Over the past decade SA has undergone significant transformation. The once pariah regime has been replaced by a vibrant democracy and the economy has thrown its doors open to international traders and investors.
A microcosm of this transformation is Telkom, which has evolved from a bloated telephone parastatal into Africa's biggest integrated communication group and SA's most empowered company, according to the Empowerdex rankings.
The empowerment ranking may come as a surprise, if one considers Telkom's lack of black shareholders. (See full list in table on Top 200 Companies.)
Discounting government's 38% stake in Telkom, the JSE Securities Exchange and New York Stock Exchange-listed company lacks an empowerment shareholder. Though government has indicated it may reduce its stake by another 10%, no time frames have been set.
There are also no signs of an empowerment shareholder being brought into the company in the near future. So how did Telkom achieve the top Empowerdex black economic empowerment (BEE) ranking?
The answer lies in its broad-based empowerment, capacity building, training and development and broader social and economic upliftment initiatives. Telkom has achieved excellent results in terms of its broader - and many would say more important - BEE goals. Telkom's employment equity and BEE procurement track record is impressive.
Sizwe Nxasana, who took over as CEO in 1998, is justifiably proud of Telkom's achievements.
"We have changed so much, and in so many ways, that the Telkom of today cannot even be mentioned in the same breath as the one of five years ago," he says.
Consider that in 1994 not a single woman or black person was part of management. For the year ended March 2003, 15 of Telkom's top 18 executives were black and four were female. Of the general staff 56% (if one includes white women the figure jumps to 69%) and 83% of top management qualify as affirmative action employees (see table).
On the procurement side, since 1997 Telkom has spent close to R19bn on goods from BEE companies. Most of these are small, medium and micro enterprises (SMMEs).
Last year more than R5bn, or 24% of total procurement spend, went to black-owned or managed firms, Empowerdex ranks it sixth in terms of procurement.
Telkom's capital budget has reduced substantially year on year, but the percentage spent on BEE has continued to increase (see bar chart). Telkom has proved that BEE aims can be achieved alongside traditional business goals such as profits.
Financially and operationally, there's little doubt that Nxasana and his team have done well.
Aided by seasoned executives from foreign shareholder Thintana (comprising SBC Communications of the US and Telekom Malaysia, which jointly own 30% of Telkom), Telkom's culture has been transformed.
Efficiencies and customer services have improved, tariffs have been rebalanced and the network has been modernised.
Telkom Group, which includes 50% of cellular operator Vodacom, has wowed the stock market since its March 2003 initial public offering (IPO). This is reflected in the share price increase of 160% by mid-March this year. About 60 445 historically disadvantaged individuals and 445 stokvels, who invested in Telkom at R22,40/share under the discounted Khulisa offer, had seen their investments increase 226% on the IPO price by mid-March.
With group revenue of R37,6bn, net profit of R1,6bn and operating cash flows of R9,8bn, the group reported an operating profit margin of 17% for the year ended March 2003.
Both the fixed-line and mobile businesses performed strongly.
Internally, Telkom has benefited from the skills transfer of its US and Malaysian strategic equity partners. Thintana executives have provided guidance on regulatory issues and on how to improve services, products and operating efficiencies. SBC and Telekom Malaysia people have also mentored Telkom's top management team.
As long as Thintana retains a 6% equity stake in Telkom, it has the right, in terms of its service agreement, to six top positions (in the areas of operations, support and strategy). This team has worked closely with the South Africans, who now call the shots.
But not everything has gone according to plan. Despite being granted five years of exclusivity on basic fixed-line telecom services, Telkom has failed to extend telephony services to millions of new homes in underserved areas. This is reflected in the fall in fixed lines from more than 5m to about 4,8m.
Also, though the IPO has exceeded shareholder expectations and has boosted Telkom's access to international capital, it has not done as much as some would have hoped in terms of BEE.
Think-tank BusinessMap Foundation says historically disadvantaged Khulisa shareholders (who were offered cheaper shares in the Telkom IPO) account for less than 1% of Telkom's shareholding.
