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Critical Success Factors of Empowerment Financing for BEE companies in South Africa Coach: Desray Clark Research Project submitted by Syndicate 2 Oscar Siziba Gabisile Ngwenya Ivan McClean
Transcript of · Web viewCritical Success Factors of Empowerment Financing for BEE companies in South...
Critical Success Factors of Empowerment
Financing for BEE companies in South
Africa
Coach: Desray Clark
Research Project submitted by
Syndicate 2
Oscar Siziba
Gabisile Ngwenya
Ivan McClean
Matheri Kangethe
Vanitha Padayachee
TABLE OF CONTENTS
EXECUTIVE SUMMARY........................................................................................................................................................... 4
1. INTRODUCTION............................................................................................................................................................ 5
2. PURPOSE AND BENEFITS OF STUDY............................................................................................................................... 6
2.1 PROBLEM STATEMENT................................................................................................................................................................6
2 .2 OBJECTIVES OF THE INVESTIGATION /PROJECT RATIONALE................................................................................................................6
3. DEVELOPING THE FACT BASE (LITERATURE REVIEW).....................................................................................................8
3.1 MERGERS & ACQUISITIONS.........................................................................................................................................................8
3.2 COMMERCIAL BANKS IMPERATIVE IN COST EFFECTIVELY FUNDING BEE EQUITY TRANSACTIONS................................................................10
3.3 CREDIT RISK MITIGANTS...........................................................................................................................................................11
3.4 BEE FUNDING MODELS............................................................................................................................................................12
3.5 CURRENT BEE EQUITY ACQUISITION LANDSCAPE............................................................................................................................15
3.6 CONCLUSION.......................................................................................................................................................................... 17
4. METHODOLOGY/DATA COLLECTION........................................................................................................................... 19
4.1 RESEARCH METHOD AND ITS UNDERLYING CHARACTERISTICS.............................................................................................................19
4.2 DATA COLLECTION................................................................................................................................................................... 19
5. STUDY FINDINGS........................................................................................................................................................ 21
5.1 COMMERCIAL BANKS............................................................................................................................................................21
5.2 BEE COMPANIES.....................................................................................................................................................................24
5.3 COMPARISON BETWEEN BANKS AND BEE PARTNERS RESPONSES.......................................................................................................26
6. CONCLUSIONS............................................................................................................................................................ 28
7. RECOMMENDATIONS................................................................................................................................................. 28
8. REFERENCES............................................................................................................................................................... 30
APPENDIX 1 - DEFINITION OF TERMS& ASSUMPTIONS......................................................................................................... 33
DEFINITION OF TERMS....................................................................................................................................................................33
ASSUMPTIONS.............................................................................................................................................................................. 34
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APPENDIX 2 – INTERVIEWEES............................................................................................................................................... 35
APPENDIX 3 – QUESTIONNAIRES.......................................................................................................................................... 36
INTERVIEW QUESTIONS FOR BEE COMPANIES.........................................................................................................................36
NTERVIEW QUESTIONS FOR BANKS..........................................................................................................................................38
APPENDIX 4 – INTERNATIONAL PERSPECTIVES ON EQUITY POLICIES BASED ON NETHERLANDS& KENYA VISITS....................41
NETHERLANDS.............................................................................................................................................................................. 41
Immigrants...........................................................................................................................................................................41
Gender Diversity...................................................................................................................................................................42
KENYA.........................................................................................................................................................................................43
APPENDIX 5 – HISTORY OF NETHERLANDS, KENYA SOUTH AFRICA &SWOT ANALYSIS.............................................................1
EXECUTIVE SUMMARY
BEE funding has become a very topical issue for the South African government because the
country must find ways to reduce the entrenched inequality of incomes, economic opportunities,
and access to services, left over from the years of apartheid. There is a political imperative that
the major financial institutions help redress the historically inadequate system of banking services
for the lower income market.
In recent years commercial banks in South Africa have experienced margin shrinkage, mainly as
a result of pursuing aggressive growth through new business acquisition and competition from
foreign banks. These trends and Government pressure have forced commercial banks to pay
attention to the BEE markets.
The objective of this project was to determine the critical success factors for empowerment
finance for BEE companies from the perspective of commercial banks and BEE companies. The
findings have shown that there are common themes that both BEE and Banks find to be critical in
the sustainability of BEE transactions. Among other themes, the top four were: funding costs;
quality and experience of BEE management; dividend flow and profitability of the business. The
recommendations to address these critical factors are then outlined and that if adopted would
benefit both Banks and BEE companies in overcoming current challenges associated with
funding of BEE transactions.
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Also, this research report is expected to directly benefit commercial banks by assisting them to
understand and acquire sustainable BEE deals, thereby enhancing bank’s profitability. It should
also benefit BEE companies by assisting them in developing long term relationships with their
banks, evaluate empowerment opportunities, resulting in better service packages that meet their
business needs. The research included an international perspective comparison which was
gained by visits to Netherlands and Kenya. The countries swot analysis can be found in the
appendix.
The research was conducted as part of the Bankseta International Executive Development
Programme Europe/Kenya 2010.
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1. INTRODUCTION
Severe limitations, historically placed on the economic activities of Black South Africans resulted
in suppressed entrepreneurship, inadequate skills to participate effectively in the economy,
limited capital accumulation, including property ownership (Mafuna, 2007).
This led to a highly marginalised and impoverished black population that cannot participate in the
economy in any meaningful way, presenting risks of possible social unrest, stagnant or declining
economic growth therefore threatening the country’s future. To mitigate these risks and ensure
blacks participate more meaningfully in the economy, Black Economic Empowerment (BEE)
policies were adopted by the newly democratic South African government (Kemp, 2008), to
facilitate a rapid and sustainable transfer of economic ownership to the black population.
Commercial banks, through financing transactions to buy stakes in companies, can play a pivotal
role in facilitating this ownership. With an average of 20 transactions per annum taking place in
key financial institutions, banks will be under continuous pressure to facilitate empowerment until
it succeeds (Lucas-Bull, 2007).
This document outlines empowerment transaction challenges, and proposes to understand the
problem through a determination of critical success factors from commercial banks and BEE
entities perspectives.
The next section of this document explains the purpose of the study, followed by a review of
literature on mergers and acquisitions, particularly BEE transactions, and thereafter examines
funding models linked to previous BEE transactions. Next is an international perspective on
empowerment experiences in Netherlands and Kenya followed by methodology applied in the
research, study findings and conclusions based on literature review and qualitative research
targeting banks, BEE companies, and BEE subject matter experts.
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2. PURPOSE AND BENEFITS OF STUDY
This research report is expected to promote a rapid and sustainable transfer of economic
ownership to the black population through improved success level of BEE funding transactions. In
addition, commercial banks and BEE companies will both financially benefit from increased
successful transactions through effective models.
2.1 Problem Statement
The study poses three questions:
What are the critical success factors for empowerment finance for BEE companies from
the view of commercial banks?
What are the critical success factors for empowerment finance for BEE from the view of
BEE companies?
Are there any differences in the perception of critical success factors between commercial
banks and BEE companies?
2 .2 Objectives of the Investigation /Project Rationale
“Black entrepreneurs participating in BEE financing transactions borrow at unfavourable terms
and with deals remaining vulnerable to high interest rates and an economy experiencing slow
growth, ownership patterns of the economy will remain largely unchanged” (Butler, 2006). Should
the majority of the black population continue to be marginalized, the resulting social unrest would
bring disturbing consequences for businesses, and the wider social progress that is ultimately
dependent upon a flourishing private economy.
Competitive and cost effective access to finance is important and plays a decisive role in the
long-term survival of a company. Generally BEE companies initially rely on the owners to self
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financing before seeking external funding, which may be in the form of debt and/or equity.
External source of funding available to BEE companies mainly depend on the development of
financial markets, regulatory financial environments and the ability of financial institutions to
access a, manage and price loans for BEE companies, based on Risk.
