Black Economic Empowerment, Barriers to Entry, and Economic Transformation in South Africa

Abstract

One of the key challenges of South Africa’s democratic project has been supporting the effective participation of the previously excluded black majority in the economy. The broad-based black economic empowerment (BBBEE) policy, as the primary tool employed to drive racial transformation, is assessed and found to have had a limited impact, although there has been some progress. The chapter considers the link between structural transformation and black economic empowerment in three key parts. First, relevant literature is drawn on to build the argument that inclusion matters for structural transformation. Second, is an examination of the factors that have underpinned the challenges with the implementation of BBBEE to open up the economy for broader participation, including its limited focus on key barriers to entry, and the implications for structural transformation in South Africa. Third, the chapter presents a case study based on a survey of applicants under the government’s ‘black industrialists scheme’ as a critical evolution from, and alternative to, the approach followed with BBBEE, as it is able to contribute to both racial and structural transformation of the economy. The chapter concludes with a reflection on the roles of black economic empowerment and the black industrialists scheme, barriers to entry, and structural transformation of the economy.

Full text

Thando Vilakazi and Teboho Bosiu, Black Economic Empowerment, Barriers to Entry, and Economic Transformation in
South Africa In: Structural Transformation in South Africa: The Challenges of Inclusive Industrial Development in a
Middle- Income Country. Edited by: Antonio Andreoni, Pamela Mondliwa, Simon Roberts, and Fiona Tregenna,
Oxford University Press. © Oxford University Press 2021. DOI: 10.1093/oso/9780192894311.003.0009
9
Black Economic Empowerment, Barriers
to Entry, and Economic Transformation
in South Africa
ando Vilakazi and Teboho Bosiu
9.1 Introduction
Economic growth requires structural transformation of the economy, and
growing the manufacturing sector in particular (Tregenna,2008; McMillan and
Rodrik,2011; Felipe et al.,2012). As set out in the introductory chapters of this
volume, for South Africa this means diversifying investments and economic
activity away from upstream capital- intensive industries to value- added and
labour- absorptive downstream industries, which have the potential to increase
employment and productivity (Tregenna,2008; Hartman et al., 2017; Baymul and
Sen, 2018). Rivalry from local or foreign rivals can lead to dynamic gains in
productivity and investments in improved capabilities, which are also associated
with structural transformation (McMillan and Rodrik,2011). However, the evidence
in South Africa is that rivalry is restricted by high barriers to entry in key economic
sectors. ese are especially high for black- owned rms (Vilakazi et al.,2020).
e chapter develops the insight that racial transformation and addressing
barriers to entry (generally, and for black South Africans in particular) are critical
for structural transformation of the economy. It does this in three key parts. First,
in section9.2, the chapter sets the scene by drawing on the literature to show that
economic inclusion and rivalry, and racial transformation of the economy, are
critical for structural transformation to be achieved in South Africa. Second, in
section9.3, the evolution of South Africa’s black economic empowerment (BEE)
policy is assessed in terms of how it has been implemented and the challenges it
has faced. is includes the shi to broad- based black economic empowerment
(BBBEE).
ird, in section 9.4 the chapter presents a case study of the South African
government’s black industrialists scheme (BIS) as an important development and
alternative to the approach adopted with BBBEE. e BIS is an industrial policy
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     
tool focused on targeted funding and non- nancial support of ‘black industrialists’
(BIs) involved in value- adding manufacturing activities. Although it is relatively
soon aer its implementation in 2016, evidence from a survey of applicants to the
programme demonstrates its strong potential for enhancing both the structural
and racial transformation of the economy. e scheme’s design and intended
focus is specically on fostering competitive black- owned companies in the
manufacturing sector.
9.2 Setting the Scene: Why Inclusion and Black Economic
Empowerment Matter for Structural Transformation
Drawing from the existing literature this section sets out the ways in which rivalry
and inclusion are important parts of the process of structural transformation,
with specic reference to South Africa. e key point is that the inclusion of black
people is critical for structural transformation to take place.
9.2.1 Rivalry and Inclusion Matter for Structural Transformation
e competitive process can drive economic eciency and higher productivity.
Rivalry between businesses is important as it enlists rms to intensify eort
and create new products and business models to improve their own oering, and
ensures a sharper focus on businesses nding ways of deriving productive and
dynamic eciencies (Roberts, 2010). While markets are inherently imperfect,
forms of competitive discipline arising from the threat of entry, regulations, or
exposure to foreign competition and international export markets can ensure that
rms retain the economic incentive to improve their competitiveness, even in
concentrated industries (Amsden,1989; Singh,2002; Roberts, 2010; McMillan
and Rodrik,2011). e gains from competition are therefore dynamic and linked
to investments in capabilities, technological upgrading, and shis to the produc-
tion of more complex products.
In South Africa, however, investment and growth in productivity have been
hampered by high levels of concentration and barriers to entry (Vilakazi et al.,
2020). In some cases, the exercise of market power upstream, which is reinforced
by government policies that eectively protect incumbency, can mean that com-
petition and investment in adjacent markets are stied (Mondliwa and Roberts,
2019). In addition, international competition and openness have not served to
stimulate rivalry and discipline the market power of large local businesses, and
the economy remains highly concentrated (see Bell et al.,2018; Bell and Goga,
2020; Goga et al.,2020). Notwithstanding the enforcement of competition law,
there is a growing evidence base that shows that substantial barriers to the entry
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and growth of rivals remain, which prevent them from eectively contesting the
market and undermining the economic rents being earned by incumbents
(Vilakazi et al.,2020).
