Ownership presents the biggest and most contentious challenge to the information and communication technology (ICT) sector’s transformation. This was underscored this week by the release of the sector’s draft empowerment charter.
Research agency Empowerdex estimates that black people directly own just 2,9% of listed ICT firms on the JSE Securities Exchange, excluding Telkom and MTN. Listed ICT firms are said to be valued at R30-billion, with the charter working group still undertaking research on the unlisted component.
The draft charter contains no ownership targets or “scorecard” weightings for each component of empowerment. This, said chairperson of the charter working group Dali Mpofu, is so that “people cannot be distracted from the other principles of the charter”.
However, Mpofu told the Mail & Guardian this week the final document would contain ownership tar-gets and deadlines.
Funding of empowerment deals is seen as the single largest impediment to ownership. The draft charter identifies restrictive funding terms and the high cost of funding as long-standing problems.
Mpofu said feedback from industry players currently suggested that the burden of funding “should be shared”, with established players using either the strength of their balance sheets or favourable relations with bankers to finance transactions.
There are no estimates of the cost of financing empowerment in the IT sector. However, the Financial Sector Charter estimates that the cost of empowerment financing in that industry is R75-billion.
There are an estimated 8 000 firms in IT, employing 100 000 people and contributing 11% of gross domestic product. About 800, or 10% of the total, are black-owned. Economists frequently describe transport and IT as “enabling sectors” that oil the wheels of the economy.
Foreign-owned firms, the charter hints, may present an additional obstacle to equity transfer. It says some multinationals have argued that stringent ownership restrictions imposed by their parent companies, and the need to preserve intellectual property, make it difficult to dilute their ownership.
Instead, they have proposed “equity equivalents”. Mpofu confirmed that this implied more onerous targets in respect of training and, particularly, the development of small black-owned enterprises, on the basis that helping a small supplier stand on his or her feet represents a strengthening of ownership.
However, he personally felt there should be no exemptions on ownership for foreign companies.
An industry professional who attended the launch of the draft charter suggested that IT firms were not willing, and probably not able, to submit to more onerous ownership targets than those in mining, liquid fuels and financial services. Charters in these sectors aim to shift a quarter of their respective industries into black hands within a decade of adoption.
The draft release followed a process described by Mpofu as “deliberately protracted”, which started in the middle of last year. It embraces “broad-based” empowerment by covering management and control, skills development, employment equity, enterprise development, universal access and social investment and preferential procurement, as well as equity transfer.
Mpofu said he believed that procurement was “the most critical” aspect of empowerment, as it could be more readily implemented and allowed the benefits of empowerment to “cascade” to other players through the supply chain.
The charter notes that black suppliers currently provide peripheral goods or do not exist in key areas. Some are also said to deliver goods of questionable quality.
It says empowerment companies are often not offered the preferential payment terms that are crucial to their cash flow. Established companies also distort the percentage of discretionary spending on empowerment firms by understating the range of goods they can source from them.
On management and control, the charter seeks to improve Empowerdex’s estimation that black people hold 14,2% of all directorships of listed ICT outfits. Pitfalls it lists in this area include window-dressing, job-hopping by black professionals, a lack of succession planning for key posts and under-utilisation of black skills.
On skills development the charter says few other sectors face such high training costs as ICT. Lack of training opportunities and management commitment to training, with firms treating the Skills Development Act’s 1% payroll levy as another tax, also contributed to the lack of black advancement in technical areas.
Black small, medium and micro-enterprises are found to be unsustainable in the long term because of lack of capital base and access to support infrastructure. Where they do exist, they are found to be low value-adding and hampered by a lack of management experience.
Mpofu said it was likely that the final charter would deviate from Department of Trade and Industry guidelines on empowerment scorecard weightings.
The charter is to undergo monthly updates, with the self-imposed deadline for release of June 25, a year to the day since the process was initiated.