Equity, third party debt, and vendor financing are the basic models used to fund transactions
(Lucas-Bull, 2007). Equity finance requires companies or individuals to have capital (equity) to
purchase the required asset. This takes many forms such as issuing shares in the open market to
raise finance, share swap models used in mergers and acquisitions, or borrowing from investors
who in turn take up equity in the business. Third party finance is where a buyer is financed by a
third party such a bank to acquire as asset. The third party will cost the capital based on risk. This
form of finance may require a buyer to put up collateral or cede the asset to the financier until the
debt is fully paid. Vendor financing is where the owner of the asset provides finance to the buyer
to purchase the same asset. Typically vendor financing in empowerment deals is through
convertible instruments and equity derivatives.
Commercial banks role in these transactions may include purely third party financing, or
participating in a mix of debt, equity, or vendor financing.
The competitive nature of the banking industry in South Africa requires the local banks to focus
their resources in growing their markets, thereby enhancing their profitability. For commercial
banks to successfully penetrate the BEE market, they must understand the needs of BEE clients
in order to deliver appropriate products and services thereby enhancing customer value.
The success of this project in providing clear guidelines for banks in dealing with empowerment
finance for BEE companies will result in more BEE companies being funded and still remain
attractive, profitable and sustainable to both financial institutions and BEE companies. This will
further result in job creation through new opportunities created by BEE companies, wealth
creation through equity transfers, poverty alleviation and growth in the overall economy.
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3. DEVELOPING THE FACT BASE (LITERATURE REVIEW)
Chapter one and two served to define the objectives, the importance of the study and the study
environment. It was also indicated that existing BEE M & A funding models have not been
effective in facilitating wealth creation in previously marginalised social groups and the need to
seek address the shortcomings. In this chapter, equity funding models, particularly those used in
BEE M & A transactions are investigated. A fact base on BEE equity transactions and their
performance is also developed.
To understand challenges faced by both BEE and Banks in facilitating BEE Mergers &
Acquisitions (M & A) transactions insights were drawn through extensive literature review of
previous research.
1.
3.1 Mergers & Acquisitions
Mergers and acquisitions continue to be a highly popular form of corporate development and
wealth creation. In 2004, 30,000 acquisitions were completed globally, equivalent to one
transaction every 18 minutes. The total value of these acquisitions was $1,900 billion, exceeding
the GDP of several large countries.
Walter and Barney (1990) completed a study to determine objectives of M & As which resulted in
five broad categories namely:
To obtain and exploit economies of scale
A mechanism to deal with inter-dependencies or leverage synergies
Expand current product lines or markets
Enter a new business
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Maximise and utilise a firm’s financial capabilities
However, in a paradox to their popularity, acquisitions appear to provide at best a mixed
performance to the broad range of stakeholders involved. While target firm shareholders
generally enjoy positive short-term returns, investors in bidding firms frequently experience share
price underperformance in the months following acquisition, with negligible overall wealth gains
for portfolio holders (Agrawal and Jaffe, 2000). Internally managers of acquiring firms report that
only 56% of their acquisitions can be considered successful against the original objectives set for
them (Schoenberg, 2006). Meanwhile, target firm executives experience considerable stress and,
on average, almost 70% depart in the five years following completion (Krug and Aguilera, 2005).
The current South African context creates opportunities and incentives for white owned
companies to achieve objectives defined by Walter and Barney (1990) when black entities are
allowed to acquire ownership stakes. For the period since South Africa’s first democratic
elections in 1994, BEE with the aim to increase black ownership of companies and subsequently
create wealth for acquirers has been an important driver behind large M & A transactions in
South Africa (Ernst & Young 2010). Over the last five years, BEE has represented a constant
proportion ~20% of all South African M & A activity over the last five years (see table1). However
BEE activity was comparatively quiet during 2009, in line with the generally depressed M & A
conditions.
Figure1: BEE transaction contribution to overall transaction value (Rbn)
Source: Ernst and Young, Mergers and Acquisitions Report, 19th Edition – A review of activity in 2009.
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The complex phenomenon which mergers and acquisitions represent has attracted the interest
and research attention of a broad range of management disciplines encompassing the financial,
strategic, behavioural, operational and cross-cultural aspects all present of this challenging and
high risk activity.
Ultimately for acquirers, BEE entities in this case, wealth creation through increased value of the
acquired stake which is greater than acquisition costs is fundamental. Hence the ability to cost
effectively fund the acquired stake and subsequent improved financial performance of the target
company due to entry of the BEE entity represents success.
3.2 Commercial Banks imperative in cost effectively funding BEE equity
transactions
The BBBEE has seven elements which make up the scorecard with which companies measure
themselves against in order to be classified as empowered or not. These seven elements are:
Equity Ownership; Management Control; Employment Equity; Skills Development; Preferential
Procurement; Enterprise Development and Residual Element (Fauconnier&Mathur-Helm, 2008).
This research project addresses equity transfer and the role commercial banks have incost
effectively funding these acquisitions
The challenge faced by the South African banking sector is how to assist with the transformation
of the economy to ensure sustainability while achieving short term profitability objectives. In the
current South African context, where the economy’s transformation is necessary for a sustainable
South Africa, a growing black middle class presents massive opportunities. With legislated BEE
targets, it’s in the Banks best interest to seek solutions leading to successful BEE equity funding
transactions. To fund BEE equity commercial banks face a myriad of risks, which have to be
managed effectively. According to Gunnion (2005), financing remains one of the main limitations
of empowerment transactions and given the past inequalities in South Africa resulting in black
people having no equity to support the lending, no security to offer, poor credit records, and
limited training and skills (Schoombie, 2000), the challenge to banks is significant.
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3.3 Credit Risk Mitigants
Credit risk management primarily focuses on loss avoidance and the optimisation of return on
risk. The identification of credit risk mitigants is important as it provides South African
commercial banks with insight on how to optimally structure BEE transactions. It further provides
guidelines on adopting these mitigants and thereby increasing their success rate in lending to
BEE companies. At present, this is still seen as a higher risk option mainly because the
underlying risk is not clearly understood.
Banks consider the following issues when the credit risk inherent in a single business is assessed
(Bluhm, Overbeck& Wagner, 2003):
Default probability: What is the likelihood that the business will default on its repayment
over the term of the facility?
Exposure at default: In the event of a default, how large will the outstanding exposure be?
Recovery rate: In the event of a default, what fraction of the exposure may be recovered
through bankruptcy proceedings or through some other form of settlement?
The five C’s are considered the fundamentals of successful lending:
Character refers to the borrower’s reputation and the borrower’s willingness to settle debt
obligations. In evaluating character, the borrower’s honesty, integrity and trustworthiness
are assessed. (Koch & MacDonald, 2003).
Capacity refers to the business’s ability to generate sufficient cash to repay the debt.
Capital refers to the owner’s level of investment in the business (Sinkey, 2002).
Collateral (also called security) is the asset/s that the borrower pledges to the bank to
mitigate the bank’s risk in event of default (Sinkey, 2002).
Conditions are external circumstances that could affect the borrower’s ability to repay the
amount financed.
In order to mitigate adverse selection, financial institutions subject the potential transaction to
financial and non-financial criteria. Some of the non financial factors that are considered before
entering into the transaction include the skills and expertise of the management team, the track
record, the barriers to competition, growth of potential market, the nature of the competition,
stage of company development and the uniqueness of product or service. Financial factors
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considered when appraising a BEE deal include existing debt, cash flow and age of business.
According to Meyer (2005), credit risk can be mitigated in lending to BEE companies by the
following:
Indemnity schemes providing collateral, e.g. Khula.
Providing of finance to allow a black person to take up a small shareholding and as the business performs, to increase shareholding and finance.
Establishing a proper mentorship programme and to have accredited mentors for skills transfer.
