• World

The Second Revolution

11 minute read
SIMON ROBINSON

Milase Mzamo knew what her future business partner Shaun Webber would look like before she even met him: white, male, construction worker. “I was thinking big like a rugby player,” says Mzamo, 36, who, with three other black women, owns a company called Infinity Inc., founded in late 2002 to buy a stake in Cape Town’s booming construction industry. “And when I met him he was those things.” But over lunch last August, Mzamo discovered that she had more in common with Webber, the managing director of design and building firm NMC, than she might have guessed. Both were raised in the Eastern Cape and share a passion for golf. More importantly, both agreed that together they could build NMC, which currently takes in around $30 million a year, into a major player.

“I remember walking away thinking, This is someone I can do business with,” says Webber, who concedes that he was looking for a black partner to help win government contracts. “She brings what we needed, which was access to markets. But she also fits into the company culture.” Three months ago, Mzamo and her partners at Infinity signed a deal to buy 15% of NMC. “I don’t know much about construction yet,” says Mzamo, who has worked as a journalist and in events management. “But give me a couple of months and I’ll be a builder along with the rest of them.”

The story of Mzamo and Webber is a common one in South Africa these days. The country is in the midst of a business revolution as control of the economy shifts from the white minority to the black majority. Frustrated with the sluggish pace of change, President Thabo Mbeki often speaks of South Africa’s “two economies”: the first, prosperous, developed and mostly white; the second, poor, underdeveloped and overwhelmingly black. “To build a unified nation based on equality and justice,” Mbeki said last month, “we must ensure that the economy is in the hands of all our people.”

To get more black hands on the economic levers, the government has introduced Black Economic Empowerment (bee) charters, which encourage companies to train more black workers, promote more black managers, procure supplies from black firms, and — as in the case of Mzamo and Webber — sell ownership stakes to black investors. In many ways, the future of South Africa depends on a successful handover. If it fails, the country will remain one of the most unequal in the world, and economic growth is likely to stagnate as crime and poverty grow. Make it work, and South Africa’s huge economic engine could help rev up the entire continent.

By the measures of South Africa’s first economy, the African National Congress (a.n.c.) government has done a good job. Ten years ago the country was swinging between boom and bust, and was in its third decade of double-digit inflation. The rich were sending their money overseas and the apartheid government was running a massive deficit. These days, most indicators look better. South Africa is experiencing the longest period of uninterrupted growth in a half- century; the inflation rate is a respectable 3.5%. Some 30,000 people applied to bring home millions of dollars in overseas assets as part of a recent tax amnesty, and the budget deficit is down to 3% of gdp. South Africa has a better credit rating than Brazil or India.

But South Africa’s second economy has fared far worse. True, the government has built 1.6 million new houses and connected millions of people to the national power, water and telephone grids. But poverty remains stubbornly stuck at around 45%. Unemployment has jumped from 19% in 1994 to 31% last year. Economic growth is steadier, though only half the minimum 6% per year economists estimate is needed to fuse Mbeki’s two economies into one. Even the initial postliberation flurry of “black chip” listings on the Johannesburg Stock Exchange fizzled, and by the late ’90s black ownership in public companies was actually declining. After peaking in early 1998 at 9% of listed stocks, black-owned companies fell to around 5%, where they remain today.

So maybe it’s not surprising that pollsters note a small but growing number of blacks experiencing “apartheid nostalgia.” “It’s not that they want to return to apartheid, but in retrospect it was a time when things worked better,” says Robert Mattes, co-director of the Afrobarometer poll, which in 2002 found that 20% of black South Africans described some aspects of apartheid as positive. To move beyond this sad nostalgia, the government is putting its massive buying power — $20 billion a year, or just under 20% of gdp — behind the bee charters. Any company that employs more than 50 people and wants to do business with the state — from supplying stationery or software to building a new road — must fill out a “scorecard” to prove it is empowering “previously disadvantaged individuals” — blacks, coloreds and Indians.

To reassure investors that the bee agreements don’t amount to state control, the government has made the charters nonbinding. But by making procurement from black firms one of the central planks of the new policy, the result is the same. “You just have to have a few key players demanding that all their suppliers are empowered, and because businesses are interdependent, you start a snowball effect,” says Colin Reddy, bee research director at BusinessMap Foundation, which tracks the South African economy. “Pretty soon, no one can afford to sit and do nothing.”

Even so, bee got off to a bad start. Two years ago, when word leaked that mining companies would have to sell 51% stakes to black owners within 10 years, investors wiped millions of dollars off mining stocks in a single day. A few months later, when the mining charter was finally approved, black ownership levels had been set at 26% — enough to create a critical mass of middle-class blacks, insisted the government, but not so much that the market would choke. “That massive flight of capital caused the President and the government to pause and say, ‘We can mess this up,'” says Bheki Sibiya, head of Business Unity South Africa, an umbrella group of white and black businesses. By the time the charter was launched, the mining industry, which accounts for more than one-third of South Africa’s exports, had also recognized that real change was needed. Over the past 18 months a flood of deals in the industry has increased black ownership to around 15%, well on the way to the 2012 goal. Even diamond miners De Beers, long a symbol of white might, will soon sell a stake to black investors.