While large rms are important for realizing economies of scale and scope and
making necessary investments for upgrading, they need rivals to spur them on to
do so. A lack of an optimal degree of competition to discipline market power
enhances inequality, in that concentration forms the basis of rents, wealth, and
the returns from ownership of assets and resources for the rich in societies (Baker
and Salop, 2015; Ennis et al., 2019). Barriers to entry and market power are
therefore directly and indirectly linked with inequality (Chapter8).
e implications are that improving productivity and competition requires a
strong role for industrial policies that are aligned with eective BEE policies. Such
policies are important to stimulate the entry of new rivals at sucient scale and
with capabilities to contest markets with established rivals, as part of driving
structural transformation of the economy. Equity and eciency do not necessarily
pull in opposite directions, as had come to be understood from classic welfare
economics (Atkinson,2015: 246). Here, rather, it is suggested that the objectives
of increasing participation and rivalry, while promoting productive growth and
structural transformation, can go hand in hand. Indeed, rivalry from dierent
sources is a key component in driving improvements in productivity and driving
structural change.
Moreover, inequality undermines social cohesion (Atkinson,2015). In South
Africa, this is especially the case given that inequality in wealth and income
occurs along racial lines—more than 90 per cent of the population are black (Stats
SA,2020), but ownership of economic assets and wealth is skewed heavily towards
white South Africans (Chatterjee et al., 2020). Furthermore, recent evidence
shows that while barriers to entry are high in general, they are especially high for
black businesspeople. is serves to reinforce the lack of dynamism in the
economy and the high levels of economic concentration and control by leading
white- owned rms (Vilakazi et al.,2020; Vilakazi and Ponte,2020; Bosiu et al.,
2020). As such, the political economy of inclusion and armative action in South
Africa is inseparable from economic policymaking and market outcomes.
9.2.2 Racial Transformation of the Economy Is Necessary
forStructural Transformation
e emphasis on racial transformation as part of economic policymaking in
South Africa is similar to the context of armative action and indigenization
policies in other countries addressing a colonial legacy, such as Malaysia. In fact,
it is not that dierent from many policies in other countries that are designed to
improve the economic position of marginalized groups, including South Africa’s
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     
apartheid- era policies for the empowerment of Afrikaners in the mid- 1900s
(Terreblanche, 2002; Gqubule, 2006; MacDonald, 2006; Von Holdt, 2019).
Experiences with armative action, in particular, are well documented in the
literature (see, for example, Gqubule,2006; Lee,2015). ese are not canvassed in
this chapter, except to note that in Malaysia, armative action policies contributed
to the economic upliment of the marginalized majority Bumiputera population,
particularly in the education sector. However, as in South Africa, there remain
concerns about rent- seeking, fronting, and lack of transformation in the ownership
of wealth (Lee, 2015). is is not surprising as economic policies to achieve
empowerment of economically marginalized groups are necessarily deeply
politicized.
Economic exclusion and its social consequences and drivers speak to the
sustainability and stability of a country’s political settlement (Gqubule, 2006;
Lee,2015; Khan,2017; and Chapter14). As such, in the South African context for
structural transformation of the economy to be sustained it will depend on the
ability to ensure that the pattern of growth and diversication of the economy is
inclusive in terms of its racial dynamics. At the simplest level, opening up markets
for new and/or black- owned rms and forging a black capitalist elite has been
critical for sustaining and stabilizing the political settlement (Hirsch, 2005;
MacDonald,2006; Von Holdt,2019; Mondliwa and Roberts, 2020). It can also
lead to potentially better economic outcomes arising from more economic
dynamism and contestation (Vilakazi et al.,2020)—both of which can have a
positive impact on structural transformation. In addition, the path of structural
change needs to enable large- scale inclusion of the black majority through
emphasis on more diversied industries and the steering of investments in the
economy towards labour- absorptive sectors, which also tend to have lower
barriers to entry.
is brief overview of the interlinkages between inclusion, racial trans form-
ation, and structural transformation shows that policies focused on each of these
areas are closely related and mutually reinforcing. Building on this framework,
the following section analyses the challenges with the approach taken with
BBBEE, and provides insights into its inability, to- date, to address specic barriers
to entry and expansion.
9.3 e Evolution and Challenges of Black Economic
Empowerment and Fostering Meaningful Black
Participation in the Economy: An Overview
Black economic empowerment (BEE) was dened by the South African
government in 2003 as ‘an integrated and coherent socioeconomic process that
directly contributes to the economic transformation of South Africa and brings
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about signicant increases in the number of black people who manage, own and
control the country’s economy, as well as signicant decreases in income inequali-
ties’ (DTI,2003). At the heart of BEE philosophy was an ambition to foster an
economy in which black South Africans, who had been previously marginalized
by apartheid government policies from long before the 1990s (Terreblanche,2002),
were able to participate ‘meaningfully’ in all aspects of economic life, including as
owners of capital.
BEE policy became one part of a wider nexus of policies to drive socioeconomic
transformation in terms of land ownership, public procurement, employment
conditions, and skills and training (DTI, 2003). Of all these, BEE policy was
undoubtedly important for driving racial transformation of the economy—not
least because it targeted widespread changes in ownership within existing, largely
white- owned businesses. Other policies, such as those relating to skills develop-
ment, were arguably less direct in terms of their symbolic and political impact.
As such, expectations of BEE were high and there has been extensive scrutiny
of its outcomes. A rich body of literature, which is only selectively drawn on here,
has reviewed BEE and the government’s incremental policy shis over time
towards a more ‘broad- based’ conception of empowerment (BEECom, 2001;
Hirsch, 2005; Gqubule, 2006; Freund,2007; Ponte et al.,2007; Southall, 2007;
Hamann et al.,2008; Tangri and Southall,2008; Sartorius and Botha,2008; Patel
and Graham,2012; Mebratie and Bedi,2013; Bracking,2019; and Mondliwa and
Roberts,2020).