The potential for experienced retired executives to mentor BEE companies.
Partnership between the bank and the BEE company, where the bank takes an equity stake in the company.
Franchising was also deemed a risk mitigant. The franchisor provides training, assists in compiling the business plan and monitoring the business on a daily bases.
Meyer, 2005 concluded that it is evident that commercial banks currently use generic credit
policies. Although guidelines exist in lending to BEE companies; these have not yet been
incorporated into the bank’s credit policy. It is noticeable that banks need to be more involved in
this than just the lending; it needs to a total solution for the BEE company.
3.4 BEE Funding Models
Bank finance is the primary source of debt funding. Commercial banks extend credit to different
types of borrowers for many diverse purposes. A number of BEE deals involve the use of hybrid
funding mechanisms, including vendor finance, debt finance and equity investment.
The 1st wave of BEE transactions was characterised by a funding model which used the creation
of a SPV’s (Special Purpose Vehicle) to facilitate the acquiring of debt in exchange for
preference shares from the seller company to be used as security for the financier/commercial
bank funding the transaction. This arrangement was necessary because black people due to
historical reasons already detailed in Chapter1 in this report do not have the cash or the assets to
back such capital intensive transactions without the assistance of a financier. For such structures
to work high reliance is put on the performance of the share price or dividend flow resulting in a
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highly geared structure. In theory, this works for as long as the dividend flow or the share price
appreciates at a rate higher than the funding and the capital costs of obtaining the shares,
however if share prices depreciate, transactions fail. This was the case with one of the first
notable black empowerment deal on the JSE which occurred in 1993 when New Africa
Investment Limited (NAIL) and Sanlam through Metropolitan Life, its subsidiary, pioneered the
first sizable transfer of equity and control from a wholly white owned company to black
shareholders. JSE listed companies’ shares prices declined sharply in mid-1998 due to the Asian
crisis resulting in some BEE companies including NAIL trading at a discount to net asset value.
NAIL’s share price fell from 800 cents to just below 400 cents by the end of September 1998
(Ngwenya, 2007).
In 1998 Legae Securities released research findings indicating that SPV’s financing structures
were responsible for over 50% of the black ownership on the JSE, and that an estimated 63% of
BEE ownership on the JSE would revert to financiers as the black companies were being
decimated by the markets and could no longer rely on the share price to fund their debt. The
financiers were relentless, with profits of as much as 90% of BEE companies accruing to them.
NAIL announced that it would un-bundle in late 1999 and, control of the company would flow
back into white institutional investors (Ngwenya, 2007). Other BEE companies simply collapsed
and were liquidated or de-listed.
In recent BEE transactions, there has been a realisation of the vulnerability of highly geared
structures and as a result there has been some creative thinking around how to reduce this
burden on the new black shareholders. One of these ways is the use of options. This results in a
less geared structure in that it is not an outright purchase of shares but rather an option so the
debt required from a financier/bank is less than the total notional amount of buying the shares.
The concern with this structure is that actual ownership does not transfer to black shareholders
until the end of the lock-up period when the option is exercised. The risk inherent with this
structure is the possibility of the share price to be below the strike (the price agreed upon at the
time of the deal) at the time of exercising the option which will leave the option with no value and
the black shareholders out of pocket as the funding costs/premium of the option will still have to
be settled with the financier. The Bidvest BEE deal struck with Dinatla (the BEE Consortium) in
2003 is an example. Dinatla bought a call option to purchase 15% of Bidvest at a maximum of
R60 a share. By December 2006, R2.7 billion of this debt would be due. Realising that it did not
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have the funds to pay this debt, Dinatla announced in September 2006 that it would sell 18 million
(40%) of its 45 million shares back to Bidvest at a 30% discount to market price in order to fund
the debt (Ngwenya, 2007). This still left Dinatla with debt relating to the equity purchase of at
least R1.3 billion, for which financing was raised through Investec as part of the sale of shares
back to Bidvest. This means that Dinatla started out with a potential 15% of Bidvest, while three
years later funding forced a reduction of this stake to 9%. Should Dinatla be unable to pay
Investec in the future, more equity will possibly be given up. It thus becomes clear that Dinatla’s
final unencumbered stake will be considerably lower than the 15% quoted at the onset of the deal
in 2003 (Ngwenya, 2007). Jenny Cargill (2010) called this phenomenon the realisation principle
where the BEE partner ends up with a reduced percentage share at the end of the lock-up period.
Cargill emphasises that this consequence is not good for the Seller either as the Seller ends up
scoring less on the BEE scorecard on ownership due to now reduced BEE shareholding.
A different variation of this Option structure was used by ABSA when it concluded its deal with
BathoBonke (BEE Consortium) in 2004. BathoBonke bought an American option which could be
exercised at anytime after 2 July 2007 with the strike between R48 to R69 for the 5 year deal. At
the time of exercising the option, BathoBonke managed to only convert/purchase 5.1% of ABSA’s
ordinary shares as opposed to the potential 10% share conversion had they exercised the share
option on 1 September 2007 (Ernst & Young, 2010) when the ABSA share peaked for that period.
The disadvantage with this structure is the inability to know when the share will be at its peak.
This is always known in retrospect often once the opportunity has been missed.
So whist the deal was struck at 10% transfer of ownership, it was shown that 5 years later the
actual ownership transfer was only 5.1%.
The more recent BEE deal which seems to have created value for the BEE shareholders was the
Goldfields and Mvelaphanda which was entered into in 2004. The structure was also that of a call
option with exercise only at the end of the lock-in period. At the time of exercising the option, the
share price had appreciated by 33.1% from R89.31 to R118.90 (Ernest and Young, 2010).
Assuming that the funding costs were below 33%, this deal would create value for the BEE
partners. It should be noted that even with the creation of value in this type of structure, the BEE
shareholders were still at the mercy of the markets. The structure still depended on the share
price of Goldfields being higher at the end of the lock-in period than the time at which the deal
was struck. So indeed this structure also depends on the Bull market for it to work.
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Based on the examples presented above, structures that are dependent on the appreciation of
the share price or the dividend flows in order to pay off the debt are unsustainable as markets are
cyclical in nature and with a downturn, it is inevitable for such structures to fail.
Table1: Volume and Value of BEE transactions (Rbn)
Source: Ernst and Young, Mergers and Acquisitions Report, 19th Edition – A review of activity in 2009.
Table1 above illustrates that no doubt, with an exception of 2001; 2008 and 2009, there has been
a steady increase of BEE transactions and the transfer of equity to black shareholders. This trend
is inline with the sentiment from private business that BEE is an imperative to the success and
stability of the democratic South Africa (KPMG BEE Survey, 2009), however, the question
becomes, is the acquisition of such equity a success or failure when it is measured against the
objectives of the BBBEE Act of 2003 which is that of distributing the wealth of the South African
economy to the broader base of the previously disadvantage population.
3.5 Current BEE equity acquisition landscape
According to President Jacob Zuma at the opening address to the inaugural meeting of the
President's Broad-Based Black Economic Empowerment (BBBEE) council in 4 February 2010,
the percentage of black-owned companies registered at the Johannesburg Stock Exchange is
disappointingly low. In a parliamentary committee briefing in 2009, Philisiwe Buthelezi, chief
executive of the National Empowerment Fund (NEF), said that there was an upward movement of
impairments reported in development finance institutions and the private banking sector linked to
BEE companies. It was also reported that the sustainability of existing BEE deals has been hit by
the global credit crunch and cash flow positions of BEE companies have been at their weakest
since 2000 and this has had serious implications on issues such as loan repayments and loan
write-offs. In addition, debt to equity ratios has been at their highest and this affects how
companies pay for deals.
