Black Industrialists Policy: Department of Trade and Industry briefing

Meeting report

Black Industrialists Policy: Presentation by the Department of Trade and Industry

Background to the Black Industrialists Policy
Mr Lionel October, Director General, DTI, stated that the concept of a Black Industrialist used in the presentation was defined by the Black Economic Empowerment Advisory Council in 2012. The aim of the Black Industrialists Policy (BIP) was to enhance the productivity of the black majority and their participation in the real economy. The scheme was approved by Cabinet on 4 November 2015 and launched publicly in February 2016.

The strength of the free-market system was the dynamism that occurred when anyone could freely enter the market to create competition. The South African economy had struggled because it faced a structural problem: it never had a real free-market economy.  Rather, 90% of potential economic agents had been excluded from participation, or minimally utilised in low-skilled labour.

The country therefore had a very narrow base of entrepreneurs and a very narrow middle class. A middle class was critical for economic development as it was the main driver for consumption. Demand and supply in South Africa wasdefective because demand was constrained by a stilted middle class. The aim of the Black Industrialists Policy (BIP) was to unleash South Africa’s potential demand.

Because we inherited a racialised system, the first step for the DTI had been to transform existing enterprises to assist the black majority in entering the market. This was the rationale behind the first phase of BEE policies, which stipulated that companies must be BBE compliant, having certain levels of black ownership, management, and procurement.

The Black Industrialist Policy was different as it is targeted businesses that already had black ownership and management. In other words it was a secondary project, a second phase. The Black Industrialists programme aimed to help black businesses expand their market penetration or enter new markets.

There were two tools that one needed in order to enter a market. The first was a need for capital. The Department wanted to unlock that mechanism and provide syndicated, combined state funding from all development finance institutions, including the: Industrial Development Corporation (IDC), National Empowerment Fund (NEF), Land Bank, Public Investment Corporation (PIC) and DTI.

The second need was for market access. Take for example the taxi industry: black people had access to the market and could capture the demand for transport, and the industry thrived. However, in many other industries they did not have the channels necessary to cooperate with state-owned companies and established private firms. The Department wanted to facilitate market access – especially with regard to state-owned companies.

The Definition of a Black Industrialist and Benefits to be Received
Ms Malebo Mabitje–Thompson, Deputy Director General: Industrial Development Incentive Administration Division (IDIAD) , DTI, stated that a Black Industrialist (BI) could be a juristic or natural person. They must create value in the manufacturing sector, and must provide long-term leadership and operational management. It was envisaged that they would have a high level of ownership (ideally 50% and above). However, cases with less than 50% black ownership were still eligible and would be accepted depending on merit. Black industrialists must be entrepreneurial and take personal risk, be a long-term investor in the business and involved in the day-to-day activities of the business. This served as a commitment device: the dti did not  intend assisting entrepreneurs who wanted to exit the enterprise within 2-5 years. The company must be legally registered and in compliance with all legislation in their given sector.

The prioritised manufacturing industries for the BIP were the same as those in the Industrial Policy Action Plan, being:

• Oil and Gas
• Clean Technology and Energy
• Mineral Beneficiation
• Aerospace, Rail and Automotive Components
• Industrial Infrastructure
• Information Communication Technologies
• Agro-Processing
• Clothing, Textiles/Leather and Footwear
• Pulp, Paper and Furniture
• Chemicals, Pharmaceuticals and Plastics
• Nuclear
• Manufacturing-related logistics
• Sectors Designated for Local Procurement
• Blue/Ocean economy, including Vessel Building and Repair

The BI that was seeking funding would be evaluated according to various criteria. Firstly, the business venture must provide job creation. If the business was export-orientated, it would need to meet certain export targets. The business should prioritise skills development. The business should develop a supply chain that deepened transformation through procurement from previously disadvantaged suppliers. Businesses were expected to contribute as far as possible to localisation, by procuring inputs from local sources. Priority was also given to ventures that would reduce relative prices and or increase the quality of products, better utilise energy and materials, and contribute to industrial decentralisation. The support may also be directed to those companies where it is expected to help them secure significant market share.