9.3.1 1994–2003: No Mandatory Compliance
Despite the widespread recognition among ruling, political, and business elites
that black inclusion needed to be achieved as part of the settlement reached
leading up to and aer the democratic transition in 1994, there was surprisingly
little specicity in policy about how this would be done (Hirsch,2005). Various
large businesses took the lead from as early as 1993 in structuring partnerships
with black businesspeople, some connected with the ruling party, to sell equity
stakes in established white businesses to consortia of black businesses and
businesspeople. A notable transaction was by Sanlam, one of the largest
conglomerate insurance and nancial services groups, which sold 10 per cent of
Metropolitan Life to a black- owned consortium called Methold, which was later
renamed as New Africa Investments Limited (Gqubule, 2006). Many similar
initiatives were concluded in the 1990s. ese became known as ‘BEE deals’,
 In the BBBEE Act of 2013, black people are dened as Africans, Coloureds, and Indians who are
citizens of South Africa by birth or descent; or who became citizens by naturalization in dierent
dened parameters.
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which denoted the transactions through which BEE rms and consortia would
acquire stakes in existing rms as BEE partners.
e manner in which this process evolved in the 1990s revealed a number of
fundamental issues that would require government attention. First, it was obvious
that white businesses were ooading many non- core business assets to black
empowerment partners, in highly leveraged empowerment transactions. is put
the consortia into extremely indebted positions and exposed them to volatility in
economic conditions in sectors such as mining, which meant that their returns
from the deals were neither stable nor signicant (Ponte et al.,2007; Southall,2007;
Tangri and Southall,2008; Patel and Graham,2012). In addition, the overseas
listings of some of the major conglomerate groups meant pressure from overseas
shareholders to focus on more clearly identied areas of ‘core business’ (Chabane
et al.,2006; Ponte et al.,2007; and Chapter10). One way of doing this was to sell
non- core assets to the black business groups, claiming credit for being engaged in
empowerment transactions, while at the same time organizing nance for these
groups at full commercial rates (Ponte et al.,2007; Mondliwa and Roberts,2020).
Second, there were almost no black businesses that had access to signicant
capital to make investments. is meant that only a few black individuals and
their companies emerged as leading black partners for various deals, including
some that were clearly linked to the ruling party (Gqubule,2006; Southall,2007).
Arguably, businesses also targeted partnerships with these connected
businesspeople because it meant that they could leverage these links to lobby for
favourable policies in particular economic sectors.
ird, there was no legal compulsion for white businesses to consider deals or
other strategies for including black businesspeople, because there was no clear
policy or mandatory compliance with BEE. is was in spite of the fact that
legislation had been developed for the formalization of transformation in other
areas, such as, employment equity, a land rights process, and black inclusion
through preferential procurement (DTI,2003).
A report released by the BEE Commission, which had been set up in 1998
under the auspices of the Black Business Council, was submitted to President
Mbeki in 2001. It highlighted in detail the range of concerns about the manner in
which transformation had taken place since the democratic transition. ese
included disenchantment with the fact that there was no policy direction, no
formal voice for black business, the fact that white businesses had led the BEE
agenda on their own terms, and that transformation had been narrowly dened
(BEECom,2001).
In some sectors, established businesses tried to anticipate the changes that
would come, and address the biggest concerns by agreeing to sector charters—
arguably to head o more aggressive policy interventions by government to drive
transformation at the sectoral level. e rst two sector charters were in the liquid
fuels and petroleum value chains, and in mining (Bowman,2019). Both included
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voluntary commitments by rms to broaden the scope of empowerment initiatives
from a focus on ownership transfers to black inclusion in management and com-
pany value chains and structures (Hirsch,2005; Gqubule,2006). Notably, these
early charters were in regulated sectors where government had relatively strong
leverage in terms of how it could use sector regulations to drive more radical
reforms (Ponte et al.,2007; Bowman,2019).
9.3.2 2003–19: Formal BEE Legislation and
Successive Amendments
e Broad- Based Black Economic Empowerment (BBBEE) Act of 2003
represented an important change. Aer 2003, most empowerment transactions or
BEE deals became more broad- based, in line with the Act. is was a signicant
development from the early forms of black empowerment of the 1990s (Hirsch,
2005; Gqubule,2006).
In response to some of these core criticisms of the manner in which
empowerment had evolved since 1994, particularly the view that BEE had only
beneted a few, the notion of black empowerment in the BBBEE Act was
expanded beyond what was eectively a focus on ownership in the 1990s, to
include seven dimensions of empowerment (BEECom,2001; DTI, 2003). e
government strategy that was published by the Department of Trade, Industry,
and Competition (DTIC) in 2003 emerged partly as a result of the BEE
Commission’s ndings, which were endorsed by the president, and set in motion
a process of formalizing and codifying empowerment (DTI,2003). ere was also
an attempt to consolidate BBBEE through the issuing of Codes of Good Practice
to provide the basis for a generic scorecard against which rms’ empowerment
credentials would be measured when they competed for government contracts
(Gqubule,2006; Southall,2007; Tangri and Southall,2008). Importantly, however,
compliance with these new provisions was not compulsory and there were no
legal penalties on rms for failing to comply.