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According to rating agency, Empowerdex, an estimated R41bn worth of BEE deals were
decimated in the past two years (Mabotja, 2009) due to un-conducive market conditions spawned
by the ongoing economic recession. Last year, (2008), empowerment deals sealed by JSE-listed
companies declined fivefold to R13bn, compared to R66bn the previous year. The slowdown in
the momentum of empowerment deal-making has prompted financial engineers to raise serious
concerns about the prospects of this important drive. Itumeleng Kgaboesele, CEO of Sphere,
holds the view that the Achilles’ heel for empowerment remains the funding mechanisms
employed in the acceleration and implementation of this drive.
BEE partners have traditionally relied on structured finance instruments that allow them to borrow
money to invest with little or no equity or collateral of their own. This historic landscape of BEE
deal making has yielded mixed results for third party funders and recipients of funds. Morne Van
Der Merwe, a senior director at Werksmans Attorney, a firm specialising in the construction of
empowerment funding models is of the view that many of the BEE deals struck in recent years
after painstaking negotiations may have to be renegotiated to ensure they do not fail (Mabotja,
2009).
Mining in particular faces significant challenges. Last year, (2009) the Industrial Development
Corporation (IDC) spent about R700m on redeeming the bank debts of BEE companies in the
mining industry whose loans had been called in by banks (Lange, 2010). On several occasions
the IDC had been asked to become shareholders in mining transactions where bank loans were
being called in.
The success of any modern economy is dependent on its ability to grow and sustain an
environment conducive for entrepreneurship to emerge and thrive. Entrepreneurs contribute to
economic growth and job creation through the establishment of new business. In South Africa,
the Task Group of the Policy Board for Financial Services and Regulation (2002) has recognised
the major contribution BEE deals make towards the socio-political stability of the country.
Subsequently, they have advocated for the government to create a framework that provides an
enabling environment in which BEE deals can flourish.
According to Fauconnier and Mathur-Helm (2008), there is an increased effort on ensuring
genuine and sustainable broad based BEE in South Africa, essentially to implement suitable
funding structures that are not superficial fronting arrangements. Fauconnier and Mathur-Helm
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(2008) further suggest that many BEE transactions have failed since inception due to complex,
elaborate and unsustainable funding structures, which include the use of hybrid funding
instruments, debt finance, vendor finance and equity finance. Successfully implemented BEE
transactions have similarities when scrutinising their funding structures which included the use of
SPV’s, mezzanine funding, issuing of preference shares, vendor finance, use of dividend income
to service the debt of the BEE investor and sustainable cash flows.
The BEE stakeholders including the company sellers of such stakes have realised the
vulnerability of such funding structures as those described above. Such funding structures do not
advance the BEE agenda instead when they fail, the stake either gets bought back by the white
previous owners or the financiers take over the shares ceded as security for the funding and
structuring costs associated with the transaction.
3.6 Conclusion
Generally, BEE lending is perceived to be high risk and this research focuses on lending models
that can be applied by commercial banks in the lending decision when equity investments are
considered for BEE classified companies. Banks are the custodians of a nation’s savings and
cannot afford to make poor lending decisions as it has a direct impact on multiple stakeholders.
This research outlines empowerment transaction challenges, and proposes to understand the
problem through a determination of critical success factors from commercial banks and BEE
entities perspectives. This will promote a rapid and sustainable transfer of economic ownership to
the black population through improved success level of BEE funding transactions. In addition,
commercial banks and BEE companies will both financially benefit from increased successful
transactions through effective models.
In light of the above, it is an imperative to determine critical success factors for BEE Funding
models in order to ensure the success of BEE. This research project embarked on this to provide
a set of factors that answer this question.
The success or failure of a BEE deal goes back to inception of the business concept, more
specifically in the structuring of the deal. The challenge in structuring a BEE deal usually lies in
overcoming a number of problems associated with the lack of funding, the integrity, track record
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and leadership skills of management and the possibility for high returns and an exit. With all this
in mind, it is not easy to forget that the relevant industry regulators are becoming more focused
on ensuring sustainable, genuine broad based empowerment.
The research includes the investigation of credit policies that are being applied by commercial
banks in South Africa when financing BEE transactions and the credit assessment models
applied by these commercial banks when assessing BEE funding. On completion of the
investigation on the credit policies and credit assessment models, a set of credit risk mitigants will
be identified that can be applied in order to improve the success and sustainability of these BEE
transactions.
This research project attempted to expand on the current Literature by carrying out research work
to determine the critical success factors for BEE funding models and provide recommendations.
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4. METHODOLOGY/DATA COLLECTION
This chapter describes the methodology that was followed to test the propositions suggested in
the preceding chapter. Leedy and Ormrod (2005) noted that in addition to a researcher choosing
a workable research problem, the following needs to be considered: the types of data to be
analysed relating to the problem; and the means of collecting and interpreting these data. The
chapter starts off with a description of the chosen method and its implications for this research.
This is followed by descriptions of the processes that were used in data collection, analysis and
interpretation.
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4.1 Research method and its underlying characteristics
A qualitative research methodology was applied in this research specifically, the descriptive
survey was used. According to Leedy and Ormrod (2005) this research problem lends itself well
to qualitative research. Another reason for not doing quantitative research is that commercial
banks have different reasons and take on BEE funding approaches, mostly due to their unique
strategies and therefore benchmarks are likely to differ significantly among banks, the same will
apply to BEE clients.
4.2 Data collection
Data was collected through face-to-face interviews. The critical incidence technique was used in
developing the semi-structured questionnaires that were used to guide the interviews. Face to
face interviews were conducted with the major banks which are prominent in the funding of BEE
equity acquisition transactions in South Africa. Additionally, BEE companies were interviewed to
determine their perspective. The aim was to understand the challenges faced by the industry and
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success achieved in these transactions in order to establish the current views of what is critical
for a BEE transaction to be successful for both the banks and companies.
The material gathered for the purpose of this research was transcribed and coded as per themes
that emerged from analysis. The data was then subjected to content analysis, to identify certain
themes that emerged from the data. A summary of results is presented in tabular form in section
5 (see tables 2 and 3). The following steps were followed in conducting the content analysis
The coding procedure to evaluate the critical success factors was a frequency count of
how many times these factors were mentioned by the respondents.
The characteristics were combined and presented in detailed tables contained in Section 5
(table 4)
A description of patterns that the data reflects is then presented in the section of the
research where interpretation of data is set out.
20
5. STUDY FINDINGS
2.
3.
4
5.1 Commercial Banks
The interview process with financial institutions revealed certain common trends as well as
marked differences on Individual responses.
Banks do not as general rule apply different credit policies to BEE transactions. They are viewed
as a subset of the overall “Merger and Acquisition” credit policies. Where the M&A activities are
on smaller unlisted companies, the evaluation differs dramatically from listed companies where
each transaction is independently evaluated.
Although listed companies were discussed, the focuses of our interviews were on the unlisted or
private companies. Subsequent findings from the interviews unless specifically noted will refer to
private companies.
The size of transactions involved varies from R5 million to R400 million with the overall exposure
being limited per institution depending on institutional risk appetite (these figures were not
divulged).
Volumes of BEE transactions have tapered down over the past 2 years with figures ranging from
10 to 20 deals in 2010. Of these deals the banks agree that the majority of the deals are
approved with FNB putting the figure at around 95%.
21
The following key elements are considered in the due diligence process for funding (not
exhaustive)
Financials – Who are the Auditors of the Audited Financials – these have to be reputable
Cash-flows – Business has to pass the solvency test over the tenure of the deal
Consistency – There has to be consistency in the income statement figures over the
years, no escalated growth patterns in the year of the sale for instance
Sales & Purchase agreement has to be in place and must make sense
Financial Forecast and Cash Flow stress testing.
As equity finance is riskier than debt funding, BEE transactions are considered riskier by the
bank. In general, it was found that 100 % funding was requested as BEE companies did not have
collateral to offer. In light of this equity funding is not attractive to Banks as holding regulatory
capital is too expensive for Banks. For every R1 lent out, the Banks are expected to hold R1 as
capital for these equity deals.
