will lead to a dependency by black industrialists on the state and drive crony capitalism and corruption.
South Africa's President Jacob Zuma in a speech in March singled out Malaysia's decades-long Bumiputera (which has helped ethnic Malays) programme which he says has served as a model for South Africa's affirmative action. But how successful has it been in transforming the economy, and at what cost?
While Malaysia's affirmative action policies like the New Economic Policy have reaped a number of benefits (such as the creation of a Malay middle-class, reduced poverty among Malays and increased Malay ownership on the stock market) the policies have also created new problems and left others unresolved (read this earlier post and this one).
Malay entrepreneurs are still predominate among owners of micro-entrepreneurs in the commerce and services sectors, while Chinese Malays overwhelmingly dominate manufacturing (see this post on how Malays entrepreneurs struggle in a similar way that black entrepreneurs in Brazil, US and SA do).
The Malaysian state's drive - a $9.5 billion Bumiputera Economic Empowerment Plan (BEEP) launched by Prime Minister Najib Razak (pictured below) in 2013 - has been slammed by Malays and non-Malays as racist, unconstitutional and economically unsustainable.
The idea is similar to South Africa's black industrialist programme - to create Malay entrepreneurs able to play a bigger part in the economy, through more financing programmes aimed specifically at Malays and quotas on getting state-owned enterprises to set aside work for Malay companies.
But Azeem Fazwan Ahmad Farouk of Sains Malaysia University argues in a 2012 paper that rather than boosting ethnic Malays, the alliance between the state and the chosen bumiputera entrepreneurs, has acted as a restraint on genuine bumiputera entrepreneurs' development.
One effect, he says, is that it has pushed many Malays into the construction sector, where the state has set-aside small contracts for bumiputeras. Like this their participation in manufacturing remains low.
Aside from the previously mentioned risks, the state's drive to finance black industrialists will likely also lead to less competitive goods and services for black firms and wastages for tax payers.
Patel said this week that the IDC will provide a 1.5% discount on the interest rate usually charged to borrowers, when it lends to black industrialists who own and control their operations. Additional discounted pricing will be given for meeting jobs, localisation and regional development targets. Such targets may look good on a businessman's business plan - whether they come about will be another thing.
In addition the Department of Trade and Industry is preparing a separate R1 billion in financing for black industrialists and plans to lend this out at between 1% and 3% - below the current rate that the Reserve Bank lends money to banks at, which is at 5.75% at present.
Discounted financing in itself may be problematic (see this earlier post on the wasted billions at Brazil's development bank) as what it comes down to effectively is free money - which will only encourage moral hazard from borrowers, as well as poor investment decisions by those handing out the money.
In addition, rather than see their money go to fund things that will benefit the public at large (such as better internet, roads, schools and hospitals), taxpayers will be forced to give large amounts of free money away to a few select entrepreneurs.
Then there is the issue of protectionism. Patel said the state is looking at various set-asides in infrastructure and other products to support black industrialists. But how will these firms be able to compete when state support is finally withdrawn? The country itself may sacrifice its competitiveness.
For the best?
The counter argument is that the South African economy remains highly concentrated. Helping to assist more black entrepreneurs could boost the economy by placing wealth into the hands of more South Africans, which could promote social progress and reduce dependence on social grants.
However more likely - as history has shown - is that support for black industrialists will concentrate wealth into the hands of ever fewer South Africans at the expense of billions of wasted taxpayers money.
Timm is a South African who writes on small business and is currently in São Paulo. Follow him on Twitter at @Smallbinsight and on Facebook.
New rules came into force for South Africa's Black Economic Empowerment (BEE) codes on May 1, but confusion over the implementation of these reveals again just how little control the state really has over its affirmative action policy.
It's this that has left the government open to manipulation by accountants and lobbyists, who are more intent on making a quick buck, and has steered the process away from one of a balanced fair one for firms.
Confusion reigned recently, until the Department of Trade and Industry (its minister Rob Davies is pictured above) issued a notice on Monday, in which among others it extended until October the date by which sector-specific BEE codes must be aligned to the codes of good practice (which affect all other sectors).
There are currently eight sectors codes covering the construction, property, transport, financial services, accounting, tourism, IT, agriculture and forestry sectors. The department wants to better align sector codes with requirements and measurements in the new BEE codes.
Until the publication of the clarification notice businesses in these sectors were uncertain over whether codes for their respective sector would still apply from this month, or whether they must switch to following the general BEE codes.
The department said in a media release on Monday (that accompanied the clarification notice) that it will release the final codes for qualifying small enterprises (firms with an annual turnover of R10 million to R50 million) by October, along with various other codes (the scorecard for specialised enterprise, the recognition in the sale of assets and the recognition of equity equivalent for multinationals).