Even aer the rst BEE legislation was enacted in 2003, there was arguably
limited commitment from the private sector to implement it. Many companies,
particularly those not reliant on government contracts or licences, have failed to
meet BEE requirements for various reasons, including the lack of an economic
incentive to do so (Tangri and Southall,2008; Mondliwa and Roberts,2020). is
has been recognized in the subsequent reviews of progress with BEE by the
BBBEE Commission and others (BBBEE Commission,2017a). In addition, the
 e seven areas were human resource development, employment equity, enterprise development,
preferential procurement, as well as investment, ownership and control of enterprises, and
economic assets.
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     
model of equity acquisitions by black business and groups has failed because
many of those acquisitions were based on loans that le real economic control
and returns in the hands of the established corporations (Southall,2007; Tangri
and Southall,2008; Mondliwa and Roberts,2020).
Large proportions of the private sector were also being excluded from having
to comply with BEE, in dierent ways. While this may be justiable as a reason
for not wanting to disadvantage smaller entities with disproportionate compliance
obligations, it did mean that only some rms had to bear the costs and re spon si bil-
ities of putting in place transformation programmes. e practice from the early
2000s was that companies with relatively small annual turnovers did not have to
comply with any of the BEE requirements (Tangri and Southall, 2008; BBBEE
Commission,2017a); and medium- sized companies could initially choose four
from the seven (previously ve from seven) scorecard components to comply
with (Tangri and Southall, 2008). Larger companies could pick up points for
spending on corporate social investment schemes such as rural development and
social upliment initiatives, which may have been helpful to society in general
terms (such as supporting youth education schemes) but were oen unrelated to
the core business of the enterprise. is implied less of a need on the part of
white- owned businesses to focus on incorporating black businesses or in di vid-
uals into their value chains and management structures (Bracking,2019).
e above concerns were some of the reasons for the 2013 BBBEE Amendment
Act. e amendments focused on strengthening enforcement and the monitoring
and evaluation of BEE across the board. is was in response to the very poor
record of compliance by companies since 2003 (RSA,2014). A new component
was to make all measurement categories compulsory from 2016, with only some
accommodations for qualifying small enterprises (Bracking,2019). e BBBEE
Amendment Act of 2013 also led to the establishment of a BBBEE Commission,
and strengthened reporting obligations for South African companies and those
listed on the Johannesburg Stock Exchange (JSE) (Bracking, 2019). e 2014
amendments to the BBBEE Codes of Good Practice changed the system from
seven to ve elements: ownership; management control, which combined the pre-
vious employment equity and management control elements; skills development;
socioeconomic development; and enterprise and supplier development, which
combined the previous enterprise development and preferential procurement
elements. Importantly, the amendments included minimum targets of a 40 per
cent score on ownership, skills development, and enterprise and supplier devel-
opment, which were identied as priority elements (RSA, 2013).
e changes also increased the credit for and weighting of black ownership
from 20 to 25 points in public procurement considerations, introduced a formal
denition of fronting and criminal sanctions for it, and increased the weighting
of accreditation for eorts to encourage training and black representation in the
supply chain in the area of enterprise and supplier development (Bracking,2019).
ese changes reected a greater emphasis on driving compliance and targeting
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     
the inclusion of black businesses in value chains. is was undoubtedly a response
to shis in the political settlement and increased agitation within the ruling party
under President Zuma for more ‘radical’ and extensive transformation of the
economy—a key tenet of which was economic inclusion of black South Africans
(Von Holdt,2019).
e amendments also gave expression to the need to confront the problematic
and cynical culture of compliance—or non- compliance—that had developed.
Some white- owned rms blatantly entered into ‘fronting’ deals to skirt
regulations. A common practice was for black business partners to be brought in
as ‘nameplate’ partners to win contracts and create the perception of compliance,
thus undermining the spirit of broad- based transformation. To counter this, the
amended legislation included a new and specic denition and penalty for
fronting. e amended legislation also sought to encourage compliance by
introducing the ‘once- empowered, always- empowered’ provision, which meant
that formerly white- owned companies were allowed to retain their empowerment
credentials even aer their black shareholders had sold their shares, including to
white investors (BBBEE Commission,2017b). While it made it easier for BEE
groups to raise nance, it was a potentially problematic shi, however, because it
meant that businesses in key economic sectors such as mining and nance—
which no doubt lobbied for the changes—would not have the incentive to seek
out new BEE partnerships once previous BEE partners had exited. It meant prior
gains made through previous BEE deals could be eroded (Gqubule,2018).
While the amended legislation did lead to a wider participation of black busi-
nesses in the economy, its eects were not at the structural level. e challenge
posed by the BEE policy agenda was that in its essence it was an attempt to engen-
der a fundamentally interventionist and redistributive social programme—in the
form of black economic empowerment—in a wider economic policy context that
was fundamentally neoliberal and market- oriented, and in which the control of
capital was highly concentrated (Ponte et al., 2007; Southall, 2007; Patel and
Graham,2012). As others have analysed in this volume and elsewhere, this was a
very conicted policy approach, one underpinned by orthodox macroeconomic
policy and liberalized trade. ere was no clear strategy for how to deal with the
legacy of entrenched economic concentration, the power of large rms, high bar-
riers to entry, and the challenge of developing new black industrialists and rms
(Chabane et al.,2006; Hamann et al.,2008; Bell et al.,2018).
9.3.3 Despite Changes to BEE Legislation and Policy,
Fundamental Problems Persist
9.3.3.1 Persistently High Barriers to Entry and Other Constraints
While the changes to BBBEE policy were signicant, a number of the key issues
addressed in 2013 were very similar to the concerns raised in 2001 by the BEE
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     
Commission initiated by the Black Business Council. is suggests that only
limited progress had been made on the ground. A key problem that persists, up to
2020, is that throughout the economy there is still insucient focus on the need
to address the barriers that inhibit entry in general, and that of black- owned rms
in particular. Barriers faced by black businesses are especially high. is is because
access to markets and capital for black businesses is made more dicult by
exclusion from well- established business networks and value chains, there are
reputation and trust issues vis- à- vis white- owned businesses, and there is a
history of skewed ownership of productive resources, which means that many
black businesspeople struggle to nd collateral when applying for business loans
(Bosiu et al.,2020; Vilakazi et al.,2020).