Default rates and failure of BEE deals are reported as low by the banks. A number of the deals
are restructured when the cash flows are inadequate to cover the debt. The actual success of the
BEE partner servicing the debt against the original agreement is not reflected by the banks. It
does however appear as if the banks are more willing to look at restructuring finance for BEE
deals.
The most preferred funding model used by the banks is the ‘NewCo structure’, often called a
section 34 structure. In this structure the BEE partner is buying into the business. The Target
Company and the BEE come together and agree to form a new company called NewCo. The
Bank then lends to this NewCo. The Credit evaluation is purely based on the cash flows of this
NewCo. Bank leverages/optimises the balance sheet of the NewCo.
When asked to rank the most important aspects which we determined from the literature review,
the banks ranked the following in order of importance for consideration on credit granting as
depicted in the table below.(Each participant ranked factors from 1 to 8, with points allocated
accordingly. The ranks were then totalled with minimum total score indicating most important,
minimum of 4 and max of 32)
22
Table 2: Summary of Banks Rank order of critical success factors as determined from Literature
Critical success factors from Literature reviewRank Order Score
· Quality and experience of BEE management 1 12
· Profitability of target entity 2 14
· Pricing (funding costs) 3 17
· Security 4 18
· Dividend flow 5 18
· Mutual benefit 6 19
· Value creation 7 23
· Share price 8 31
The most valuable finding from the interview process is indicated in the response to the following
question: What do you consider as must have’s in approving a BEE deal with your BEE client?
The individual responses varied, but a clear theme was emerging:
There must be a willing buyer and a willing seller.
The expectations of the BEE partner and the Seller must be aligned.
The culture of the organisation and the BEE partners must be conducive. (the trust and
culture blend).
The BEE partner must not be paying an inflated value for the share.
The new partners must add value to the company (BEE must not just be an asset swap).
Outgoing management must be committed to the success of the transaction.
23
There must be an honest an open partnership. The notion of BEE as a get rich quick as
the silent partner is almost a certainty to failure.
More should be done to facilitate BEE transactions. The role banks play is limited and that
BEE partners need assistance in:
• Company valuation (paying a fair price).
• Enterprise development
• Contractual legalities
• Mentorship
5.2 BEE Companies
Interviews with companies brought to the fore the preferred funding models, the impact of the
financial crisis and the latest deals brought on to their books. Covered also were the problems
that impede BEE deals.
In general, it was found that 100% funding was requested as BEE companies did not have
collateral to offer. First problem is that Banks take 100% downside risk but BEE legislation
requires that upside benefits be shared with the BEE partner, a ratio of 49 to 51. Since Banks got
the short end of the stick in the early 2000’s for this structure, they no longer fund 100% debt.
Banks now fund eg: 80% senior debt with 20% equity stakes into these deals. This leads to the
problem of capital requirements for equity deals being more expensive than normal or senior debt
and is expected to get even more expensive with the implementation of Basel 2. Currently for
every R1 that is lent out, the bank has to keep R1 in capital. To date, the Reserve Bank is not
relaxing these capital requirements. One Bank revealed that numerous attempts to apply for
concessions to the Reserve Bank to reduce this capital requirement for BEE equity deals have
been made in the past and have all been rejected. The Reserve Bank is of the view that Banks
are deposit takers and should protect depositors’ money and not gamble with injecting it into
equity deals. In light of this, BEE equity funding is not attractive to Banks.
A problem which was also highlighted in our literature review was lengthy lock-in periods, this
does not allow the BEE partner to exit when profitable to do so, this results in an artificial market
24
where shareholders cannot exercise economic gain which leaves BEE partners cash flow
constrained for years and not allowing opportunity for growth or acquisition of other assets.
More recently funding structures require what is termed “unencumbered equity portion”. This is
the partner’s contribution that has not been borrowed in any shape or form but really is his own
funds. Model is doomed as few BEE partners have the cash to do this.
Another finding has been the applying of account sweeping facilities by Banks to service debt
leaving the BEE partners with no cash flow to survive and unable to buy into other economic
opportunities. Banks still resort to account sweeping of cash even when covenant has been met.
Three of the four Banks interviewed confirmed that sweeping of accounts is applied even after
covenant has been met.
All the interviewees agreed that for the country, it is essential that BEE be successful. There is a
general sense that not enough is being done to facilitate these transactions and that NGO’s, DTI
and business partners need to take a more active role in achieving this.
When asked to rank the most important aspects which we determined from the literature review,
the respondent’s from BEE companies interviewed ranked the following in order of importance
for consideration on credit granting as depicted in the table below. (Each participant ranked
factors from 1 to 8, with points allocated accordingly. The ranks were then totalled with minimum
total score indicating most important, minimum of 4 and max of 32)
Table 3: Summary of BEE respondents Rank order of critical success factors as determined from Literature
Critical success factors from Literature reviewRank Order Score
· Profitability of target entity 1 7
· Dividend flow 2 10
· Pricing (funding costs) 3 11
· Value creation 4 19
· Mutual benefit 5 20
25
· Security 6 21
· Quality and Experience of BEE management 7 26
· Share price 8 30
A final sentiment from the interviews on the way forward – Only Education will resolve the issue
of wealth distribution and enterprise development. Government must create an environment for
these to flourish. Banks or BEE will not solve this. (These sentiments are echoed in Trick or Treat
by Jenny Cargill 2010)
5.3 Comparison between Banks and BEE partners responses
As can be seen by the tables in this section,(tables 2 and 3) there is a disparity between what the
banks rank as most important and the BEE respondents rank as most important.
There are areas where the companies and the banks are aligned. What appears in the top four of
both lists is Profitability and Pricing. These 2 key variables will form the basis for any common
ground. That BEE companies do not see “Quality and experience of Management” as important,
is a misnomer as they themselves believe that they have the ability to add a positive contribution
to the future growth of the company. As such we can say that 3 of the top 4 factors between BEE
respondents and banks are aligned. Dividend Flow also ranks highly on BEE and in top 4 overall.
This alignment is more apparent if we sum the scores of both respondents and then rank order
the result. (see highlighted yellow)
Table 4: Collation of Banks and BEE summaries of critical success factors as determined by literature
Critical success factors from Literarure reviewRank Order Score
Profitability of target entity 1 21
Pricing (Funding Costs) 2 28
26
Dividend flow 3 28
Quality and experience of BEE management 4 38
Security 5 39
Mutual benefit 6 39
Value creation 7 42
Share price 8 61
It is now clear that the top 4 success factors as indicated in table 4 must be in place for there to
be any meaningful basis of funding by the banks and acceptance thereof by the BEE partner.
Share price on both rankings is last as the interviewees focus was biased towards non listed
companies.
27
6. CONCLUSIONS
Based on the research findings, of the eight critical success factors, four: namely pricing
(funding costs), quality and management experience of BEE partners, profitability and
dividend flow linked to the target entity were viewed as the most critical by both banks and
BEE companies.
7. RECOMMENDATIONS
Below are the recommendations that could be adopted by the Banking industry; the BEE
companies and other stakeholders involved in BEE transactions. If implemented, this could go
a long way in improving the sustainability of BEE transactions through such funding models.
The role of Government in reducing BEE funding costs (pricing)
The research findings have shown that 100% debt funding or equity funding of BEE
transactions by commercial Banks is unsustainable due to high regulatory capital that banks
need to hold for such equity deals which then results in very high funding costs. This funding
model is not optimal for both banks and BEE companies. Government can play a role in terms
of offering guarantees to commercial banks for BEE transactions for the equity portion of the
transaction. The presence of this guarantee will enable the banks to fund 100% of these deals
without assuming 100% of the risk. The risk could be shared 70-30% between the bank and
the government respectively. This will allow the banks to classify this guaranteed portion of
debt as senior debt instead of equity hence reducing the capital requirement to 10%. This will
result in cheaper funding of these BEE transactions thus ensuring sustainability of the
transaction and the survival of the BEE company.