Who's in control?
The latest saga is just one in a long line of bungling by the state. These include confusion at one time over whether small firms could rate themselves and a failure to crack down effectively on firms accused of fronting (using fake black equity partners or employing accounting tricks to gain BEE points).
In the end poorly trained state officials have opened the state to being manipulated by outsiders - accountants and black investors - who stand to win either through a steady stream of income from BEE certificates or from equity stakes in white-owned companies.
It hasn't helped that BEE has become ever more complex - involving not only the percentage of black ownership a firm has but also such areas as the number of black employees a company has, how much training it spends on black employees, as well as the time and money allocated to mentoring black entrepreneurs and buying from black enterprises.
Like this the government has had little choice but to become ever more reliant on the accountants to write the BEE codes and to even issue notices and guidelines. Some of the accountants include those that helped to author the first and recent BEE codes of good practice. If that is not a conflict of interest, what is?
Likewise the codes have created a minefield for companies, necessitating ever more reliance on accountants who often use dubious accounting tricks to help clients to score the points they need to win business with corporates and to clinch government contracts.
In addition BEE has in recent years been hijacked by the black business lobby (see this earlier post and this one too), which pressured the department to include in the codes minimum requirements for equity, in order to force all white-owned companies with an annual turnover of above R10 million to have a minimum of 10% black ownership, or risk losing BEE points.
While doing so, the codes now exempt all black-owned companies up to R50 million a year, from having to get a BEE rating - something which goes against the very principle of broad-based transformation that the initial BEE law of 2004 sought to promote.
Many analysts and consultants believe the new codes will only increase the incentive to front - to misrepresent their BEE score by using accounting tricks or by paying off a black representative to gain quick equity. This, despite fronting now having been made a criminal offence.
Over the knee
Like this it's difficult to see how the accountancy field and black investors don't have the government over their knee. What is needed are well-trained technical public servants able to guard against outside influence while being able to assert their own authority.
More importantly the country badly needs less rules and red tape, which stifle businesses. A greater effort to help grow scalable, high impact firms. South Africa needs more of such firms, Endeavor said this week, rather than simply thousands of micro-firms, if it is to create the jobs the country badly needs.
One way to do so is to increase the turnover threshold at which small businesses are exempt from having to undergo a BEE rating. Currently it's set at R10 million, with firms of between R10m to R50m being rated slightly less onerous codes.
Black business owners fare badly not just in South Africa - but in the US and Brazil too when compared to white compatriots (see this earlier post). Increasing investment in quality education, health, improving security and widening internet coverage in poorer communities may help.
South Africa's recent scourge of xenophobic violence is a warning of things to come if more jobs are not created soon enough. Piling on more rules is certainly a great way to keep jobs down.
Timm is a South African who writes on small business and is currently in São Paulo. Follow him on Twitter at @Smallbinsight and on Facebook.
South Africa’s affirmative action programme – Black Economic Empowerment (BEE) – has taken a worrying turn. Since the 1990s when the first BEE deals emerged there has been much criticism of BEE. Many say it has benefited merely a select few, who in many instances sell their black credentials to white-owned firms without active participation in the respective companies themselves.
The biggest concern now is that BEE has been captured by a black lobby group – the Black Business Council (with its secretary Sandile Zungu pictured above). Though some (eager to see the rise of more formidable black capitalists) may sing their praises, they could represent a major threat to entrepreneurship and transformation in South Africa.
The council claims that it is all for creating black entrepreneurs who can stand their own, but they continue to insist that big companies be forced to give more shareholding to black managers – essentially fuelling the very rent-seeking that the Department of Trade and Industry says it is trying to root out.
The group formed in 2011 after splitting from the country’s major business body Business Unity SA over what they saw was a failure to assist black business effectively.
Since then they have scored a number of victories after lobbying the government. These include the setting up of the small business ministry and getting the department to put in place a measure in the new BEE codes (which are expected to come into effect in May next year) to exempt all black businesses with annual sales of less than R50-million ($4.6-million) from BEE verification.
Firms are not obliged to undergo BEE verification, but big companies and the state use a points system, (termed the BEE scorecard) based on the BEE codes, when deciding who to source goods or services from.
Last year BEE analysts spoke out against the measure included in the new BEE codes to exempt black firms from with sales of less than R50-million from BEE verification.
They said it went against the broad-based nature of the codes (which incentivise companies to not only sell stakes to black partners, but also to train more black staff and assist and buy from more black businesses).
However under the new codes white-owned small businesses, with an annual turnover of above R10-million will have to fulfil more criteria if they want to avoid seeing their BEE score radically reduced. For small business this could be damaging.
