Business support is key

2010-01-09 15:44

BLACK economic empowerment can thrive this year if established

companies actively support smaller entrepreneurs through their enterprise

development programmes, business people and analysts believe.

This would mean that enterprise development, one of the seven

pillars of empowerment, would steal the limelight from equity ownership which

has dominated the headlines on economic transformation for the past five


The view comes after a year in which some empowerment deals turned

sour as dividend payouts, usually used to repay the black partners’ debt,

evaporated because the economic meltdown reduced the profitability of the

companies they were invested in.

Paul Nkuna, the chief executive of the Mineworkers’ Investment

Company (MIC), says: “Established black companies need to make sure they provide

an environment for smaller businesses to develop and grow. They need to offer

financial management, bookkeeping and strategic assistance to the small

companies they give contracts to.”

He says black companies should not give their suppliers contracts

that make them hand-to-mouth operations.

“We should not use cheap labour to boost profit. The companies that

we outsource to need to be able to offer their employees incentives such as

medical and retirement benefits. They contracts need to be long term and have

service-level agreements,” says Nkuna.

Nkuna is making this call at a time when some established

empowerment companies have woken up to this challenge.

Cyril Ramaphosa’s Shanduka Holdings, for example, launched its

Black Umbrella programme last year to nurture and mentor developing

entrepreneurs. It does this by offering office space, computers, internet,

telephones, vehicles with drivers, a compulsory reliable bookkeeping service and

a structured mentorship programme with a business consultant/mentor at a cost of

R1?000 a month.

Nkuna says entrepreneurs who win contracts or tenders need to be

assisted in coming up with sustainable long-term plans for their businesses

instead of them rushing out to buy expensive cars.

“Luxury purchases should flow from the proceeds of sustainable

long-term businesses,” he says.

Nkuna does not see this intervention as additional costs.

“Investors sometimes forgo their dividends to build the companies

they are invested in. Assisting smaller businesses to be sustainable can be big

business’s contribution to job creation and establishing a stable socioeconomic

environment,” he says.

But the Achilles heel of empowerment has been funding. When the

credit crunch sucked money out of the financial system, it left many medium and

small empowerment firms stranded.

Nkuna says developmental financial institutions such as the

Industrial Development Corporation, National Empowerment Fund and to a limited

extent the Development Bank of Southern Africa have been more sympathetic to the

plight of struggling empowerment firms.

“The developmental financiers have been pumping new money and have

restructured the terms of the loans. Commercial banks have moved in for the kill

once empowerment companies defaulted on repayment obligations,” says Nkuna,

whose MIC company has never raised funds from developmental financiers. “If we

were to raise funds this year, we will definitely consider approaching

developmental financiers.”

He says the challenges facing some empowerment firms presents an

opportunity for commercial banks to reduce their exposure to them. This can be

achieved by selling some of the debt at a discount to financiers who will bring

fresh money. This money can go towards repaying the original loan. Commercial

banks then lose out on the interest that would have accrued had they remained

the sole funders.

An analyst says a lot of empowerment deals are expected to be

concluded in medium and small business this year, making the right funding


He says the black entrepreneurs will need to ensure the deal is

priced fairly. Medium and small businesses tend to be owner-managed businesses.

This can lead to a significant discrepancy in the valuation of the businesses as

owners tend to have an inflated opinion of what is a fair price for their


“The price and structuring of the deal has to be informed by the

performance of the businesses in a similar economic climate. The track record

and the projections need to reflect this reality,” says Nkuna.

He says vendor financing, where the company looking to conclude a

deal finances or stands as surety when raising external debt, works well in good

business cycles, especially if the empowerment partners were not required to use

their assets as collateral. Some analysts say the vendor financing model can

dilute the influence of black investors in the running of the business because

management is also the funder.

Other key developments that are expected that can affect the

direction and debate on empowerment include President Jacob Zuma’s broad-based

black economic empowerment (B-BBEE) advisory council scheduled to sit for its

first meeting this month. There are three meetings scheduled for the year.

The council is expected to review progress in achieving black

economic empowerment goals, advise on draft codes of good practice and

transformation charters and facilitate partnerships between organs of state and

the private sector.

The work of the council could have a significant impact on the

financial services industry which is deadlocked over ownership targets.

The mining industry is bracing for a mid-term review of its

empowerment charter. The process is expected to start within the first two

months of the year.

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