Quality and management experience of BEE partners
The findings have shown that both Banks and BEE companies place a lot of importance
on the quality of management in BEE transactions. Funding models should incorporate
operational involvement of BEE partners as one of the CP’s (condition precedence) to
28
ensure that the BEE partners understands the industry and that skills transfer and capacity
building takes place. Another CP could be to introduce a lock-in period for the outgoing
Dividend Flow
Both the Banks and BEE companies rated dividend flow as critical as it generates the cash
flow needed to service the debt. The findings have shown that Banks apply sweeping of
accounts i.e. all cash flow available go into servicing the debt. It is recommended that
Banks should allow portion of dividend back into the BEE business for growth – no
sweeping should be applied to BEE companies once covenant is met. Allow a percentage
of the dividend back into the business instead of the entire dividend going to service debt.
This will allow growth for the BEE partner to get involved in other economic activities or
invest back into the business. Banks need to play a collaborative role in this model.
Sustainable Profitability of the business is crucial
It is of utmost importance for banks and BEE companies to ensure that the target company
is a viable going concern that can generate profits even after acquisition by the BEE
partners. BEE partners should ensure that valuations are not overstated in order not to
over-pay. This also increases prospects for healthy dividend flow that can be applied to
acquisition debt-repayment and re-investments.
If the above recommendations are considered, the probability of success in BEE funding
by commercial banks will increase, causing more transactions. In addition, the government
objectives of sustainable wealth creation amongst the black population and general
economic growth will be achieved.
6
29
8. REFERENCES
Agrawal, A., and Jaffe, J. (2000). ‘The post merger performance puzzle’, Advances in
Mergers and Acquisitions, 1, pp. 119-156.
Bluhm, C.,Overbeck, L., and Wagner, C. (2003).An Introduction to Credit Risk Modelling.
New York: CRC Press Company.
Cargill, J., (2010), Trick or Treat: Rethinking Black Economic Empowerment, Jacana
Media (Pty) Ltd.
Chweya, L., (2006): Paper Presented at the ‘Mijadala on Social Policy, Governance and
Development in Kenya’ sponsored by Development Policy Management Forum on 26
October 2006 at Holiday Inn, Nairobi.
De Lange, J. (2010). IDC spent R700m on BEE debt. Fin 24 (Online).
http://www.fin24.com/Companies/IDC-spent-R700m-on-BEE-debt-20100204
Ernst & Young. (2010).Mergers and Acquisitions: A Review of Activity for the year 2009,
19th Edition, Transaction Advisory services.
Fauconnier, A.,&Mathur-Helm, B. (2008).Black economic empowerment in South Africa
mining industry: A case study of Exxaxo Limited. University of Stellenbosch Business
School, September 2008.
Gunnion S. (2005). A new look at empowerment, Real Business in Business Day. 22-02-
2005:1
Kemp, K. (2008). Implementation of Black Economic Empowerment in South Africa’s
Economy. In A. Muhamed, J. Muliru, A. Corradi and T. Davis (eds). An Exercise in World
Making 2008. Netherlands: Institute of Social Studies, 157 – 163.
30
Koch T. W., &MacDonald, S. (2003).Bank Management, 5th edition. Ohio: South-Western
Thompson Learning.
KPMG, (2009). Are We There, Yet? 2009 BEE Survey.2009 KPMG Services (Proprietary)
Limited.
Krug, J., and Aguilera, R. (2005). ‘Top management team turnover in mergers and
acquisitions’, Advances in Mergers and Acquisitions, 4, pp. 121-149.
Leedy, P.D., andOrmrod, J.E. (2005).Practical Research: Planning and Design, Seventh
Edition, Upper Saddle River: Merrill Prentice Hall.
Lucas-Bull, W. (2007). From Politics to Business. In Mangcu, X., G. Marcus, K. Shubane
and A. Hadland (eds). Visions of Black Economic Empowerment. Johannesburg: Jacana
Press, 132-146.
Mafuna, E. (2007). From Politics to Business. In Mangcu, X., G. Marcus, K. Shubane and
A. Hadland (eds). Visions of Black Economic Empowerment. Johannesburg: Jacana
Press, 31-37.
Meyer, P.G., (2005): The determination of credit risk mitigation in lending to Black
Economic Empowerment (BEE) companies, from a banker’s perspective. Graduate School
of Business Leadership; University of South Africa, November 2005.
Ngwenya, F.S.(2007). Success and Failures of BBBEE – A critical Assessment. MBA
Thesis:Stellenbocsh University, December 2007.
Schoenberg, R. (2006). ‘Measuring the performance of corporate acquisitions: An
Empirical Comparison of Alternative Metrics’, British Journal of Management.
31
Schoombie A. (2000). Banking for the poor: The success and failures of South African
Banks, in Poverty, Prosperity and Progress, Wellington, New Zealand, November 17-12,
2001. http://www.devnet.org.nz/pdf
Sinkey J.F. (2002).Commercial Bank Financial Management in the Financial-Services
Industry, 6th edition. New Jersey: Prentice Hall.
Statistics SA, (2010). 1st quarter published results of Statistics SA,
2010http://www.statssa.gov.za/publications/statskeyfindings.asp?PPN=P0441&SCH=4661
Walter,G.A., and Barney, J.A. (1990). 'Management objectives in mergers and
acquisitions', Strategic Management Journal, 11, 1990, pp. 79-86.
32
APPENDICES
APPENDIX 1 - DEFINITION OF TERMS& ASSUMPTIONS
Definition of terms
The following definitions are relevant to this research:
BEE – as defined in the Broad-Based Black Economic Empowerment legislation means
the economic empowerment of all black people, including women, workers, youth, people
with disabilities and people living in rural areas, through diverse but integrated socio-
economic strategies.
BEE Transaction - all transactions for the acquisition, by black people, of direct ownership
in an existing or new entity (other than an SME) in the financial or any other sector of the
economy; and joint ventures with, debt financing of or other form of credit extension to,
and equity investments in BEE companies (other than SMEs).
BEE companies – all Black empowered/influenced/women-empowered companies
Empowerment Finance - means the provision of finance for or investment in Targeted
investments and BEE transactions. The focus of this research will be on BEE Transactions
only.
Financial Institutions - means banks, long -term insurers, short -term insurers, re-
insurers, managers of formal collective investment schemes in securities, investment
managers and other entities that manage funds on behalf of the public, including
retirement funds and members of any exchange licensed to trade equities or financial
instruments in this country and entities listed as part of the financial index of a licensed
exchange. Any other institution in the financial sector, including licensed exchanges, may
opt in.
33
Commercial Banks– are defined as commercial or merchant banks that sell banking services
and products to large corporate (companies). They provide services and products such
overdrafts, medium term loans, long-term loans, debtor finance, treasury products such as letters
of credit, cash management products, corporate
Assumptions
The following were the assumptions made :
All referral to Legislation/Statutory Acts and the Financial Sector Charter (FSC) refer to
the currently available versions at the time of publishing the final report.
Interviewees are knowledge experts in their own fields simply by their title and the position
they assume in their organisations.