At the time the former chief executive of the Black Business Council, Xolani Qubeka, said it was “grossly unfair” for black-owned firms to have to pay “up to R40,000 (about $3,700)” for a BEE rating only to get a BEE level six rating, while a white-owned company notched up a level three rating.
Capturing state money
The black lobby group is also expected to gain another way – by capturing state money going to business support programmes.
The organisation already offers an aptly named Black Industrialists Development Programme which invests in training and provides practical skills to black business owners.
But the black business lobby body's biggest drive at the moment is to get the government to set aside a certain percentage of procurement strictly for black businesses. The Department of Trade and Industry has long been against the National Treasury’s stance on set-asides.
It's deputy minister Mzwandile Masina (pictured here with DJ's Oskido and Sbu alongside him) last month claimed that big business in South Africa only gave "crumbs" to black business and that the Preferential Procurement Policy Framework Act needed to be changed to achieve South Africa’s developmental goals. "We want set asides for black people — we see it in a lot of countries, why not South Africa?"
However he is wrong. While several countries have set-asides in place to procure from small businesses, none have measures in place to procure solely from one race group. Opting for additional race-based mechanisms may be a step too far for South Africa's new democracy.
In Malaysia a plan launched last year that will among other things require every government ministry to carve out contracts from big projects to award to indigenous Malay-owned businesses (the $9.4 billion Bumiputera Economic Empowerment Plan) has been met with a hail of criticism.
Both indigenous Malays (who are supposed to benefit from the new programme) and Chinese and Indians say the new plan is racist and will only make Malays more dependent on the state.
A former minister of the majority party UMNO, Zaid Ibrahim, has even described race-based policies as an "addiction" which makes Malays lazy, while lawyers have branded the the plan as unconstitutional as it exceeds the quotas stated in the federal constitution.
Some say the plan is merely a veiled bid by Malaysia's Prime Minister Najib Razak to regain support from Malays for his UMNO party after the less than satisfactory result it achieved in recent elections.
Back in South Africa, the country's Treasury also argues that the measure is unconstitutional and that it will raise the cost of state procurement if put into effect. In May last year the business lobby said it would test the Treasury’s prohibition of "set-asides" for black-owned firms in awarding government contracts in the Constitutional Court.
In the meantime the department announced last month that it would from now on carry out BEE verifications, in place of the private consultants that at present conduct verifications.
Its principle gripe is that majority white-owned firms are often able to score more BEE points than many wholly black-owned firms, using creative accounting tricks. This has allowed white firms to out compete many black firms in the awarding of state tenders (where ones BEE score counts for 10 or 20 points depending on the size of the contract).
But South Africa must listen carefully. Malaysia's new programme is a warning to South Africa. The risks are clear - too many handouts will lead to increased dependency - and not more. Like this black entrepreneurs will before extensions of the state itself, never really doing things themselves. Corruption will also likely increase.
In the words of Malay Economic Action Council chief executive officer Mohd Nizam (pictured here) to teach young entrepreneurs, you can’t have government officers or professional speakers do the job: “You need professional entrepreneurs. From there, you can create a partnership between new and seasoned entrepreneurs".
Steadily more black entrepreneurs worthy of standing on their own two feet are rising up in South Africa. What is sorely lacking is more such entrepreneurs. The government can help things along by focusing more on the basics - like better internet, more quality education, and infrastructure such as housing and hospitals. But it should beware of interfering too much or adding more race-based policies.
Big companies should also get stuck in. The new codes incentivise companies to incubate and buy more from black suppliers. And a recently instituted incentive from the Department of Trade and Industry assists the private sector in setting up business incubators. These are examples where the government has got it right.
The black business lobby should add to these with its own initiatives - but race-based set-asides and continuing equity cuts will only worsen the ability of black entrepreneurs to stand on their own and compete in the marketplace. A more business-minded approach is needed.
To read part I of this article (Worrying plan to create black oligarchs) click here.
South Africa is slowly drifting towards a system of crony capitalism. The latest cause for concern is the government's plan to use state funds to create 100 black “industrialists”. Will these be South Africa’s new oligarchs?
The country's increasing corruption isn't something all that new – it began in earnest in 2009 with the election of Jacob Zuma (pictured left), who as the country’s former deputy president had over 200 corruption charges against him dropped over allegations that the charges were promoted by a political witch-hunt against him - this despite a businessman having been sentenced over a corrupt and fraudulent relationship he'd had with Zuma.
Real, honest black entrepreneurs will be tainted by the government’s new drive which in all likelihood will channel state contracts and money to politically-connected pals.
In this I was reminded of one black business owner, a seemingly humble man who had fallen on hard times. His story captivated Zuma during a breakfast he held sponsored by The New Age newspaper, whose bosses' friendship with the president is the subject of one of the statesman's many recent scandals.
