In the wake of President Jacob Zuma’s call for black industrialists to emerge, BBQ goes in search of answers

The South African government needs to take the initiative by integrating the development of black industrialists with the country’s overall industrial strategy, said Jerry Vilakazi, chairperson of the board of directors at Netcare.

He was questioned on what the country could do to vigorously develop an active black industrial sector.

A passionate plea in this regard was made by President Jacob Zuma in September, while delivering the keynote address at the Black Business Summit in Sunninghill, Johannesburg. He urged black businesspeople to move away from only owning shares or fronting to becoming authentic industrialists who own factories and mines.

The president said: “With regard to the ownership of the economy: While we are happy to see many black people entering various sectors of the economy, there are no visible black industrialists. We do not see large factories or mines that are owned by black people or women.

“As we build the economy by expanding manufacturing, mining, agriculture and the green economy, we also need to develop the black industrial sector.”

The economy, he added, must produce authentic black entrepreneurs whose factories manufacture textiles, furniture, metal products or whatever the market requires.

Less talk, more action

Vilakazi said the integration of the development of black industrialists in the industrial strategy is pivotal if South Africa is to advance the black industrial sector.

He said there is a tendency to confine the development of black business to debates and policies on black economic empowerment (BEE), and to exclude it in other key government policies.

In the last four to five years, there have been massive investments and growth in infrastructure and construction projects, fuelled by the awarding of the 2010 Fifa Soccer World Cup.

“Can we pinpoint any black construction companies that were created as a result of this boom?” Vilikazi put forward. “We need decisive and strong leadership from government if we are going to create sustainable black industrialists.”

South Africa boasts some great industrial companies that are competing with distinction against their global peers. Some are active both in sub-Saharan Africa and in other countries.

These, however, are mainly white-owned companies. Sadly, one is beginning to see a trend of South African companies being
sold offshore.

The problem with this trend is that it removes a flow of investment into the creation of new industries that would result in the creation of new jobs in this country.

Instead, there is shareholder rotation and exchange of capital, which is not always invested back into the business for expansion, said Vilakazi.

The industrial strategy should certainly map out how South Africa intends to promote new industrialists, particularly black industrialists.

The decision by the Black Business Summit to call for the creation of a black-owned financial institution, is an indication that, if the country is to advance President Zuma’s call for the development of black industrialists, funding institutions need to be set up with this specific purpose in mind.

Pitfalls

Leslie Sedibe, chief executive officer of Proudly South African, says a lack of incentives for big business to actively implement enterprise development initiatives – which are now being revised to give more weight to enterprise development and local procurement on the Codes – remains a stumbling block toward the attainment of a sober economic and productive model.

Steps are needed to improve access to finance and access to information, while improving the support from the government and big businesses to entrepreneurs.

“We need to do away with red tape when applying for registration of companies and funding through government grants. In other countries, including countries on the African continent such as Rwanda, the process to register a company can be completed in less than three days,” said Sedibe. “Many opportunities have been lost due to the unnecessary delays in the system.”

He added that an absence of mentorship and skills training within the different sectors has been a pitfall in the development of the black industrial sector.

It is a point fully supported by Zoli Kunene, chairperson of Grintek Ewation. A lack of mentorship, funding and skills undermines growth in the black industrial sector, he maintained.

“You need a private equity fund that will support the young generation coming into business. You also need to mentor these young entrepreneurs, sit on the board with them and support them every step of the way,” he added.

Kunene expressed concern about the lack of skills: “When you see a road full of potholes and ask yourself why it has not been fixed, you realise it is not because of a lack of funds, nor material nor labour. It is critical to develop skills and address the gap between skilled and unskilled labour.”

Banking on change

Vilakazi said South African banks and financial institutions have not been geared toward promoting entrepreneurship, nor the development of new enterprises and industrialists. They have their comfort zone in financing the purchase of “shares”.

“Who on earth, with access to capital, would choose to buy 26% in someone’s company instead of starting their own business?” he pondered. “The current financing models and philosophy are not supportive of new enterprises. We should look at what made Germany the industrial manufacturing hub of Europe.”

Renewable energy

Vilakazi said the government should be bold in using its procurement budget to buy from companies that are more than 51% black-owned. “We should not shy away from using the granting of new licences in targeted industries to majority black-owned and -managed companies.

“It is sad that even after the conversion to new order mining rights, blacks are still battling with under 10% ownership in mining,” he lamented.

The Black Business Council should engage with the government to ensure that, in areas such as renewable energy, one can see the emergence of black-owned and -managed companies as independent power producers.

For this to happen, alignment of financial institutions with this objective is required.

Learn from the Afrikaners

“Why are we not learning from the Afrikaner experience of the period between 1948 and 1994?” asked Vilakazi. “How did they create such a massive Afrikaner industrialist base? They were decisive and unapologetic,” he noted.

Said Mike Teke, CEO of Optimum Coal Holdings: “We need a culture change with regard to hard work. We must embrace the culture of hard work. A great work ethic is number one.”

He recalled how his grandmother forced him to go to school, even when he was feeling a bit off-colour. “You can go to sleep when you come back from school,” she said.

“If you work hard and are compensated, you derive a lot of pleasure from it,” said Teke. “We are a great country, but we need to put our shoulders to the wheel.”

A culture change is required also in terms of delayed instant gratification. Raymond Ackermann and Dr Anton Rupert did not become wealthy within a day. It took time, and they were prepared to build an empire over a very long period, said Teke.