As an illustration of the lack of the necessary complementary measures, requir-
ing existing companies to procure from black- owned businesses assumes that these
black suppliers both exist and that they have grown enough to be able to supply
large rms. And, where they do exist, the BBBEE approach assumes that they are
given a fair chance in bidding for contracts with existing rms, or that they are con-
nected to networks that enable them to integrate into value chains and that they are
given the opportunity and support to overcome barriers and grow (das Nair et al.,
2018; das Nair and Landani,2020). is is in fact not the case in many value chains
analysed in recent research (Bosiu et al.,2020; Vilakazi et al.,2020).
is form of BBBEE also had the major—and probably unintended—conse-
quence that by including black capitalists in the ownership and management of
existing large businesses the position of entrenched incumbents has only been
reinforced. Aligning the economic incentives of the emerging black middle class
with those of the existing capitalists has made it far less likely that black capitalists
will agitate for more extensive reforms to address the entrenched racial skewing
of capital ownership. Calling for a change to the structure of markets and the need
to address concentration more directly would not serve the interests of the large
rms from which black businesspeople, elites, and the emerging middle class
have been beneting. e black partners have shared the incentive to protect the
established rents of the insiders (Vilakazi and Ponte,2020).
e BBBEE policy has, therefore, not gone nearly far enough in addressing the
complex ways in which outsiders are excluded from economic participation. e
principal and mutually reinforcing barriers include lack of access to nance,
diculties integrating into existing value chains, lack of access to inputs, and
limited access to key routes to market and large- scale patient nance to enable
growth and the achievement of scale economies. ese and other constraints are
discussed below:
9.3.3.2 Problems with Access to Funding
Foremost among these barriers is the lack of a comprehensive system of industrial
nancing with provision of adequate ‘patient’ capital to allow for the time it takes
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     
rms to build capabilities and make large- scale investments. While there is an
established network of government development nance institutions (DFIs),
their activities have largely been uncoordinated and are not aligned with a central
objective of driving structural transformation. In the post- apartheid period in
general, the reorientation of government’s industrial development initiatives have
not successfully supported more diversied industrial activities (Goga et al.,2019).
Funding for the development of downstream linkages has remained relatively
weak, despite stated government objectives of increasing beneciation, strength-
ening local value chains, and supporting more labour- intensive (and downstream)
activities (Maia et al.,2005; Bell et al.,2018). is has been perpetuated by a com-
mercial banking and private equity sector whose lending and investments have
been directed at private consumption, household credit, and short- term portfolio
interests, rather than at productive xed investments in the real economy (Bosiu
et al.,2017; and Chapter10). Importantly, black- owned businesses in particular
continue to report challenges with access to nance and a problem with DFI insti-
tutions that do not steer a proportional share of capital towards black businesses
(IDC,2003 and2015; Goga et al.,2019; Bosiu et al.,2020; Vilakazi et al.,2020).
9.3.3.3 Poor Coordination of Economic Policy
A further problem is that industrial policy, and competition and empowerment
policies have not worked eectively together to address other barriers to entry and
racial transformation. For example, it appears that the issue of improving access to
routes to market for challenger rms has not been addressed directly by the dier-
ent policies. is has been acknowledged by the ministry responsible for trade and
industry (Bosiu et al., 2020). In practice, these gaps in policy coordination and
implementation have eectively meant that laws not specically intended to eect
transformation, such as competition law, have rightly or wrongly been viewed as
primary tools for promoting transformation. Competition policy (as opposed to
the narrower enforcement of competition law) is an important potential tool to
remove strategic barriers preventing black business participation as competitors,
as contemplated in the denition of BEE policy discussed earlier. With the
2018 amendments to the Competition Act, greater participation by smaller
enterprises and businesses owned by black people, in particular, is also now
included in specic provisions relating to anticompetitive conduct.
9.3.3.4 Problems with Gaining Access to Value Chains in Crucial Sectors
ere has also not been recognition in policies of the complexity of entering
certain value chains in key, labour- absorptive sectors. For example, in order to
survive and then compete with established, vertically integrated rms, successful
entry into the agroprocessing sector requires nance, skills, and achieving scale
economies in activities such as processing and distribution (Bagopi et al.,2016;
Nkhonjera,2020). While incumbent rms have been penalized for engaging in
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     
anticompetitive practices in agroprocessing that further raised barriers to entry
and limited participation (Mncube, 2014; Nkhonjera, 2020), this needs to be
complemented by appropriate measures to support eective entry.
Emerging rms also face challenges in terms of accessing retail shelf space and
routes to market, despite the expansion of retail supplier development programmes
that have historically been token corporate social investment schemes (das Nair
et al.,2018; Chisoro- Dube and das Nair,2020; das Nair and Landani,2020). is
is a challenge that still confronts black industrialists, in particular, because of the
lack of established networks and a proven track record with existing white- owned
businesses (Bosiu et al.,2020).
e size of investments required to establish competitive challenger rms is
signicant, and entry has been dicult in many value chains, even for rms that
do have established links with sizeable holding companies (Nkhonjera,2020).