As corporate South Africa recognizes that transformation makes economic sense, other industries have begun to write their own charters. “For us it’s a business imperative,” says Johan van Zyl, ceo of insurance firm Sanlam. “If we really want to grow as a company, we have to be all-inclusive.” Dali Mpofu, president of the Electronic Industries Federation, is more blunt: “If you’re selling mobile phones, do you want to be selling to a market of 5 million or 40 million people?” The answer is clear: last year, more than $6 billion worth of empowerment deals were struck, according to accountants Ernst & Young, up from $1.9 billion in 2002.

But paying for one of the largest transfers of wealth in the history of capitalism is proving to be a headache. Most black South Africans have limited access to capital, and raising funds for even the most modest buyout can take months. The National Empowerment Fund, created in 1988 as the flagship vehicle for financing black ventures, has yet to announce a business plan, while the Industrial Development Corporation, a self-funding, government-backed development bank, has financed just $1 billion worth of deals in the past decade — a tiny share of the tens of billions of dollars needed. Commercial banks are growing savvier at finding creative ways to finance bee deals. But for now, many deals still require the seller handing the investor a stake that he or she then, if things go well, pays for out of future profits.

Another problem is the dearth of black professionals, a legacy of the apartheid school system that deliberately gave blacks second-class education. Even as millions of South Africans struggle to find work, employers can’t fill vacant positions. The problem: a massive skills mismatch between what companies want and what job seekers offer. Some black professionals regularly move jobs and charge a premium for their services. “You see guys jumping from one job to another and exploiting that shortage of skills,” says Mandla Maleka, chief economist at Eskom Treasury, the financial arm of South Africa’s giant power company. “And I wouldn’t count myself out of that loop either.” Maleka has worked at four different places in the past few years.

Then there is the dubious practice of “fronting,” which occurs when a black face is hired to win contracts and mask a white company that has no intention of transforming. “They’re nothing more than a glorified salesman while the white guys in the back office continue to take most of the profits,” says Business Unity South Africa’s Sibiya. “It’s a significant problem.” So, too, is the issue of how to deal with foreign firms, many of whom balk at selling stakes to South African investors just to do business there. The government is encouraging foreign firms to come up with creative alternatives. Foreign banks have agreed to provide financing for bee deals equivalent to 25% of their value. Such haggling has proved healthy. In nine months of talks to develop a financial-services charter, “the representatives of the black community learned a lot about the issues and hurdles of the financial sector,” says John Coulter, ceo at J.P. Morgan Chase South Africa and head of the Foreign Banks’ Association. “And we learned a lot about the expectations, needs and difficulties of the black community.”

Critics charge that bee is enriching a tiny élite. They point to the fact that 80% of the value of the 10 largest bee transactions last year involved just three men, all of them with a.n.c. connections: Cyril Ramaphosa, former party Secretary General and a key negotiator during talks to end apartheid; Tokyo Sexwale, who served time on Robben Island with Mandela and was later the premier of Gauteng, the province around Johannesburg; and Patrice Motsepe, whose sister is married to the Minister of Public Enterprise. President Mbeki’s brother Moeletsi, a businessman and deputy chairman at the South African Institute for International Affairs, is one of the policy’s most outspoken opponents. “We are not creating entrepreneurs,” he said in a speech last year. “We are taking political leaders and politically connected people and giving them assets which they don’t know how to manage.”

Workers grumble that there should be more emphasis on improving rights for the country’s employees, regardless of their color. They also worry that the government will undermine competitiveness and the supply of basic services because it favors affirmative action toward blacks rather than awarding contracts on merit. “If [bee] means worse services, it can actually be disempowering for the poor,” says Neva Makgetla, chief economist at the Council of South African Trade Unions. Others want to know the point at which a person no longer merits special consideration. Mining magnate Motsepe has built an empire worth more than $500 million. Should he still be considered disadvantaged?

The government counters that its scorecard system will deliver real change by focusing not just on ownership but also on training and employment. And many of the new élite insist that they act as vital role models for would-be black entrepreneurs. “The crucial issue has to be the growth of the middle class,” Motsepe told Time. “Successful blacks have a very special role to play to ensure the meaningful upliftment of all our people. It’s a huge responsibility, but one that we are willing and honored to bear.”

As the complexion of the corporate world changes, the government hopes that South African society will also be transformed. There’s a long way to go, but signs of change are everywhere, from Jaguar South Africa, which now sells more cars to black customers than white, to the appearance of black mannequins in upmarket department stores and blacks spurring strong growth in the insurance industry. “I wish I’d had these opportunities 10, 20 years ago,” says businesswoman Mzamo. “It has given me the freedom to make my thoughts reality.” Her business partner Webber also sees opportunity in the changes. “We’ve all got a role to play in making South Africa great. If you leave too many people behind it’ll never work.”

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