34
APPENDIX 2 – INTERVIEWEES
Bank Respondent's Name Designation
First National Bank-Commercial Banking Sipho Mdanda Leverage Finance - Senior Debt Lending
Nedbank Business Banking Bridgette Ryders Senior Debt Provision-Special Assets
ABSA - Commercial Banking Peter Swart Head of Credit
SBSA: Corporate and Investment Banking David Redwick Head of Strategic Finance and Acquisitions
SBSA: Corporate and Investment Banking Mohale Masithela Head of BEE
Industry Expert Respondent's Name Designation
BEE specialist Jenny CargillAuthor of Trick or Treat, Investment Advisor on BEE
Assistant Professor on Diversity Dr Betina Szkudlarek University of Rotterdam
Equity Funding Expert Sandile Hlope Director of BEE, KPMG
M&A Expert Dave Thayser Director of M&A, Ernest & Young
BEE Company Respondent's Name Designation
Thebe Resources Mpilo Shelembe CEO
Indigo African Legend Mashude Tshivase Executive Chairman
Vito Retailers Group Brian Skosana CEO
Euromatic Plastop (PTY) Ltd Garl Wolman Financial Director
35
APPENDIX 3 – QUESTIONNAIRES
INTERVIEW QUESTIONS FOR BEE COMPANIES
36
37
Interview schedule to be used for BEE companies
SECTION A COMPANY DETAILS:
Name of the Company:
Physical address
Nature of business/industry (SIC)
No. of Employees:
Company Turn-over
Respondent’s designation:
Company’s Main Bankers:
Other Bankers:
SECTION B: Incident Description – Specific transaction
concluded
We would like to discuss your BEE transaction – can you give us a
brief overview of your business and an explanation summarising
the details of the deal?
What insights can you share with us about the funding structure of
the deal?
Please explain what role the Bank played in the funding structure of
the deal
Were there any challenges associated with the funding structure of
this deal?
What were the critical criteria this deal had to meet in order to get
credit approval from the Bank?
What were the critical criteria for your company to consider this deal
successful?
Were there any issues that you believe might have been overlooked
in achieving the optimum funding structure for this deal?
INTERVIEW QUESTIONS FOR BANKS
Interview schedule to be used
A COMPANY DETAILS:
1. Name of the Bank:
38
2. Physical address
3. Respondent’s designation:
4. Respondent’s Role:
5. No of BEE deals in 2010:
SECTION B: General
6. What Credit Policy is applied to BEE funding?
7. How often do you receive BEE funding/credit applications?
8. How many of these get approved?
9. What are the key elements you look for when conducting a due
diligence exercise for BEE deals?
10.Drawing from your experience, how do BEE transactions risk profile
compare to other similar transactions?
11.What percentage of your NPL makes up BEE transactions?
12.What funding models or mechanisms are prevalent in your bank for
funding BEE transactions?
13.What do you consider as critical (must haves) in approving a BEE
deal with your BEE client?
SECTION C: Specific
14. Can you share some insights into the latest deal you have
approved?
39
15. Do you consider the following to be critical (must haves) for bank to
secure a BEE deal (the list will not be made available to the client to
avoid influencing the respondent’s response in the above question).
Ranking to be used.
Profitability
Value creation and mutual benefit
Value creation
Share price
Dividend flow
Security
Pricing
Quality and Experience of BEE management
16. In your opinion, what attracts BEE companies to your Bank?
17. Have you recently lost a BEE transaction to your competitor, and if
so why?
In your opinion, what needs to change for BEE deals to be sustainable
and mutually beneficial to the bank and customer?
40
41
APPENDIX 4 – INTERNATIONAL PERSPECTIVES ON EQUITY
POLICIES BASED ON NETHERLANDS& KENYA VISITS
Netherlands and Kenya have attempted to implement equity policies with varying degrees of
success:
NetherlandsIn a South African context, BEE policy is aimed at broadening the economic base of the country;
stimulating further economic growth, creating employment and enhancing the economic
participation of Black people (South Africa. Info, 2008 & DTI, 2006). Since its implementation the
program has become legislation, demanding companies to comply. BEE is supposed to provide
equal chances to all, and improve the living conditions of all South Africans. (Afrique du Sud,
2010).
Netherlands is faced with the challenge of diversity, predominantly, discrimination against
immigrants and gender diversity.
Immigrants
The following are our findings after discussions with Dr.Betina Szkudlarek, assistant professor at
the Erasmus University in Rotterdam
In the mid-1960s, most migrant workers entered the Netherlands from the southern and eastern
Mediterranean countries, notably Morocco and Turkey. A few years later, the Dutch government
formalized the recruitment practices by bilateral agreements with the sending countries. The
Dutch and the sending societies and the migrants themselves expected this migration to be
temporary.
In fact, most labourers from southern Europe (Italy, Spain and Greece) returned to their home
countries after a couple years of work in the Dutch industry. However, during the 1970s
Moroccan and Turkish migration shifted into more permanent settlement of these ‘guest workers’
and their families.
42
Although the Dutch authorities called for the recruitment to stop, immigration from Morocco and
Turkey continued in the 1970s in the form of family reunification and later in the 1980s onwards in
the form of family formation. As a result of large scale family reunification more female migrants
entered the Netherlands and as a consequence the sex ratio became gradually more balanced.
Now with second generation Moroccan and Turkish immigrants in the system there are issues
about acceptability into society. There is a distinct “separation” in society with immigrants being
referred to as “non-allentogs” and the ethnic Dutch population as “allentogs”. Further distinction is
evident in the residential areas of these groups; both groups live in different residential areas and
in their community. However on the positive side, businesses are now realizing the potential of
this market and are recruiting Moroccans and Turkish immigrants to service this market.
Gender Diversity
The following extract are conclusions from Mary van der Boon, who is principal of trans-cultural
management firm global tmc international, President of the European Professional Women’s
Network-Amsterdam and PhD candidate in Organisational Behaviour on the topic of Systemic
Bias in Organisations at Amsterdam Business School, University of Amsterdam.
Countless surveys and studies have come to the same conclusion: gender diversity in the
Netherlands, particularly the streaming of women to top positions in business, government and
universities, lags sorely behind other European countries. A common myth in the Netherlands is
that companies who appoint woman are taking more risks.
Corporations have to make the appointments and then back their (female) appointees all the way,
making it clear that no insubordination will be tolerated. There isn’t any visible mechanism
(process) that holds women back (perhaps only the resistance from middle management. This
group is nervously hanging onto their own positions, and won’t easily let women through). Top
managers will perhaps have to give women a helping hand by breaking through this resistance.
The concept of ’systemic bias’ is ingrained in every organisation. This occurs when certain
behaviours and characteristics ¬ often those of background, ethnicity, personality, gender, age; in
43
short, things over which people have no choice or control are encouraged and rewarded in an
organisation. The preference is very subtle, but extends from recruitment approaches (where is
the organisation looking for its new talent, for instance, and what kind of candidate applies?) to
promotion (who is placed on the fast track and in management development programmes, and
who is asked for key overseas jobs?) and leadership (what kind of diversity exists in the top
200?).
Most organisations unconsciously favour those who look, act and feel like the present leadership,
and they in turn are usually clones of the leaders before them. With senior management boards
of any organisation in the Netherlands there is virtually NO change over time. Down to the ties
they are wearing.
It is simplistic, therefore, to assume that the problem lies in a middle-management bottleneck.
The problem lies in engrained, hidden and very powerful bias inherent in every process in the
organisation. It takes incredible courage to undertake the change management initiatives
necessary to enact serious improvements in an organisation. Very few organisations have this
courage.
Kenya
Re-distribution of wealth in Kenya after colonial dominations did not evolve to create a broadly
empowered population but only benefited a few. The anti-colonial nationalist leaders and the
African population in general were in agreement about the colonial economic domination of the
African population, but differed on how to restore equity in the economic sphere once
independence was achieved (Chweya, 2006). The African population and a few leftist nationalists
like Bildad Kaggia expected redistribution of land in the former White Highlands as well as other
economic opportunities in the commercial, services, and manufacturing sectors in favour of the
poor and the “land-less”. But the right wing bulk of the KANU leadership like Jomo Kenyatta
seemed to favour redistribution to a new African bourgeoisie; that is, to individuals able to pay for
the land and other means of capitalist production that the colonial bourgeoisie had opened. New
African elite emerged through the process of Africanization of both the economy (land ownership,
commerce, industry) and state apparatuses including the bureaucracy thereby establishing a link
44
between state power, state resources and accumulation. In the end, Kenya adopted a system
that was neither free market nor socialist and the development of capitalism was halted except for
a few.
