South Africa's 99 Percent
January 21, 2015
Jan 21, 2015
7 Min read time
Photograph: South African Black Entrepeneurs Forum
From Lookout Hill in Khayelitsha, colorful, tightly packed rows of small, one-story homes are visible as far as the eye can see. The view from the observation deck is vast and flat until interrupted by a distant stretch of mountains, which bridges South Africa’s fastest growing township with the horizon.
On a Sunday afternoon, the shutters of a small sewing business below the deck were opened and several women arrived for work. Occupying a quarter of its fifteen or so sewing stations, they pulled pieces of canvas from tidy folded stacks and were assembling them into branded tote bags for business conferences and expos. Outside, the streets were crowded with pedestrians, shoppers, and share taxis, but with many local businesses closed for a day of rest, the neighborhood felt calmer than it would on a Saturday.
Thirty kilometers outside the center of Cape Town, Khayelitsha is home to more than a million people. It is dense and sprawling and contrasts starkly with the order and elegance of the city center and with the spacious, laid-back atmosphere of Cape Town’s posh beachside neighborhoods. There are no high-rise office buildings as there are in the central business district and no swanky cafés or chic restaurants as on the Waterfront. There are no promenades for strolling or manicured parks, as there are at Sea Point. Instead crowds cluster in canteens and fast food chains and children kick balls in the street.
Tourists who arrive on buses to snap pictures of “township life” are told this is the “authentic African experience.” But another experience can be found in the bubbles of wealth and commerce just a few miles away. Standing in either place, it is easy to forget the other exists at all.
This was precisely what the white architects of apartheid intended when they pushed black residents out of the country’s urban centers. In Cape Town this eviction began in the late 1920s. The passage of the Group Areas Act in 1950 brought forceful expulsion and sequestration to all areas of the country.
The Black Economic Empowerment Act was seen as a complement to Truth and Reconciliation.
Twenty years after apartheid, today’s townships host pockets of small middle-class homes, suggesting marginal upward mobility for some. Others with greater means have moved out altogether. But the majority of those living in South Africa’s largest and densest communities remain far removed from resources and opportunities in the established commercial centers. They are sustained by localized economies of small shops and micro-enterprises, such as the sewing business. These economies were built to ensure day-to-day survival but lack the infrastructure to thrive.
Attuned to this inequality, the African National Congress (ANC) under Thabo Mbeki’s presidency passed the Broad-Based Black Economic Empowerment Act in the early 2000s. B-BBEE, as it is known, was envisaged as the economic complement to Truth and Reconciliation. It is a sweeping policy designed to unlock new opportunities for the South Africans, an overwhelming majority, excluded from meaningful economic participation during apartheid. It touches every facet of business, from corporate shareholding to entry-level employee training.
In practice, though, the earliest version of B-BBEE functioned narrowly, as a quick fix emphasizing change at the top tier of business. In the years after the policy was implemented, financial newspapers began running stories about “BEE deals”—large, showy transfers of corporate stock to so-called empowerment companies and trusts. But most of these deals were structured around only a handful of prominent black businessmen, selected as “beneficiaries” for their reputation of being friendly to the status quo. In 2003, the year the B-BBEE Act was announced, 80 percent of the value of the top ten BEE deals benefitted three business owners. The following year, 70 percent of deals involved six business owners, all of whom were top ANC members.
Gradually, the recipients of ownership transfer agreements diversified to include more women- and employee-owned businesses, but this shift coincided with a new practice of tokenism whereby board and executive positions were handed over in name only. Meanwhile, B-BBEE’s mandates for employee education, community engagement, and “enterprise development,” which was intended to strengthen the small business sector, were largely treated as tick-box compliance exercises: big businesses cut corners to satisfy legal requirements and did far less than was necessary to buttress the nascent small business sector. The vast majority of the population remained unaffected by B-BBEE.
