One of the flagship economic transformation policies of the South African government is to create a new class of black industrialists.
Six years ago the ANC initiated its Black Industrialists Scheme to fund black-owned businesses, both start-ups and established firms, to play a new and expanded role. The aim of the scheme, according to the first recently released ‘Black Industrialists Report’ is to increase black ownership and ensure greater local manufacturing capacity. The government is pouring massive resources into black industrialists and neglecting very small business.
Since 1994, a wealthy black class has been created largely through empowerment deals, which have allowed individuals or groups to take sizeable stakes in large stock-exchange listed companies, and through government procurement.
Over the past five years the government has made R32 billion in funding available to nearly 800 black-owned businesses, according to the Black Industrialists Report. One of the requirements for funding from this agency is a high level of black ownership and control of the businesses. The government also finances black business through the Small Enterprise Finance Agency, which says its loan book in 2020 amounted to R1.9 billion. In addition, since its launch the National Empowerment Fund has approved total loans of over R11.3 billion for black businesses. These represent the bulk of government financing for black small business. But there are other efforts, including the Umsobomvu Youth Fund and a Co-operative Incentive Scheme. And, until about ten years ago, there was a fund which provided microfinance.
All this amounts to a large government commitment to the financing of black business. By way of comparison, the Industrial Development Corporation which also contributes to the black industrialist scheme lent a total of R11.7 billion in its 2020 financial year. According to a Banking Association report on transformation released last year, the total balance sheet exposure of the banks to black small enterprises is rapidly growing and was R28.8 billion in 2018.
Strong spin-offs
The report on the Black Industrialists Scheme says its efforts – which bring together loans from the Industrial Development Corporation, equity funding from the National Empowerment Fund, and grants from the Department of Trade, Industry and Competition – generate strong spin-offs for the wider economy. According to the report, the R32 billion in funding will generate R58 billion in total investment and support 120 000 jobs.
The scheme fits well into the ANC’s vision of a large state financing and guiding private enterprise. First under Minister Rob Davies, and since 2018 under Ebrahim Patel, the Department of Trade, Industry and Competition has exercised increasing day-to-day control over South African development finance institutions.
The ANC has also been keen to use industrial policy to exercise greater control over business and direct it politically to ensure ‘transformation’ and greater planning. The government has come up with ‘masterplans’ for a number of industries, including auto, mining, and agriculture, and is developing plans for steel, furniture, and chemicals. Al-though negotiated, the masterplans are a means to pressure big companies into fitting into a government vision, and funding black businesses.
For example, under the auto industry master plan, auto-makers have committed R6.4 billion for an Automotive Industry Transformation Fund to provide funding and market access opportunities for black component manufacturers.
But there could be high costs from the push to use small local suppliers to pursue a policy of ‘localisation’. One binding constraint on local manufacturing is that the domestic market is small, which means the country cannot easily achieve substantial economies of scale to compete against overseas suppliers. This means that government’s masterplans could push up costs and lower international competitiveness.
The nearly 800 companies supported by the Black Industrialists Scheme operate in a diverse range of industries and include start-ups as well as long-established companies. There is a recognition in the report that not all will succeed in a market economy.
Industry’s prospects
The outlook for the firms created by the scheme will depend on their own management and their industry’s prospects. South Africa is burdened by over-regulation and a relatively high cost of doing business. Wage rates are not set in relation to the economics of the small business but rather by bargaining councils upon which they often have no re-presentation. Many basic services for businesses are deteriorating, there is low growth in demand, and electricity supply is unreliable and expensive. This all makes for a tough environment. To help black business and, for that matter, all business, government needs to address these issues. If they fail to do so, many of the black industrialists that they have funded are likely to fail.
Around the world, governments have programmes to support small business, but are government agencies in the best position to determine which are the best bets?
Government might have been better off handing over its funding for black industrialists to the banks, who for a fee might determine which companies to support. After all, that is what the banks do day in and day out. The real test will be to see how many of the 800 are around when the second five-year report on the black industrialists’ scheme is released.
There is a more basic problem to government’s approach to funding small business. Making small-business funding on the basis of race has its own complications. There would be a lot less risk if the small businesses to be financed were chosen from a larger and more diverse pool of all South Africans.
It might well be the case that in the years ahead, all black groups will not be perceived to be equally disadvantaged. Would black-owned businesses receive allocations of capital in proportion to their share of the black population or a portion of the number of loans extended? It would be far easier to fund enterprises solely on the merit of their business plan and the anticipated return on investment. After all, the country would be best served by choosing projects with the highest rates of return.
The missing part of the small business puzzle in South Africa is financing for micro enterprises. With South Africa’s outsized unemployment problem one would have hoped that more attention had been given to this.
Missing out
It is easier for banks or government agencies to make a few large loans rather than multiple micro loans, yet the benefits of small loans to an economy where millions are out of work could be immense. In all its empowerment initiatives, the government is missing out on lending small amounts to many individuals.
One way to address this would be to get the banks to lend for this purpose, perhaps with guarantees. At the moment this market is probably served by many micro-lenders who are able to extract extortionate rates of interest.
And if the government is really intent on empowerment, business studies might be given a greater emphasis in school and continuing education. Giving people the skills to generate ideas and understand very basic concepts of profit, the dangers of excessive debt, and basic book-keeping could be the real means to empowerment.
[Image: Christina @ wocintechchat.com]
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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