Moreover, empowerment consortium Ucingo, which was allocated 3% of Telkom, lost its stake to its financiers because of its inability to finance the shares. The result is that Telkom has no significant black empowerment shareholding.
In the quest for efficiency, Telkom has had to cut staff aggressively. As of September 2003, the company had about 34 000 people, much less than the 62 000 in 1998. In the medium to long term, staff is expected to fall to 28 000.
Telkom management maintains that most job losses have resulted from natural attrition, early retirement, voluntary severance packages and outsourcing.
Nevertheless, job cuts are politically unpalatable and Telkom has tried hard to soften the blow through initiatives such as its Agency for Career Opportunities, which helps workers find new jobs and advance their skills in any area, from hairdressing to basic business skills.
Telkom has also invested billions of rand in upgrading employees' technical skills through internal training courses (its projects include equipping schools and universities with computers and Internet laboratories). It also helps rural women use waste copper to make crafts and corporate gifts and provides training in basic business skills.
Other programmes aimed at building capacity include a special fund to award price preferences to deserving black SMME suppliers. Benefits for such suppliers include short-term payment cycles and performance-guarantee certificates.
Telkom also encourages traditional white suppliers to support black business through joint ventures, strategic alliances, skills-transfer programmes and the desegregation of contracts.
Its focus is on procuring goods and services from black-owned information & communication technology (ICT) companies, creating jobs to secure opportunities for former employees and unemployed people, and ensuring black equity participation in outsourced contracts. There are also measures to ensure appropriate skills among staff, and development and training to ensure the sustainability of black suppliers.
In the past financial year, Telkom trained 724 suppliers in areas such as tender application and basic business management.
Telkom's financial performance and BEE are closely linked, says Nxasana.
"Business has a crucial role to play in helping to create a broad-based black middle class," he says, stressing that unless the millions of poor South Africans are uplifted economically, the creation of shareholder wealth will be unsustainable.
This is a message that Essa Govender, group executive for procurement services, conveys to local and international suppliers.
"I spend a lot of time educating the broader stakeholder base on why we are involved in BEE and its benefits. It's about creating a sustainable market. There is often a misunderstanding, particularly among foreign vendors, about empowerment. I explain to them that BEE will increase the market size. It will increase the customer and revenue base," says Govender.
Govender is responsible for all Telkom procurement - from "high-end technology systems all the way to toilet paper".
Notably, Telkom has designed its own balanced scorecard for procurement. This exceeds some of the department of trade & industry's (DTI) empowerment weightings in its BEE scorecard. Whereas the DTI suggests a 20% equity ownership to be considered for tenders, Telkom's weighting is 30% - a deliberate strategy to encourage black ownership within the ICT sector. For tender evaluation, Telkom's weighting of 45% on management, employment equity and skills development exceeds the DTI's criteria by 5%, while the 10% weighting on enterprise development compares favourably with the DTI's criteria (see table).
Black equity is not always possible, particularly with overseas vendors.
"We do not insist that suppliers dilute their shareholding," says Govender.
The balanced scorecard approach allows for flexibility, he says.
Equity may not be a prerequisite, but Telkom does ask for other BEE commitments over the contractual period. Where requested, it will even act as a matchmaker by brokering partnerships between black and white firms.
Govender says Telkom's procurement auditing team ensures compliance with BEE commitments and will terminate contracts if suppliers do not honour these.
"We say to our partners: Let's be deliberate and honest. But if you do not honour your commitments, we have no time for you'."
Telkom also has no time for "fronting" and will guard against black enrichment tendencies, he says.
At a broader industry level, Govender is lobbying for the ICT and other BEE charters to come up with a standard BEE measurement and auditing system. The ideal situation, he says, would be to have a standard format for BEE accreditation. Companies could use this accreditation in tendering. Ideally, the accreditation would be recognised by all the industry BEE charters.
Govender's moves are typical of Telkom's proactive BEE polices of the past decade. Though constantly evolving, these have been grounded in sound economic and business realities.
