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South Africa has taken significant steps in the right direction insofar as freeing up the economy and making it more accessible to the majority of people is concerned. Nevertheless, there are valid criticisms of the manner in which the government continues to fail emerging entrepreneurs, family-controlled businesses and other types of business.

Moreover, the government has failed to provide tax incentives and decentralisation benefits that are significant and sustainable. All but the major urban centres of South Africa have been left without a commercial base. In the Eastern Cape, for example, previously successful industrial nodes such as Dimbaza, Sada/Whittlesea, Butterworth, Mthatha (Umtata) and Fort Jackson have virtually disappeared off the map.

Contrast this with the success of the Motor Industry Development Programme benefits around which the motor industry in South Africa has been built. Any significant changes to this programme would have a negative effect in the long term on the record growth that has taken place in this sector. The destruction of the clothing and textile industry illustrates how, in a very short space of time, a sector of the economy can become uncompetitive as a result of external competition and the inability of the local businesses and their stakeholders to adapt to and meet external challenges.

The jury is out as to whether or not the current Youth Incentive Scheme will contribute to meaningful job creation for Youth.

Many businesses are fearful that the broad-based BEE Scorecard places them at such a competitive disadvantage that they will not be able to survive – notwithstanding their broad-based BEE largesse, buy-in to the national agenda and support for change in South Africa.

While businesses need to give broad-based BEE serious strategic consideration, the government, in setting parameters for South Africa’s economic transformation, needs to recognise potential problems, understand how to tackle them and create an environment that is conducive to creating and growing businesses.

CASE STUDY

Lessons learned: case studies

Case study 1

In order to be successful in transacting with the government, Company A had committed itself to selling 25,1 per cent of its equity to the trade union representing the majority of its workers. The shareholders obtained full value for their shares.

The trade union was represented through a special-purpose vehicle (SPV) investment company.

The purchase price was raised by the issue of preference shares in the SPV investment company.

The existing joint venture partners and their advisers were heavily involved in the negotiations. On the other hand, no union representative ever attended the negotiations – only their merchant bank and attorneys. The first sign of union representatives was at the signing of agreements. One problem was that no representatives of the union or the SPV were known to the management. The union had not appointed a representative to the board and had no involvement in the business.

The merchant bankers earned a major fee paid for by the original shareholders.

Case study 2

Company B has lucrative state contracts which are about to expire. Management has recognised the need for a joint venture with a black empowerment partner and the need to sell 49 per cent of its equity.

A suitable partner has been identified, staffed with talented black professionals and technicians. The ideal ingredients all seemed to be present. “Broad brush” heads of agreement have been drafted, with very little communication regarding and limited understanding of what the partner wants.

Comprehensive sale, shareholders’ and funding agreements have been drafted following the outline agreed in the heads of agreement. The transaction is announced in the media and accompanied a high-profile launch.

Post-launch there are heated objections to the documents, one reason being that there was no line-by-line negotiation. Up-front grant cash incentives are demanded, the negotiations fail and the entire deal is abandoned when the company draws a line in the sand.

Lessons that can be learned from these case studies include:

•Be careful of leveraged debt driven by complicated financial structures

•Mutual understanding by each party to a broad-based BEE transaction is essential;

•Documentation and structuring must be carefully planned and negotiated;

•Do not make an overhasty announcement before signature;

•Financing can give rise to unforeseen problems, particularly in relation to expectations and financial “harvesting” programmes;

•Spend more time upfront to avoid negative consequences later on,

•Be wary of joint venture deals with unscrupulous partners that are potentially adverse, and

•It is difficult to get all the right ingredients in place.