Can SA create an additional 100 black industrialists?

Brian Naidoo is a black industrialist with big ambitions to take on the manufacturing giants of automotive components for Toyota and Volkswagen.

Naidoo is MD of Durban-based Microfinish, a manufacturer of automotive components such as valve guides and valve seat inserts, which are supplied to aerospace, marine, and heavy-duty vehicle industries in SA, Europe, and the US.

Established in 2012, Microfinish operates from a factory in Pinetown that directly employs more than 50 people. So competitive is the domestic automotive component manufacturing industry that Microfinish is the only 100% black-owned company in the sector, says Naidoo.

Microfinish is one of the many black-owned companies that received funding from the Department of Trade and Industry (Dti) under its black industrialist programme. In 2017, Microfinish was approved for grant funding of R13.5 million, which Naidoo says assisted in the purchase of factory equipment that would help the company become more productive.

At first glance, the concept of “black industrialists” may seem like more hyped jargon created by government to reboot the black economic empowerment (BEE) policy, which has been heavily criticised for creating wealth for a coterie of politically connected individuals.

Ardent supporters of the black industrialist programme argue that it’s about expanding SA’s industrial capacity while upscaling black entrepreneurs and reducing their barriers to market entry. It is also about changing the ownership patterns of SA’s economy, which, more than 20 years after apartheid, still benefits white people disproportionately.

The programme was introduced in 2015 under Jacob Zuma’s administration, which set aside R1 billion in the first year to fund 100 black industrialists over a three-year period. This seed money was expected to unlock up to R40 billion in additional funding from the Industrial Development Corporation (IDC), National Empowerment Fund, Public Investment Corporation and commercial banks.

These institutions top-up whatever funding that black industrialists receive from Dti.

After black industrialists received funding, the government, through state-owned enterprises and various state organs, would use its muscle to procure goods from industrialists in order to scale them up.

Dti spokesperson Sidwell Medupe says 102 black industrialists have been given financial support amounting to R2.2 billion (as at May 2018), with 48 companies receiving market access support. “This leveraged R8 billion in investment and jobs created and retained is projected to exceed 18 484 jobs,” he adds. The department is now planning to support a further 100 industrialists over the next two years.

Defining an industrialist

The big question is what is a black industrialist and who qualifies to participate?

A Dti policy document describes black industrialists as “black people directly involved in the origination, creation, significant ownership, management and operation of industrial enterprises that derive value from the manufacturing of goods and services at a large scale; acting to unlock the productive potential of our country’s capital-assets for massive employment locally.”

An industrialist must be part of an entity that is at least 50% owned by black people and actively involved in the management and operations of the business.

The emphasis on ownership and control sets the black industrialist programme apart from earlier empowerment models that led to incidents of BEE fronting, says Ajay Lalu, MD of Black Lite Consulting. Lalu has advised government on various BEE policies, including the black industrialist programme.

“We made sure that the definition of what constituted a black industrialist was very clear thus ensuring that real black industrialists would benefit,” he says. “It was a deliberate strategy to ensure that there were measures to reduce the potential for abuse.”

IDC CEO Geoffrey Qhena says measures to guard against the peddling of influence are in place. “We look at an entrepreneur as an individual and their business case,” he says in an interview with Moneyweb. “We need to be comfortable with the fact that their business has a chance of being sustainable and must have economic merit. If the jockey is lousy, the horse is never going to win any race.”

With total assets of nearly R130 billion, the IDC has the financial muscle to take on higher risks and be invested for the long term, compared with other funding institutions.

Within two years of the inception of the black industrialist programme in 2015, the IDC approved funding worth nearly R12 billion to 185 companies. Cumulatively, the value will be closer to R18 billion by year-end. Of the R15.3 billion in funding approved by the IDC for the year to March 2017, R4.7 billion was approved for funding black industrialists in 83 transactions.

Funding mix

Another criticism of the programme is that there is a high concentration of entrepreneurs funded in traditional sectors such as agriculture and agro-processing, metals and mining, and other manufacturing, with limited export opportunities for businesses.

Black Lite’s Lalu believes that government will be able to create 100 more black industrialists given the success of the first phase. However, he suggests that funding must increase in non-traditional sectors such as ICT and 3D printing technology – sectors that are geared for a 21st-century economy and the fourth industrial revolution.

Qhena says the IDC has a new industries unit, which looks at investing in disruptive sectors. However, the lion’s share of funding is still going towards traditional sectors (see below).

“Some of our interventions will disrupt even the traditional sectors that we are funding,” he says. “It’s well and good for us that we don’t restrict ourselves to traditional sectors.”

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