In fact, economic inequality in South Africa has worsened. A 2013 report from the South African Institute on Race Relations found that in 2012, white South Africans earned 7.6 times more than black South Africans—up from 6.9 times in 1996. Ironically the end of apartheid contributed to the divergence; when international sanctions were lifted and global trade and investment recommenced, white South Africans still controlled most of the country’s resources. Rising black unemployment has continued to stretch the income gap.
However, more than a decade on, B-BBEE is getting a second chance. The government recently overhauled the law, shifting enterprise development into the spotlight. With the new focus on opening market channels for black entrepreneurs, big companies will no longer get credit simply for financial assistance—grants or otherwise. Now, they will also have to procure goods and services directly from the small businesses they support. The idea is that black-owned small businesses need both tools for growth and markets to grow into.
Connecting emerging entrepreneurs to established markets is crucial to successful economic transformation, according to Pascal Fröhlicher, whose advisory firm in Cape Town provides business development support to social entrepreneurs. “Inequality in wealth distribution and opportunity is one of South Africa’s biggest problems,” he said. “To enable a new growth stage, those networks that have traditionally been closed have to be opened up.”
These networks have remained closed because it rarely makes economic sense for large companies to partner with rural and township businesses, which don’t have the capacity to meet their supply demands. Big businesses that have made a point of working with township and rural black entrepreneurs have mostly partnered on nonessential services—catering, office supplies, the tote bags sewn in Khayelitsha.
“These low-level things don’t add up to much,” said Matsi Modise, executive director of the South African Black Entrepreneurs Forum, whose mission is to connect black entrepreneurs to mainstream economic sectors. A few large companies, including Microsoft, brewer SAB Miller, and Massmart, a Wal-Mart subsidiary, are attempting more meaningful enterprise development. But Modise pointed out that, given the deep roots of inequality, far more would need to get involved.
“There aren’t generations of [black entrepreneurs] with experience in heavy industry,” she explained, “so if enterprise development is going to work, it has to start with building their education and exposure to key sectors. Empowerment can’t happen if people can’t integrate into the main economy.”
In the Eastern Cape city of Port Elizabeth, a dairy manufacturer is setting the right example. Started in 2010, Coega Dairy is majority-owned by the proprietors of nineteen farms that supply it, including a small number of black farmers, who are still an emerging presence in the country’s commercial agricultural sector. The remaining 39 percent is owned by the Coega Empowerment Trust, an entity comprising the dairy’s black factory and farm workers. Collectively, they supply and process 180 million liters of milk per year. Coega has quickly become an economic driver in a poor region badly in need of investment and jobs.
In 2012 a publicly listed restaurant franchiser called Famous Brands helped Coega take its social mission further by partnering on a cheese manufacturing plant adjacent to the existing factory in Port Elizabeth. Overnight, Coega’s farmers had a market for an additional 38 million liters of milk annually, which is processed into mozzarella cheese for Famous Brand’s more than 500 pizza outlets. Coega will eventually supply the franchisers’ other chains as well.
Johanna Legote, Famous Brands’ “transformation manager,” credited the initiative as an example of how enterprise development should be done. Famous Brands, she explained, has incentive to support Coega’s farmers and factory workers because it depends on them for its cheese, and Coega’s farmers and factory workers are encouraged to meet the franchiser’s supply needs since they rely on the plant’s market and income. This is not tokenism or de minimis compliance: both sides are invested in the partnership for the sake of their bottom lines.
The cheese factory came about before the new edition of B-BBEE, and it is but one example of the types of interventions needed. But that is why Legote believes the “drastic” and “aggressive” revision to the policy marks a turn in the right direction. She hopes the new B-BBEE will compel other large companies to rethink their role in improving economic opportunity for everyone else.
And she isn’t alone. “We should see this as an economic imperative,” one corporate B-BBEE representative admitted. “But we are big business—we need a stick. If you leave us alone, we just get on with ourselves.”
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January 21, 2015
7 Min read time