Large- scale entrants have found it dicult to build market share in tightly held
sectors (Chisoro- Dube and das Nair,2020; Nhundu and Makhaya,2020; Robb,
2020). In many cases, there are diculties with building a brand and overcoming
network eects, rst- mover advantages, and high switching costs. However, they
also reect the eective lobbying by insiders for regulations that protect their
positions (Nhundu and Makhaya, 2020; Vilakazi and Ponte, 2020). is is in
addition to the restrictions that incumbents can impose in relation to the access-
ing of routes to market and key infrastructure (Paelo et al.,2017; Chisoro- Dube
and das Nair,2020; Mondliwa,2020; Robb,2020).
All this shows that the structure of markets and the racial composition of
ownership and control has not changed signicantly over time, despite the many
iterations and amendments to empowerment policies and legislation. Clearly a
more focused intervention is needed.
9.4 Rethinking Empowerment towards Structural
Transformation in South Africa: New Evidence from
the Black Industrialists Scheme
e case study of the black industrialists scheme (BIS) oers key insights into
how the failures of BEE policy can be addressed through a sector- oriented strat-
egy for inclusion, which also has a focus on the structural transformation of the
economy.
Diversifying the economy in terms of productive activities and control of
resources by black South Africans clearly requires new thinking about policies for
increasing black participation. e discussion in section 9.2 suggests that a
 e discussion in this section draws substantially from an underlying working paper (Bosiu et
al.,2020). See also DTI (2015).
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     
comprehensive policy approach to achieving structural transformation needs to
be closely linked with industrial and competition policies to address barriers that
can undermine structural change. is is reinforced by the experience of BEE in
practice reviewed in section9.3, which has highlighted the lack of a policy focus
in the early years, ineective enforcement, low levels of compliance once
legislation has been in place, and the lack of coordination with other critical
policy areas.
e focus of the BIS, launched in 2016, has been on rms in the manufacturing
sector with a high potential to contribute to structural change, including through
investments in diversied and medium- technology production activities.
Another of its features is its aim to address important barriers related to nance
and access to markets, which, as has been argued, are key determinants of eective
participation of black- owned businesses. In this section the BIS’s design and key
outcomes are evaluated, followed by a discussion of the cross- cutting implications
of key policy gaps for barriers to entry.
9.4.1 Key Features of the Black Industrialists Scheme
e rationale of the BIS is that the development of the manufacturing sector
through the production of higher- value products, creating employment, and
broadening black participation within it, is critical for establishing a new
economic growth trajectory for South Africa (NCOP, 2016). Early discussions
around the BIS began in the mid- 2000s, although the BIS policy was only
launched publicly in February 2016. Importantly, at the core of the rationale for
the programme is an evolution in the strategy for BEE (without displacing BBBEE
laws), as reected in the parliamentary summary of the inputs of the Director
General of the Department of Trade, Industry, and Competition (DTIC, formerly
DTI), Lionel October:
[T]he rst step for the DTI had been to transform existing enterprises to assist
the black majority in entering the market. is was the rationale behind the rst
phase of BEE policies, which stipulated that companies must be BEE compliant,
having certain levels of black ownership, management, and procurement . . . [the
BIS] targeted businesses that already had black ownership and management. In
other words it was a secondary project, a second phase . . . to help black
businesses expand their market penetration or enter new markets.
(NCOP, 2016)
is reference suggests a recognition by the government that, since its inception
in 2003, the BBBEE policy had not suciently addressed certain aspects of
barriers to entry. e BIS can thus be seen as a progression in policy—and with
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     
the potential to catalyse structural transformation in targeted industries, tied into
broader economic objectives. Indeed, the design of the BIS programme points to
an important shi in the understanding of barriers and what it takes to build
challenger rms beyond the scorecard parameters of BBBEE.
e two main tools used to achieve the objectives of the BIS programme are
the provision of access to capital, and access to markets. Access to markets is to be
facilitated through state- owned companies, and progressively through private-
sector channels. In practice, the scheme aims to assist so- called ‘black
industrialists’ (BIs) through providing concessional funding (grant plus debt)
through a central oce which sources funding from the Industrial Development
Corporation (IDC), South Africa’s primary DFI, and provincial DFIs. e BIS
targets enterprises operating in industries that fall within the DTIC’s priority
manufacturing sectors noted in the Industrial Policy Action Plan (IPAP).
e IPAP is the primary industrial policy implementation strategy in South
Africa (arising from the National Industrial Policy Framework of 2007), updated
through various iterations with a particularly strong sectoral focus (DTI, 2015;
NCOP, 2016). is is a critical aspect as it means that black industrialist support
is directly linked to the strategy to grow South Africa’s manufacturing sector as
part of long- term growth. A key dierence with BBBEE is that the BBBEE policy
necessarily applies a generic code system and criteria across all economic sectors
and cannot be adapted to issues that may be specic to certain sectors or
industries.
Qualifying BIs are dened as those entities in which the black owners hold
more than 50 per cent of the shares in the rm that operates within a focus sector
of the IPAP. e BIs need to demonstrate a medium- to long- term commitment
to the rm, exercise operational control, bear personal risk in the venture as the
primary entrepreneur, and be involved in driving the strategy and day- to- day
running of the rm. e very specic characterization of the qualifying
industrialists appears to respond to a key criticism of BBBEE, namely that many
black shareholders (and managers), even in broad- based arrangements, were not
exposed to key operational aspects of the existing businesses in which they
became owners and so could not gain the skills and experience relevant for build-
ing new enterprises in the medium and long term.
e two broad qualifying criteria—the scale of the project and the potential
contribution to the economy—suggest the prioritization of large- scale projects
that have the potential to impact on competitive dynamics in markets and create
substantial employment. In terms of substantial scale, the specic project for
which funding is being sought must require a minimum investment of R30
million (US$1.8 million, in 2020). e DTIC then provides a cost- sharing grant
 Smaller projects and companies are, in principle, catered for through other programmes of the
DTIC and/or those of other government agencies.