He added that the government must “fix and jack up” the education system. “We must create a nation of job creators. We tend to be a nation of job seekers. I want more opportunities for job creators.”

The country needs a partnership between the government as regulator and legislator, and private business as the enabler, to propel those job creators to new heights.

Local not attractive enough

Vilakazi said South Africa is importing too many products that could be manufactured locally to stimulate industrial development and growth.

The country is well positioned in the continent, with its industrial base to be a major supplier of many goods and services. Both the private sector and government should show more commitment to buying local goods.

“We often speak of the high costs of labour that make us uncompetitive, and forget what drives the costs of labour in South Africa,” said Vilakazi.

“Government needs to move faster in improving public transport and reversing the legacy of apartheid spatial planning, resulting in workers living far from their places of work.

“We need to create more opportunities for skills development. We have too many young people unemployed who could contribute to the growth of our economy if given a chance,” he added.

Black entrepreneurialism could spark a revolution

Claude Baissac, executive director of Eunomix, said black entrepreneurialism is alive and kicking in a country that is distinguished by a strong entrepreneurial culture.

For the most part, it is undocumented. And yet, it could be part of an economic revolution if the government provided the resources and business environment required.

It is hugely encouraging to see that South Africa ranks higher than the United States, the United Kingdom and Germany in the Global Entrepreneurship Monitor’s latest survey.

One possible cause is an unintended consequence of BEE: the necessity for those who have been displaced or have lost opportunities because of BEE to become entrepreneurs.

A second possible cause is the product of necessity: the fact that, for a large part of the poorest portions of the population, “survival entrepreneurialism” is the only option. One sees this daily creative, risk-taking, transactional toil everywhere.

Entrepreneurialism cannot be legislated, ordered or willed. Legislation can, in fact, be counterproductive if it aims at creating a class of entrepreneurs through obligatory transfers.

Welfare benefits do not create entrepreneurs, neither does BEE, claimed Baissac.

Plea for a new model

Broadly speaking, the government needs to take a strategic view of entrepreneurship and turn the current model upside down.

Much can be done, particularly when one realises that South Africa is losing ground in the Doing Business Index, which ranks countries according to the quality of their business climate from a regulatory standpoint.

It is 34th worldwide in 2011, down from 32nd in 2010. It is very concerning that it lost nine places in the “starting a business” category, and four in “registering property”.

Very specific – and frankly, easy – measures would have a very rapid impact on entrepreneurship.

The great news, however, is that South Africa far outranks Brazil (127th), Russia (123rd), India (134th) and China (79th). But given the relatively small size of our economy, being at the top is essential.

Specific micro-economic measures are required to support black entrepreneurship. Looking at it from a grassroots, bottom-up standpoint, the government should support greater access to micro-financing for micro enterprises, even informal ones.

It should create a corporate tax structure that encourages these enterprises to formalise.

Additionally, vast financing reserves exist in reconstruction and development programme houses, and the government should transfer their ownership to their occupants, who could then use them as collateral for raising capital – with the adequate protection against abuse practices from all parties, Baissac maintained.

Changes to the country’s restrictive labour regulation would help enormously, particularly for small, medium and micro enterprises – historically the most important source of employment creation.

India’s new strategy for labour force training, done in co-operation between government and business, should be looked at.

Meaningful tax breaks should be provided to businesses that train large numbers of employees in technical, business development and managerial skills, said Baissac.

A pragmatic approach advocated

Looking at industrialisation and black entrepreneurialism, one has to be pragmatic, Baissac warned.

The country is deindustrialising, and quite rapidly, in the face of very serious cost and capacity constraints: above-inflation wage increases, an institutionalised strike culture, double-digit increases in electricity costs, and infrastructure bottlenecks caused by a series of state monopolies.

Manufacturing only represents 15.6% of gross domestic product – down from over 22% just a few years ago.

This is an economic disaster. South Africa is losing the competitiveness battle against other emerging markets. It is a real emergency, and the current state-centric approach is very obviously not working, said Baissac.

It is not evident that introducing further regulatory measures, which dictate ownership or create quotas for government-related business, would be effective at stopping the crisis of the industrial sector and solving ownership inequality.

More than 15 years after liberation, the country is discovering that changing the ownership structure of the economy is much harder than changing political ownership. It is a trial-and-error process, said Baissac.

Looking for a model, Malaysia provides an interesting example of how to work toward solving the twin objectives of industrialisation and racial justice.

After independence, it turned toward strongly redistributive policies between its impoverished Malay majority and its Chinese and Indian minorities who controlled the economy. This approach increased after race riots in 1969.

The objective of the government was to achieve redistribution from a ratio of 2.4% to the Malays, 33% to “other Malays” (Chinese and Indians), and 63% “foreigners” to 30:40:30 respectively.

The strategy was thus to ‘expand the pie’: rather than transferring assets owned by minorities and foreign interests, the government pursued national wealth redistribution through increasing the size of the economy and allocating preferences to the ethnic Malays through affirmative action programmes.

Industrial development was chosen to provide the necessary economic growth required for the strategy to work.

Over the decade, Malaysia became an economic powerhouse, another Asian “miracle economy” that absorbed significant surplus labour, generated large exports and attracted large amounts of foreign direct investment.

In this environment of shared growth, Malay entrepreneurship has striven without crowding out minorities, and without costing precious growth and jobs.

Fanie Heyns