Financial Support:
The Department would provide industrial financing through the development finance institutions. Several had already made commitments: The Industrial Development Corporation (IDC) had committed R23 billion, The Development Bank of South Africa (DBSA) had committed R2 billion, and the Small Enterprise Finance Agency R100 million (SEFA).

Unlike previous BEE initiatives, the BIP funding would have a syndicated portion to it. Previously, the dti would expect the entrepreneur to go to each institution to request whatever funding was available under the mandate of that given institution. In this programme, there was a central office to assist the entrepreneur who filled out one application form, after which funding was provided from the most appropriate source. The DTI itself would also set aside funding for the Black Industrialists, and had also engaged several private banking institutions, some of whom had come on board.

Financial support would be in the form of concessional loans. These were loans provided at lower [subsidised] interest rates or with extended terms of repayment. The DTI would oversee the system to monitor applications and implement a responsive financing system of government.

The black industrialists funding forum had been established to act as a pre-adjudication forum. Here the DTI would consider the applications from various BI’s and redirect them to the appropriate institutions. The DTI would monitor that they had been processed and responded to, and when funding was provided, make sure that it was aligned to the priorities of the BIP. Where it had not been provided, the Department would make sure that it understood where the problem arose from, so that it could work to implement a responsive financing system of government.

The DTI would allocate BI funding on a cost-sharing basis for procurement of capital equipment for qualifying entities. The DFI’s had a broader mandate, and could provide funding via equity participation, concessional loans or export guarantees. The DFI’s support should include both early stage capital as well as the relevant non-financial support to develop projects to bankability stage. The level of financial support would depend on the level of black ownership, with the ‘floor’ (minimum) level at 51% ownership.  Note that even if a loan was attained through the BIP of the DTI, the loan itself existed between the BI and the particular DFI or DFI’s.

Market Access and Technical Support:
Funding on its own was not sufficient - business strives in the market and not in the bank. The DTI had worked to create an agreement between it and various SOE’s, who would assist the Department in the implementation of the BIP. These SOE’s would improve market access for BI’s, by providing procurement channels and other supplier development mechanisms. In addition to SOE’s, the DTI was working with various other institutions to facilitate market access, including government departments, the Chief Procurement Office, and private sector companies. The SOE’s procurement forum would be used to facilitate market access for these BIP projects.

The DTI itself would intervene to create market access for BI’s. The Department would support BI’s in the export market by tailoring export support mechanisms to prioritise black industrialists. This would include priority in export-readiness assessments and export market exposure. An example of market exposure involved taking BI companies to international shows where strategic customers would be attending. The SOE’s would be encouraged to publish their long-term planning opportunities so that BI’s could position themselves.

The technical support measures involved establishing a portal where BI’s could network and match-make. This portal would also facilitate the incubation and mentoring of BI’s.

THE BIP’s implementation and oversight would be done by the Presidency, supported by the Cabinet and the Presidential Advisory Council on BEE. The Minister of Trade and Industry would bi-annually table achievements and emerging challenges. The DTI would provide a monitoring and progress report on a three-yearly basis.

Discussion

The Chairperson Makue asked how the BIP would be different to existing incentive schemes that also aimed to unlock the potential of BI’s. He also asked if it was correct that one of the criteria of qualification was that the entrepreneur would need to have 10 years of business experience. This requirement seemed unfit given that the black majority had been traditionally denied opportunities to enter the business world. He doubted that the DTI would be able to find sufficiently many BI’s that met this requirement. Finally, the National Empowerment Fund had reported that it had made significant in-roads in embowering black economic agents. Would the NEF [which was also within the DTI] continue to run its existing operations once the BIP was underway? How did the DTI intend to synthesise those two bodies doing similar work?