Back in 2012 the business owner’s dream – to create the first black-owned trailer manufacturing businesses in the country, and with it 180 jobs – seemed to be all but over. He had been struggling for three years to obtain finance to open a factory in Mogwase, near Sun City in the country's North West province.
Previously he had run a small trailer-manufacturing business in Witbank in nearby Mpumalanga province for five years up until 2009. The time he believed had come to expand to serve larger clients. For this he would need a bigger factory. It's then that he moved to Mogwase.
Over the next three years he approached several entities to help fund his idea for a factory, including the Industrial Development Corporation (IDC) where he applied for a R74-million loan - a considerable sum given his limited experience in running any large operation which such a loan would demand.
In the meantime he had been able to strike a deal with the North West Development Corporation (NWDC) which in 2008 agreed to a one-year moratorium on rental payments. But by February 2012 he had still failed to secure finance and the NWDC, having lost patience with his failure to regularly pay his rent, won a court order to evict him from the unit he was occupying.
Having been evicted from a provincial agency’s premises, it was then that he appeared at the breakfast. It was clear that he was there to make an appeal in person to Zuma. With members of the public and media present Zuma could hardly side-step the request, when the business man stood up to make his passionate plea to the country's highest office.
Zuma later told him that the NWDC, the North West government and the IDC would meet with him.
After Zuma’s intervention doors seemed to open for the businessman. He was able to meet with IDC chief executive Geoffrey Qhena himself. The IDC then informed him it would help him - by assisting him to carry out market research to assess whether the manufacture of trailers was viable or not.
But things seemed to drag on. When I spoke to the IDC at the time, its spokesman, Mandla Mpangase, told me that the business owner had failed to provide sufficient information in his initial business plan around his target market, for the IDC to assess the sustainability of his business.
Mpangase told me that the IDC had provided additional support to assist him to develop a more comprehensive business plan and added that he was welcome to approach the IDC for funding should market conditions improve. That was the last I heard of the story.
Grabbing the state
Depending on which side of the debate you sit on, the story of this businessman is a worrying sign of the times in South Africa.
On the one hand the president himself had intervened in a matter he should not be involved in - particularly if it influences the decision of state agencies to award loans.
In all probability the businessman simply had an unbankable business proposition, which was why things were going the way they did - not because the anyone didn't want to help him. So there was no need for the president to intervene. Thankfully (or so it seems), the IDC is still running things like a business, even if it is a state-owned funding organisation.
But for many black business owners this man's story is yet another case in point for the need for stronger intervention from government. Isn't this after all why black businesses stay small in the first place, some may ask.
Many might still allude to racism as to the real reason funding is denied to many black entrepreneurs. The businessman himself pointed out that the IDC had previously funded three big white competitors and that no market study was carried out for these recipients. But could it possibly be for the simple reason that they had a better business proposition and not because they were white?
Turn for the worst?
South Africa’s affirmative action policy – Black Economic Empowerment (BEE) - has taken a worrying turn. Since the 1990s when the first BEE deals were made to sell company stakes to black shareholders there has been much criticism of the policy. Many say it has benefited only a rent-seeking class, who sell their black credentials to white firms, but don’t actively participate in these respective companies.
The new fear is that rather than encourage more black entrepreneurs to start up and expand, the state is bowing to pressure from a recently formed black lobby group – the Black Business Council (with its secretary Sandile Zungu pictured above) - to hand finance and contracts to a select few. After all the group is behind the latest push to create "black industrialists" - a strange term in itself (what does it really mean?).
The business lobby group claims that it is all for creating black entrepreneurs who can stand on their own feet, but at the same time its members continue to insist that big companies be forced to give more shareholding to black managers (new BEE rules which come into effect in May next year will mean firms will have to have at least 10% black ownership if they are to be assured of not losing business from big business and the government).
This fuels the very rent-seeking that the government has been keen to root out in the first place. Will "black industrialists" just amount to more rent-seeking suite-case businessman without any real entrepreneurial street cred?
In this South Africa is not alone, Malaysia's the $9.5 billion Bumiputera Economic Empowerment Plan (BEEP) launched by Prime Minister Najib Razak in September last year has been slammed by Malays and non-Malays as racist, unconstitutional and economically unsustainable.
Any plan by the state to "create entrepreneurs" which involves dishing out loans and contracts, instead of a plan which focuses principally on improving the business environment (better education, infrastructure and less red tape) should be viewed as deeply suspect by any citizens.
Stephen Timm writes on small business and entrepreneurship. Click here to read part II of this blog article which looks at how the black business lobby has captured the state and why Malaysians should also worry.
Stephen Timm is a