Empowerment analysts agree that if there is to be significant transfer to, and creation of assets by, black people, state capital will have to play a role in BEE funding.
Government seems to appreciate the importance of playing a role in financing empowerment through, for example, the creation of the National Empowerment Fund and a commitment by the national treasury to provide R10bn over three years for empowerment. But there has been a five-year delay in setting up the fund and a lack of clarity about the source and distribution channel of the R10bn.
Nevertheless, the state has played an important role through its other institutions, primarily the Industrial Development Corp (IDC) and the Public Investment Commission (PIC).
BEE approvals amounted to a third of the IDC's total funding, or R2,1bn, last year.
In 2002 BusinessMap Foundation named the IDC as the Top BEE Financier for its 384 deals totalling R4,2bn. In fact, since 1990 the IDC has financed more than 625 empowerment deals, collectively worth more than R5,6bn. The IDC's empowerment financing increased substantially between 1990 and 2000. From just three approvals in 1990 it grew to more than 191 approvals in 2002, representing about 37% of the total number of approvals.
The IDC is the biggest funder of medium-sized BEE deals in the country, so it plays a key role in broadening ownership and economic development.
According to the IDC, between July and December 2002, 77% of the total value of approvals went to medium-sized enterprises. These resulted in the creation of 13 000 jobs.
A reason for this is that as BEE became more of a priority for the IDC, structural changes were made to the way BEE funding was handled.
Initially BEE at the IDC was a separate unit. However, BEE is now a core element of each focus sector of the IDC. This means that people looking to raise loan capital from the IDC are often required to incorporate BEE into their plans. An example of this was Harmony's expansion loan from the IDC. As part of the conditions of the loan, Harmony had to facilitate empowerment into the group. That led to the infamous Kumani consortium, which was bought by Mzi Khumalo.
Government has also played an important role in ensuring that more small and medium-sized businesses can access funding.
In one of the few positive BEE initiatives by the trade & industry department, the government body responsible for the IDC, government pushed the unit to lower the risk capital requirement for BEE players, especially for small deals. As a result, the risk capital requirement for BEE is just 2,5% against the typical 10% required for most other transactions. That means entrepreneurs trying to raise the minimum R1m offered by the IDC have to come up with only R25 000 of their own capital.
However, most analysts complain that the IDC's cost of capital remains far too high at about 28%. That creates obstacles for entrepreneurs. Though it makes sense, particularly given the higher risk profile of IDC loans, it seems out of kilter with the development mandate of the unit.
The other key focus for the IDC will be financing empowerment in mining. Financing BEE transactions in mining will take precedence as the Minerals & Energy Development Act comes into effect in May this year.
The FM understands that government has suggested that the IDC play a key role in providing finance for BEE mining deals, despite an initial reluctance by the unit. But the mining sector presents the IDC with the opportunity to provide more innovative funding that lowers the investment risk for the institution.
IDC chief investment officer Raisibe Morathi said last year at a BEE conference that the IDC took risk primarily on the underlying operations and not on the BEE parties.
The trend in mining finance is to buy into or ring-fence specific assets. That suits the IDC's needs perfectly. The IDC's approach to funding BEE is similar to private-equity players - there is a constant and active role until repayment.
So far, the IDC has put up about R1,3bn for black companies investing in the mining sector. The IDC has been involved in the funding of SA Chrome, where it provided R250m for its smelter development in the Bushveld Complex; and in African Rainbow Minerals' 50% share of Anglo Platinum's Modikwa project.
The IDC also participated in the Gold Fields Mvelaphanda Resources transaction, providing R300m as part of the R1,1bn mezzanine financing raised by Mvelaphanda for its 15% stake in the local operation of Gold Fields.
The PIC's entry into BEE financing is also interesting, and a little controversial. There was initial uncertainty from some quarters about the PIC using government employee pension funds, the overwhelming bulk of its assets, to invest in BEE deals. However, as new PIC chief Brian Molefe points out, assuming adequate measures were taken to ensure rigorous investment principles were met, there is little difference between the PIC's funds being invested by third parties such as private asset managers and the PIC entering similar investments on the back of BEE deals.
The PIC recently restructured its Isibaya Fund, a ring-fenced fund that was initially intended for infrastructure development and social responsibility investments.
Tshepo Mahloele has joined the PIC from the Development Bank of Southern Africa and is heading the fund.
The fund wants to focus on finding ways to contribute to broad-based empowerment through its investments. A PIC official says the fund wants to promote empowerment deals where BEE players are operational and ensure that those black businesses remain sustainable in the long run.
Isibaya will invest in sectors such as information and communications technology, energy, power, chemicals, financial services, infrastructure (roads and ports), mining and transport.
Cabinet recently agreed to Molefe's proposal to corporatise the PIC as a state-owned entity outside the public service. The restructuring of the fund is in line with the PIC's overall restructuring.
Corporatisation is aimed at creating a modern asset-management company that will compete with private-sector companies. Molefe says the PIC's name will change to the Public Investment Corp , which will be governed by a board of directors. It will no longer have commissioners. The name change will lift the constraints under which the PIC operates, says Molefe.
For instance, at present PIC staff are seconded from the national treasury by the department's director-general. Corporatisation will make it easier to attract skilled private-sector fund managers. That is both good and bad news for BEE.
For a start, it means there is less chance of the PIC's funds being given to third-party managers. Many BEE players had invested in asset management in the hope that there would be a huge outflow of business from the PIC.
On the other hand, skilled PIC staff will make it easier for the PIC to directly finance BEE players since they will have the skills to evaluate, value and monitor deals.
This is a clear departure from the approach the fund used to take. It originally employed one person to oversee contracted asset managers who made all the investment decisions on the fund's behalf. So far, the big investments the PIC has made have been the BEE management buyout of MTN and the provision of most of the finance for a 27% BEE stake in Investec.
