In September 2011 President Zuma raised his concern about the lack of black industrialists in South Africa and called for the economy to produce “authentic black entrepreneurs” who own factories. A few months later in his 2012 State of the Nation Address, President Zuma introduced government’s plans to make a massive investment in infrastructure. The aim, he said, is to “industrialise the country, generate skills and boost much needed job creation.” A few days later, during his budget speech, Finance Minister Pravin Gordhan announced that R845 billion is to be spent on energy infrastructure, transport, logistics, housing, telecommunications and water, budgeted for the next three years.
The role of B-BBEE
In December 2011 new procurement regulations as well as proposed amendments to the Broad-Based Black Economic Empowerment Act were introduced, in terms of which tenders can no longer be awarded to black intermediaries who then pass on the skilled work to non-compliant companies. Sub-contracting of worth more than 25% of the value of the project now must go to a contractor with an equal or greater B-BBEE status or to an exempt micro enterprise.
This is aimed at encouraging the development of capacity within black-owned companies. Local production is also given more support with the ‘China Clause’ which requires tenders to stipulate a minimum threshold of local production and local content and obliges contractors to honour these terms. Contractors may not change their minds and procure cheaper materials from China.
The B-BBEE amendments also propose a controversial requirement that states that, in order to score BEE points for Enterprise Development, companies will be expected to provide practical support to their beneficiaries, in addition to the funding support that was originally required.
But are any of these measures sufficient to boost the development of black-owned manufacturing companies?
Walking the talk
My colleague, Deon Oberholzer, CEO of Gestalt Fund Managers, believes that it’s all very well to introduce procurement regulations, but government itself must walk the talk. He cites the example of the Gautrain busses which were imported instead of being manufactured locally. South Africa’s manufacturing sector has suffered due to competition from other emerging markets. Manufacturing now only represents 15.6% of the South African GDP.
Some commentators believe that government is the guilty party – it has the greatest buying power in the country but is itself not sufficiently committed to local procurement. The concern is that government will repeat its old ways in its proposed infrastructure projects. “Will they still contract the bulk of the work to larger international companies that only employ temporary construction workers, or will they find a solution to bring the black medium-sized businesses into the projects on a sustainable basis?” asks Deon.
Some local authorities are being proactive in this regard. A notable example is the Rustenburg Local Municipality in the Northwest Province, which has embarked on a R3 billion investment in a rapid bus transport system to serve the entire Rustenburg region, including the surrounding rural settlements and the mining operations in the area.
The municipality has stipulated that 25% of the money paid to contractors has to be spent within the community. The result is that contractors are engaging with local suppliers, transferring skills and building capacity. The system will be run by specially trained professionals selected from within the community and support services (such as bus and infrastructure maintenance and manufacture of materials and uniforms) will be sourced locally, supported by procurement agreements with the local authorities.
But even with a nationwide drive to involve local suppliers and build local manufacturing capacity, we still have the challenges of our critical skills shortage, along with a serious lack of understanding in our emerging sectors of the complexities of entrepreneurship.
The reality of working in SA
In October 2011, Deon conducted a study of a group of Soweto-based entrepreneurs and found a number of constraints; a poor understanding of financial systems (such as the difference between income and cash flow), a misperception of how the tender system works compounded by a belief that all are entitled to a fair share of tenders, an inability to market their products, a limited grasp of paying suppliers, collecting payment, applying for funding or the purpose and content of the business plan, a poor understanding of or compliance with labour legislation, little ability to manage customer relationships, no functional understanding of health and safety requirements, and neither the tools nor the skills to develop strategies for growth or manage a bigger business. Overall, the test group perceived the role of government as a required enabler and yet an unwelcome restraint in terms of regulations and compliance.
According to Deon, other studies have also shown that emerging entrepreneurs are constrained by mindsets of entitlement, self pity, a focus on short-term gains and the inability to move from thinking like an employee to thinking like a business owner. He concludes that, given these challenges, the policy of giving blanket support to all SMEs is not the answer to fostering the rise of black-owned industrial companies. To meet this specific target, we need to identify high potential businesses early and give those selected businesses the right support.
If private businesses are indeed required to be hands-on in supporting black-owned enterprises in terms of the proposed amendments to BEE legislation, this could go a long way in identifying potential industrial stars. But then government has to come to the party as well by committing to procurement from new local suppliers and directing practical resources to specifically help establish such new manufacturing companies.
Land ownership is a critical factor in empowering a new black industrial sector. Government land should be allocated for the development of industrial clusters, with ownership rights built into the deal. Once ownership of the land and its infrastructure is in the hands of the people who are working on it and there is a stable market for their products, along with knowledge transfer coming from established businesses, then much else can fall into place, such as; leveraging of funds, accountability for success and retaining the flow of money within that community.
The R845 billion infrastructure building programme has the potential to create a platform for sustained industrial development and transformation. But government will need to be vigilant about the structure of its tenders and will have to do as much to empower its suppliers as it is asking of the business sector.