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     
of between 30 per cent and 50 per cent of the required investment for the project,
up to a cap of R50 million (US$3 million). e contribution to the economy is
based on eight equally weighted criteria in terms of the expected contribution to:
employment (securing, retaining, or increasing direct jobs); market share
(securing new business or increasing existing operations); quality improvement
(reducing relative prices and/or increasing the quality of products oered); green
technology and resource- eciency improvements; localization (increasing local
production activities, diversication, and exports); improving the regional spread
of production (in rural areas or regions with unemployment higher than 25 per
cent); personal risk (demonstrating own nancial and/or non- nancial contribu-
tion to the business); and empowerment credentials (BBBEE scores) (DTI,2015).
e criteria have therefore been designed to reward and incentivize certain
behaviours that are aligned with a range of socioeconomic and manufacturing-
specic objectives. e amount of the government contribution is based on the
combined performance of the applicant in relation to black ownership (with more
being desirable) and on the economic benet criteria. However, it is a signicant
concern that these criteria have only applied at the pre- qualication stage, and
rms are not required to report on their performance against them, once they are
on the programme. is means that there are no repercussions if the rms do not
achieve any of the objectives claimed in the application stage.
Overall, a total of 135 enterprises had been supported under the scheme since
its commencement in 2016 to the time of the survey in May 2019, with a substantial
combined value of approved project disbursements (DTIC and co- funder funds
combined) of approximately R12 billion (US$700 million) (Bosiu et al.,2020).
e potential impact of the programme is therefore signicant.
9.4.2 e Survey of the Black Industrialists Scheme
9.4.2.1 e Aim and Design of the Survey
e analysis of the outcomes of the BIS involved an online, anonymized survey
administered in May 2019 (for full details refer to Bosiu et al.,2020). e survey
gathered data on the businesses and their performance, including under the
economic benet criteria, and their experience with dierence stages of
application and disbursement processes at the DTIC as well as other DFIs or
private funders as comparators. ere were thirty- nine respondents, which
included both applicants and beneciary rms of the programme since its
inception in 2016—out of 255 applicants or beneciary rms (Bosiu et al.,2020).
At the time of the survey, there were 135 beneciaries, at dierent stages of the
 By comparison, South African public sector institutions spent approximately R250 billion on
xed assets in 2018. See Statistics South Africa website: http://www.statssa.gov.za/?p=12,705.
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     
programme cycle between approval and claims and disbursement. e survey
was accompanied by verication workshops and in- depth interviews with
selected rms as well as with the DTIC as the responsible ministry, and various
other state- and private- sector agencies responsible for the provision of nancial
and non- nancial support to small and medium- sized rms in South Africa. is
combination of engagements served to test and strengthen the robustness of the
ndings.
9.4.2.2 Key Findings of the Survey: Has the BIS Contributed to Inclusive
Structural Transformation?
e focus here is on aspects relating to the programme’s potential to drive an
inclusive form of structural transformation in the terms discussed in sections9.2
and 9.3 above. Further details can be found in Bosiu et al. (2020).
e majority of the investments made by the BIS beneciaries have been
expansionary capital investments in diversied manufacturing, which suggest
that the programme has contributed to catalysing investments in new productive
assets in the economy. ese investments occurred at a time in South Africa when
private and public gross xed capital formation was stagnant (Bosiu et al.,2017;
Bell et al.,2018). Given their particular emphasis on diversied manufacturing
activities, this meant that they contributed incrementally to structural change.
Although the businesses of BIs are relatively small compared with large South
African businesses (such as those listed on the JSE), the survey found that these
businesses have invested in relatively large projects, in line with the BIS objectives,
ranging up to R390 million (US$23 million, 2020) in value.
e BIS cost- sharing grant oers support in three main categories of
interventions: capital investment, investment support, and business development.
Of total investment allocations for approved BIs that responded to the survey,
matched against data from the DTIC database, 97 per cent (R2.9 billion, US$177
million, 2020) of actual and projected disbursements by the DTIC and the co-
funders were committed to capital investments. Indeed, 80 per cent of these funds
were earmarked for investments in machinery and equipment, implying that
rms were expected to invest in productive assets that would improve production
capacity, scope, and capabilities. e majority of rms responding conrmed that
their output had increased since approval to the BIS, in many cases due to the
project for which they had applied to the BIS.
Generally, these are also large investments relative to those supported under
other government programmes and some private- sector schemes. is targeting
of the programme is especially signicant because it implies a focus on rms that
have already overcome the initial stages of testing and learning involved in the
building of organization capabilities and have sucient scale and scope to
compete as eective rivals in the markets in which they operate. is includes
shiing to more sophisticated activities and stimulating rivals to do the same as
part of the competitive process.
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     
ere is also signicant diversity in the manufacturing activities in which the
rms surveyed are involved, and many of them have operations in ‘rural’
locations, although this is not a strong feature in the data. Specically, based on
self- classication by the rms under the IPAP focus areas, een of the thirty-
nine respondents operated in chemicals, pharmaceuticals, and plastics, followed
by agroprocessing, and clean technology and energy. Other activities included:
manufacturing of wiring and electrical components; electrical and digital devices;
food additives, preservatives, food processing; household consumables; and
clothing and textiles products. ese are generally activities which entail medium-
technology manufacturing processes, and, importantly, are also labour-
absorptive, which means ultimately shiing the employment of labour to higher
value- added activities in the economy.
