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Black economic empowerment codes have not lived up to expectations of enabling genuine and sustainable transformation. And without it, South Africa is sure to struggle to achieve meaningful economic growth.

The first Broad-Based Black Economic Empowerment (B-BBEE) Strategy and Codes were published almost sixteen years ago in 2007. Yet 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 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.

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, described as black people directly involved in the origination, creation, significant ownership, management and operation of industrial enterprises.

An original target of supporting 100 black industrialists by March 2018 has since grown to support hundred more industrialists over the next two years. To date R8 billion in investment has been leveraged, with jobs created and retained exceeding 18 000 jobs.

The Black Industrialist Policy emphasises entrepreneurial leadership, majority equity shareholding or financial interest, significant influence on strategic direction, and executive participation or managerial control over operational activities.

How is a black industrialist identified and financed?

The dti describes black industrialists as “black South Africans who own and, through significant shareholding, control an enterprise whose products are significantly used, 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, have the requisite expertise and a high level of ownership (>50%) and/or exercise control over the business.

The challenge of access to finance is 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.

The dti set aside R1 billion to invest 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) offers a cost-sharing grant ranging from 30% to 50% to approved entities, up to a maximum of R50 million of project costs.

Beneficiaries can further apply for concessionary loan finance from the Industrial Development Corporation (IDC) which has earmarked R7.9 billion in funding in addition to the original amount of R23 billion set in 2016. The financial sector, as part of its transformation code, has also committed R100 billion over the next five years to support black enterprises and firms within the industrial sector.

How do we ensure success?

It is of critical importance to provide access for more black South Africans into the mainstream economy, and to create job opportunities, new businesses and a wider pool of taxpayers. BIS beneficiaries have highlighted market access and penetration of established industries as a critical challenge. Limited marketing capacity, high transaction costs and poor market research are factors that hinder access to appropriate networks and market penetration. Besides funding and access to markets, high-end operational and financial management skills are required to manage critical cash flows in the low margin industrial environment.

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 to ensure that economic inclusion moves the needle on South Africa’s poor economic growth.

Read here: Finweek Collective Insights May 2019

Published: Finweek Collective Insight