Mr S Mthimunye (ANC, Mpumalanga) praised the BIP as a commendable policy tool. If implemented correctly with performance targets, the BIP had the potential to turn the economy around. He was interested in the relationship between the BIP and existing Special Economic Zones, and asked whether a BI operating within an SEZ could also apply for BIP benefits. Secondly, he wanted to know how the BIP plan would include provincial departments, and how easily the BIP would be able to be implemented at the provincial level?

Mr Mthimunye echoed the Chairperson’s concerns that the 10 year requirement for business experience was too restrictive. He asked for clarification on what was meant that the BI funding from the DTI would be supplied on a cost sharing basis. What did cost’-sharing’ specifically mean? Did the DTI maintain that disadvantaged BI’s would really be able to share costs in this regard? Similarly, what was meant by personal risk? Lastly, when did the Department expect to complete the envisaged implementation guidelines?

Ms M Dikgale (ANC, Limpopo) pointed out that the conclusion of the presentation mentioned that implementation would take into consideration the participation of women, youth and the disabled. Speaking on behalf of women traditional leaders in more rural areas, how was the DTI going to include them in the plan for the policy? They were important cultural figures but were often omitted from these discussions.

Mr October responded to the Chairperson’s question about the role of the BIP vis-à-vis other incentive policies. He explained that other incentives schemes were introduced to build and revive certain industries (such as clothing, automotive, film, telecoms, etc), by making these industries attractive to investors and competitive on the global stage. The BIP was an entirely new programme that aimed to unlock the real potential of the economy by expanding the base of black entrepreneurs. The BIP would expand and bolster existing local industries through transformation. The BIP was primarily about financing, through the IDC, the Land Bank, the NEF, et cetera. The DTI itself would provide grants and not loans, but these amounts would remain a small portion of the investment. For example, if a firm needed to purchase a vehicle for capital equipment, the Department would provide the equivalent of the deposit for the car.

Mr October explained that the 10 years of business experience and the qualification criteria that existed were essential as in any society only a small group of people became entrepreneurs. The rest were salary-earners who did not take risk and were not experienced in a competitive environment. Entrepreneurship was based on risk and reward - “if you win you win big but you can also go bust”. So in the long-run it was not feasible if everyone ends up relying on state grants – a true entrepreneur would never rely on grants. And a novice entrepreneur was not going to have a reasonable likelihood of survival. It was therefore not viable for the DTI to continually provide funds to agents that were likely to fail. This was why the quality of the business plan was also a qualifying factor - the project needed to be viable.

Mr October clarified that the phrase ‘personal risk’ meant that the entrepreneur must be involved in the running of the business. The applicant could not raise funds on behalf of someone else who is going to run the business. The success of the business must depend on the applicant personally. While there was a lot of black ownership already, due to other policies, this programme would help to expand existing black businesses to a new level. There was already a range of other programmes for small-business start-ups, such as the National Gazelles programme. These could be thought of as feeder schemes that prepared and provide entrepreneurs that satisfied BIP requirements.

Mr Sipho Zikode, Deputy Director General: Special Economic Zones and Economic Transformation, DTI, responded to Mr Mthimunye’s questions. The two main objectives of SEZ’s were to use specific tax-based incentives to attract direct local and foreign investment, and to decentralise the industrial base of South Africa. The BIP would therefore also benefit from the BIP programme and SEZ incentives if they located within an SEZ. The programmes were complimentary. The NEF mandate went up to R75 million, whereas the BIP mandate would be in the billions. The NEF had a role in developing small and medium manufacturers. The bigger funds such as the IDC and the PIC were for the more significant BI’s who would have a large influence on the value chain and the sectors they were involved in.

