Black-empowered IT companies should focus on organic growth, and not only on buying equity in previously white businesses. With the former, previously disadvantaged individuals (PDIs) can truly achieve empowerment. While empowerment deals provide equity for some PDIs, very little changes at the operational level, where real sustainable black economic empowerment begins, says Inana Nkanza, MD of iLAYO, a 100% BEE IT company.
True black economic empowerment comes when black entrepreneurs create new companies. This is the only way to stimulate economic growth and create new job opportunities. However, one of the challenges is financing such an endeavour - there are no banks aggressively supporting new business development, be the entrepreneur black or white. Banks like to do business where there is zero risk.
Most empowerment deals redistribute equity, but that equity has to be paid for, so it is not empowering the black partner now, but only in the long term. In many cases, the equity buyer is not au fait with the technicalities of the business and struggles to add value to his investment by involving himself operationally.
iLAYO management made a conscious decision to form a black-empowered company that took the traditional business route of creating a viable company rather than what occurs in the majority of BE transactions these days - a black equity purchase in an existing business.
We built a business based on the competence of the black management team and created a South African company that is reflective of the country, using the skills that exist and applying skills transfer to the younger, previously disadvantaged individuals (PDIs) in the team.
South Africa needs a growth rate of 6-10% in order to flourish and adequately redress the imbalances of the past. Currently, that figure is currently sitting at 3%. The best way to improve on that is to create new black employers, not new black-empowered companies, as they are still doing the same business they were the week before - just under new management.
There is space in the economy for equity transactions where a black partner buys 25% plus one share or more of an existing business. While that is definitely black empowerment, it is more economic empowerment than literal empowerment.
New companies create new jobs and provide tax revenue to the government, and we add newly created money to the economy that was not there previously. With the 25+1 scenario you are not creating new wealth, but merely redistributing it. That is the fundamental difference between the two models.
Both models have a place in South Africa. Those who buy into the model of 25+1 need to focus on what BE is all about. It is not merely a financial transaction. It is about transforming the organisation and creating additional value both financially and from a black intellectual property perspective; this is vital for the economy going forward.
Often we find that in BE transactions the black party doesn`t bring any money into the merger. In most empowerment deals the company seeking the black partner finances the purchaser or the company redeems the value through the revenue that will be generated through deals it can win going forward. The expectation is that the black party will bring additional business in to pay for its stake going forward.
Until that is proven, the empowerment partner lacks influence in the boardroom to bring about the necessary changes organisationally. My concern is that if you borrow from Peter to buy Peter`s stock, how do you influence Peter to make discernible changes in the organisation?
The government, the IDC and the private sector should lend more support to black empowerment deals. Most organisations are not willing to back new business, whether it is black or not. South African companies need to be more aggressive in giving business to black enterprise. Many companies give non-strategic business to black companies, but not strategic contracts. This is usually because they do not believe in the technical competence of new black businesses. In that case, they should encourage joint ventures between a current supplier and the black business to encourage skills transfer.
We are celebrating 10 years of democracy and BE has been at the forefront of democratic change since 1994. Without it necessarily being legislated, in about 2000 the IT sector started placing an emphasis on the creation of equity plans. I challenge anyone to produce an equity plan they have managed to achieve. Most of them are mere doorstops - they are produced as a sign of commitment to the BE process, but I would be interested to see an organisation that has developed one and achieved its aims.
We need to look at BE from a white perspective and ask why a white organisation should involve itself in the BE process. Generally, they are doing it because they have to, but since they carry the key to the economy, they need to see how the transition to BE can help them to achieve their goals.
If you are going to do BE, do it right. It is too easy for whites to say BE is not working, but we must remember deals do fall apart. The problem is, when BE deals fall apart, they are given a higher profile than a normal business transaction.
Don`t blame failed mergers on BE. BE merely exacerbates the attrition rate, as it is done for the wrong reasons, is not thought through, is rushed, and the parties involved do not consider the simple integration challenges that any merger or acquisition goes through.
The ICT Charter is going a long way towards promoting BE in the IT sector, as it is a consultative process with the key role players in terms of fixing the problems of the past.
The most critical level at which the ICT Charter is falling down relates to multinationals having to play by the same rules as South African companies. I have no problem with that. You can`t change the rules for overseas companies doing business in South Africa. Obviously the charter sets out to make it viable for businesses to operate in South Africa, and not chase them out, but it needs to be a win-win situation for all parties concerned. The basis of the ICT negotiations is there should be no exclusion for multinationals.
We forget the whole essence of BE is to correct the problems of the past in terms of the exclusion of the majority of the community from the economy, but it must also be sustainable going forward.
The youth of today are predominantly black, and those will be the people we employ in the next 10-15 years. If we resist BE now, it will happen anyway. The market leaders of tomorrow will be those that embrace change today. If they do it now they will win in the future.
Share
Editorial contacts