In response to questions on whether they had made improvements under each
of the eight economic benet criteria, many companies responded with detailed
descriptions of specic technologies acquired and indications of the savings made
in some cases (with 63 per cent of respondents reporting and describing some
form of improvement). Firms also reported improved product quality, advancing
product development, and achieving cost eciencies which are important in
terms of upgrading production processes and the potential to be competitive in
international markets. In terms of employment, the respondents reported an
increase of almost two thousand jobs when comparing their employment levels at
the time of their rst application to the BIS up to the time of the survey in 2019.
Many of these were jobs in operational activities (rather than technical) involving
large proportions of youth and women employees (Bosiu et al.,2020).
In addition to the competitiveness improvements noted above, nearly three-
quarters of rms increased sourcing from local and/or black- owned rms,
indicating local linkages. However, more than 80 per cent of the primary input
materials are still imported from China and the USA, followed by Europe and
India, which means there may be opportunities to increase local supply linkages
over time.
e evaluation of the survey points to the importance of targeted industrial
policy interventions which require eective levers and support, while also placing
strong conditions on rms in terms of expected outcomes from funding grants. In
this regard, the DTIC does not require rms in the BIS to report on the above
outcomes at all, except if they are applying for additional funding. While this is
potentially problematic, the risk of funds being squandered or used in un pro duct-
ive ways is partly mitigated by the fact that the BIS operates on a claims- based
system, which requires rms to rst make the investments they have committed to
in their applications (using own or external funding), before they can claim for a
refund under the scheme. e claims- based system also means that the BIS e ect-
ive ly ‘rewards’ existing projects and entrepreneurs that have been able to commit
some of their own or borrowed funding for the projects already. e challenge, of
course, is that many black- owned businesses have reported signicant diculties
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     
with sourcing funds, including for working capital requirements. In this regard,
the DTIC has created a joint funding forum with private sector funders and DFIs
to work closely with the DTIC on the BIS applications.
e insights gained from the programme at a relatively early stage in its life
suggest that the BIS has a signicant potential contribution to driving structural
transformation, not least through investments in improved capabilities. Overall,
it is clear that the provision of nance and the accompanying non- nancial
support is critical, and that this is best done through targeted programmes that
build the capabilities of potential (medium- sized) challenger rms in the
manufacturing sector, in particular.
9.5 Conclusion
e precarious and shiing balance in South Africa’s political settlement
necessitates a rethinking about how to achieve structural transformation and
economic inclusion. In this chapter it has been argued that these objectives must
go together. As a political and social necessity, structural transformation of the
economy must account for the politics and economics of the exclusion of black
individuals and enterprises from participating in the mainstream economy.
Black economic empowerment and opening up the economy to entrants and
more competition generally are essential for the process of structural trans form-
ation in South Africa. A crucial point to highlight is that inclusion and rivalry
need to be substantive for there to be productivity- enhancing eects. is means
that entrants and emerging rms need to be able to compete as eective rivals in
the economy to stimulate dynamic eciencies through the competitive process—
pointing in turn to the importance of addressing barriers to entry and expansion
that are even higher for black- owned businesses. e competitive pressure that
new rivals can bring contributes to dynamic gains to the economy in terms of
investments, diversication, and upgrading to improve competitiveness. ese are
all critical factors in the process of structural transformation.
e BBBEE policies have been an important and necessary rst step towards
achieving economic inclusion, but they have not gone far enough or provided the
right incentives for incumbent interests and black capitalists to drive structural
change. ey certainly have not addressed the structural and strategic barriers
discussed in the chapter which prevent smaller and black- owned rms from
expanding; nor have the dierent strategies focused in any way on competition
and building eective rivals. Development nance has not provided the expected
thrust for driving inclusion and structural transformation, and BEE deals have
created a false sense of inclusion.
In this context, the BIS marks an important shi in the thinking about the role
of industrial policy that is integrated with BEE in driving inclusion and
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     
competition. e main insights are that the provision of nance and the
accompanying non- nancial support is critical, and that this is best done through
targeted programmes that build the capabilities of potential (medium- sized)
challenger rms in the manufacturing sector, in particular. e early- stage survey
of the performance of rms under this programme shows that the scheme has
had a catalytic eect in terms of stimulating relatively large investments by
industrialists, as well as driving improvements in their production capabilities,
cost eciencies, and product development. e programme has, however, not
been successful in improving access to markets and into established value chains.
is is the function of a lack of a coherent and coordinated strategy within South
Africa’s industrial, sector regulation, and competition policy space to systemically
address barriers of this nature. e potential benets of developing such a strategy
for driving structural transformation of the economy are signicant, requiring
extensive further research to inform policymaking that must avoid the pitfalls of
previous approaches.
e impact of the programme in driving inclusion and structural
transformation is therefore likely to be more signicant if there is more focus on
opening up access to markets through procurement by government and private-
sector entities. is is because there has not been a systemic approach to
understanding and targeting specic barriers faced by black- owned rms, such as
lack of access to markets.
e lack of focus on specic barriers such as nance in the BBBEE and indus-
trial policies has meant that other areas of policy, such as competition law, have
become viewed as the primary tools for transformation, despite their limited legal
remit. A more integrated and comprehensive approach, involving dierent agen-
cies and private- sector bodies is required. Such an integrated approach is also
necessary for dealing with some of the administrative challenges raised by the
rms surveyed, particularly with respect to delays in disbursements and the lack
of coordination between agencies of government.
It is clear that while the BIS presents a number of challenges to address, it also
oers a great deal to build on for it to become an eective tool to drive a process
of inclusive structural transformation. Early indications are that the programme
has promoted diversication, employment creation, entry and expansion, and
investments in improved capabilities, which are all essential for structural change.
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