Ms Mabitje–Thompson addressed the question on provincial involvement. The DTI had started engagements with provincial economic development agencies. It had already consulted with provinces that were often under-represented, such as Limpopo and Mpumalanga. The Department would be signing a Memorandum of Understanding with the Limpopo Economic Development Agency (LEDA) in the next two to three weeks. It was cooperating with various institutions within the provinces to find funding and assist in adjudication and implementation. Mpumalanga would be committed within a month or two, and KZN was already on-board and had set aside some funds through the Ithala Development Finance Corporation and the KZN Growth Fund. So it was not a national policy that would be implemented somewhere in Pretoria – it was a policy had to be implemented across the provinces using all the state levers available.

Ms Mabitje–Thompson asserted that the implementation guidelines were already being implemented by the DTI [and did not still need to be envisaged at some later date]. The DTI had already begun telling BI’s that the systems were ready. The Department would raise the issue of women traditional leaders when it meest with provincial economic development agencies. The first adjudication committee was set to meet in March. The work now was to make sure that all potential BI’s were aware that the programme was starting.

On the question of provincial involvement, Mr Zikode mentioned a DTI programme called the revitalisation of the old industrial parks in the former homelands. The DTI began with five such industrial parks within the provinces, towards which R100 million was set aside for industrial development. In the new financial year it hoped to add 10 parks to the programme. Security had been an issue in these parks. The DTI did have programmes in place to assist provinces that had fallen behind.

The Chairperson commented that the Parliamentary Liaison Office needs to make sure that Members were informed when the DTI had conferences and meetings with provinces to keep the Committee well-informed. For example, Members of the Committee visited the industrial park outside Pilansberg and discovered that the entrepreneurs were struggling particularly with market access. It was critical that information gained from trips and meetings such as these were passed between the Committee members and the DTI so that they cooperated efficiently, and that the Committee could provide useful oversight and ensure that it was the people that were deserving who received the benefits.

Mr Y Vawda (EFF, Mpumalanga) introduced an analogy that he believed would be useful. He likened the South African economy to a tree, and suggested that one should fertilise the soil of the tree to improve its growth and output, rather than immediately focusing on the fruit itself. By its nature the BIP programme was mistakenly working on the fruit. It would be wiser to work on the social-economic base of the country. When this was done, entrepreneurs would emerge naturally through the system. Take the example of taxi’s – yes it was working but even then it was working on a weak consumer base because the economy was constrained. 

He requested more quantitative information about the programme. It had been said that we are going to select around 100 BI’s – but how many industrialists were currently in the country and how many of them were black? We need better information in this regard. Secondly, there was a trade-off in outcomes between supporting start-ups and building existing firms; how was the ratio [of funding between these objectives] going to be managed? We don’t want R100 billion to end up on the stock market being held in large existing firms. Please be more specific exactly how funding will be split between these objectives.

The Chairperson responded to Mr Vawda’s analogy, saying that if South Africa’s economy was likened to a tree, it was his view that that the fruit – the productive entrepreneurs - had already been produced. What the BIP aimed to do was to prune the tree so as to maximize its product.

Mr W Faber (DA, Northern Cape) stated that the reality was unfortunate, but the stance of the Portfolio Committee [on Trade and Industry], and not just the DA, was that the BIP would serve to enrich a few, possibly politically connected people. The opportunities would allow a few people to become stinking rich while the benefit to everyone else was unclear. The DIT was unable to even estimate how many jobs would be created. Look at Herman Mashaba and his company Black Like Me. He went through and benefited from the BBE system. We need to go back to basics and train people step by step to become industrialists. It was about training and mentoring and not about dishing out money to already successful business people. She had a serious problem with the Department and the BIP when it could not even offer a figure about how many jobs would be created.

The Chairperson suggested that Members should not bring party positions into the discussion. The BIP was not intended to walk people step by step into becoming entrepreneurs. It was also not a handout – it was an opportunity for deserving entrepreneurs who already existed. The point about job-creating was important; this was an element of the discussion that was missing. However, it was probably premature at this point to expect a projection on job-creation. We have clearly defined our target industries, but it is not clear to what extent we will be able to provide support in each industry. For example, it may turn out that there were too many applicants for an already saturated (competitive) market.  We should not make the mistake that these people were going to be politically connected. We don’t drive a political agenda with the programme.

Mr B Nthebe (ANC, North West) stressed that the BIP needed to consider the balance between creation of BI’s and the viability of the business plan; experience was critical and could not be bought. The North West had identified agro-processing and tourism as key areas for viable economic development. The BIP also needed to be more decisive– for example it should limit support to dominant black owned businesses and not just significant ownership. “We understand that businesses must be viability and we do not want to simply dump capital, but when we discuss ownership control, we need to use explicit language and criteria”. Another example was market penetration into Africa: we keep mentioning it but we actually need a decisive way of achieve it. Regarding the issue of the trade-off between encouraging small start-ups as opposed to large and existing BI’s: was it not possible to devise a way to create different brackets of BI’s that we want to assist? We assist them over the long-term and elevate them from one level to the next.

Mr October responded to Mr Vawda’s analogy, saying that yes in a normal society the economic base could be developed and the entrepreneurs would emerge. Back in the 1920’s and the 1930’s during the Great Depression, an American Carnegie Commission of Inquiry found that the reason the rich people were all English-speaking, was that the system amongst Europeans was discriminatory against particular groups. They solved the problem by 1960. They did so by intervening decisively and systemically to address the problem. They created a Land Bank and the Industrial Development Corporation. The disadvantaged were given tangible benefits such as capital and mineral rights. Tenders and access to contracts were a decisive way of giving people access. We already had the entrepreneurs out there, it was now just a question of opening access. The problem was systemic, it was not just discriminatory. Land was taken away, mines were taken away, and we could never have had a normal economic basis. So the systemic problem needed to be addressed with a systemic solution. Since 1994 the economy had created 7 million jobs just by opening up. The DTI calculated that it had created some 300  000 jobs through incentive programmes. It was speculative but based on historic experience, we could expect to grow the manufacturing sector by one quarter to create 300  000 jobs. But remember also that there was a multiplier effect when you expanded existing companies and increased the middle class. Furthermore, the industrial sector had forward and backward linkages. That was why developing existing industries was a good idea. And the BIP did so by removing exclusion which was occurring through a lack of finance and access.

Mr Zikode responded to Mr Nthebe's point about black majority ownership.  He pointed out that shareholding was at times very diverse – the major shareholder may only hold 20-30%. A scenario was therefore possible where the BI did not have a majority in the shareholding, but the Department expected that if the DFI funded the business through equity, over time the BI may over time amass the necessary funds in order to buy out the DFI shares and thereby gain a higher stake or a majority share in the company.

Ms Mabitje–Thompson responded to the comment that the BIP might only benefit the few. She asserted that the DTI had never pre-determined who would apply for BIP support. Support was based on the types of activities the applicant was involved in, more than the particular individual. The Department had seen that certain support systems such as the SEZ’s had been tilted towards helping existing white business people. When these high-ranking individuals sought to leave industry, we should consider acquisitions. It was not just about who had equity ownership, however, as we also look at who was the effective management of the business.

The Chairperson summarised deliberations, saying that the Committee welcomed the idea of the BIP. It wanted to make sure that the approach to addressed economic challenges would work for all people in South Africa. The importance of the project was to create a new development paradigm, one which would not necessarily only benefit those who were connected but help those who were willing entrepreneurs.

Committee Minutes
The Chairperson summarised the contents of the minutes and opened the floor for questions.

Mr Faber indicated that his comment that creating another body was a duplication of the work already done by the Department of International Relations and Cooperation. His comment has been omitted from the minutes.

Mr Nthebe pointed out that the importance of the minutes was not to capture every single comment and view but rather to reflect the gist and flow of the meeting.

The Chairperson ruled that even when there were initial presentations with briefing information (as was the case in the previous meeting), which we anticipate would be supplemented by subsequent presentations, we should still include comments made in the minutes, such as Mr Faber’s.

The minutes were adopted.

The meetings was adjourned.