The departure of European participation in agrarian, commercial, and industrial activities left
behind a vacuum that called upon new local, indigenous elite to fill. While Africanization of
ownership of the means of production was effected rapidly, the emergent class of African elite
lacked the characteristics of the European elite, especially skills, capital, and relevant culture of
accumulation resulting in stalled development.
In addition, nationalization of the economy was undertaken through the establishment of public
enterprises as a framework for wealth creation and production. While public enterprises (PE)
served more purposes than just capital accumulation, the generation of wealth was crucial and
was not necessarily antagonistic to the fulfilment of the other goals of PE. However, public
enterprises failed to spearhead development because the state mixed non-capitalist
considerations with capitalist undertakings, especially political patronage. The state treated PE as
a source of cash for political operations and employment to favoured individuals.
Therefore the turn of independence did not result in the beginning of widespread wealth
redistribution and growth due to failed state policies that favoured the elite, while promoting
subsistence peasant production and petty entrepreneurship.
45
APPENDIX 5 – HISTORY OF NETHERLANDS, KENYA SOUTH AFRICA &SWOT ANALYSIS
The Netherlands Kenya South Africa
HISTORY The Netherlands has been historically been
made up of the Dutch population until the mid
60’s when the Dutch Government signed a
bilateral agreements with countries like
Morocco and Turkey to allow migrant workers
into the country. Some of these migrant
workers never went back to their original
countries and instead established permanent
homes and as a result, there has been a
second generation of non-indigenous Dutch
population which is making a significant size
(ca 20%) of the total Dutch population today.
This non-indigenous group has been
classified as the Multi-Cultural Group.
Because of the growing numbers in this
population group and hence the increased
economic activity in this segment, Marketers
and Financial Institutions alike have taken
note of the potential of this “emerging” market
segment as a new growth area for their
products. Certain Banks visited have
Kenya got her independence from
Colonial rule in 1963. They have since
had 3 democratic presidents with the
current parliament being made up of a
coalition government following a
contested election in December 2007
which resulted in a series of violence
attacks which left more than 800 people
dead. These series of violence sent a
shocking wave to the international
community which resulted in Kenya’s
GDP dropping to its lowest level in
history. Tourism which makes up 63%
of GDP dropped by .. as the
international community issued travel
warnings to Kenya. The economy is on
the recovery following a formation of a
coalition government after some
intervention from key international
figures like Kofi Anan. Kenya had a
referendum which introduced a new
South Africa’s 1st democratic elections were
held in 1994 following Nelson Mandela’s
release in 1990. Nelson Mandela was sworn
in as South Africa’s first democratically
elected President. Since European settlers
first arrived in South Africa with Jan van
Riebeeck on April 6 1652, the rights and the
wellbeing of the indigenous Black population
had been placed second to racial superiority
of the minority groups, first by the Dutch, then
by the British colonisation and then by
Apartheid under Afrikaner minority Rule.
Under Apartheid Government, racism was
institutionalized and put into law by the
enacting of various Acts aimed at
disenfranchising the Black majority
population. Amongst these was the Group
Areas Act No 41 of 1950 which divided urban
areas into racially segregated zones. Black
people were separated and prevented from
owning land or residing in designated ‘white’
confirmed that they even have programs and
products targeting this market segment
however diversity is still a challenge in terms
of servicing these “new” clients. As a result,
there is a drive towards recruiting from the
Multi-cultural group to service this market.
constitution which will see among other
things the re-distribution of land through
imposing of tax for large ownership of
non economic use of such land . The
new constitution aims reduce
presidential powers and rather
empower cabinet to have more powers
that currently is the case.
areas. Opportunity for economic growth for
Black people was restricted to the community
where people were designated, generally the
poorer areas. Industrialisation and economic
growth only flourished in the white areas.
Amongst the many Legislative framework that
were put in place following democracy was
Black Economic Empowerment (BEE) which
was intended to enhance the economic
development of the Black population.
SWOT
Strengths – Stable Democracy. Multi Party
Democracy. Subnational Government at
provincial level. The Council of State is an
advisory body of cabinet on constitutional and
judicial aspects of legislature and policy. Over
and above - the Court of Audit investigates
whether public funds are collected and spent
legitimately and effectively while the National
Ombudsman investigates complaints about
the functioning and practices of
Strengths – Vibrant Democracy.
Effective opposition. Political tolerance.
Weaknesses – Shaky coalition
Government.
Opportunities – A new progressive
constitution.
Strengths – Stable Democracy. Effective
opposition. Political tolerance. Parliamentary
governance system. An independent
Constitutional Court. A National Protector who
handles public complaints and investigates
whether public funds are collected and spent
legitimately while the National Prosecuting
Authority is there to handle corruption cases
at the highest level.
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government.The Judiciary System is
independent.
Weaknesses – Immigration laws that have a
tendency to cause ethnical tension within
society.
Opportunities – To embrace the
multicultural group and the diversity it offers
to the country as well as economic diversity
that the multi-cultural group offers in terms of
untapped markets.
Threats – likelihood of the Netherlands
becoming less Liberal following the elections
in 2010.
Threats – Corruption Government level.
Weaknesses – Electoral system which
excluded the public from electing it’s own
presidential candidate but rather this decision
vests with the elected party.
Opportunities – To embrace Black Economic
Empowerment as a legimate and voluntary
tool to address economic imbalances of the
past in order to effect Social change.
Threats – Social unrest which will lead to
political instability due to widening gap
between the rich and the poor.
Economic Strengths – Open economy. Hosts the 3rd
largest harbours in the World. Hosts the
biggest flower trading market in the world.
Boasts the best water management
engineers.
Weaknesses – The Netherlands is below
sea level, therefore water management is a
Strengths – Biggest economy in East
Africa. Exporter of Agricultural products.
Biggest exporter of flowers and tea.
Weaknesses – Undeveloped
infrastructure for robust economic
growth.
Strengths – Biggest economy in Africa.
Developed and mature Banking Industry.
Weaknesses – Unfriendly economic policies
to hinder investor confidence.
Opportunities – Gateway to the rest of Africa
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countries biggest challenge.
Opportunities – Situated centrally to
Eurozone hence a gateway for Eurozone to
the rest of the world both in air travel with one
of the biggest airports in the world – Schipol
Airport for tourism and trade via the harbour.
Threats – Since it is below sea level, Global
Warming is the greatest threat as the
Netherlands might find itself under sea if
global warming continues at the rates. It is
estimates that it will take only 30 years for the
country to be under sea.
Opportunities – Economic Gateway to
the rest of Africa from the East to West
and the rest of Africa.
Threats – Non-development of the
Harbour for robust economic
development. Corruption increases the
cost of doing business hence a cost to
the economy..
for economic development.
Threats – Deterioration of Infrastructure with
the country which hinders economic growth
e.g. around transportation; Harbours and
Roads.
Social Strengths – The population is mostly made
up of middle and working class. No cases of
the population living on less than a one USD
a day.
Weaknesses – Handling of Diversity issues.
Opportunities – Embrace diversity and
inclusion of multi-cultural groups which will
result in less ethnic tensions.
Strengths – Socially coherent society.
Communal based society.
Weaknesses – Corruption.
Opportunities – To embrace the
different ethnic groups to avoid such
intolerance and violence seen in late
2007 and early 2008.
Strengths – Growing middle class. Better
access to education albeit the quality not of
the highest standard.
Weaknesses - Lack of Good Leadership in
policy making and Corruption
Opportunities – To enhance service delivery
to avoid social unrest.
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Threats – Social unrest due to ethnical
tensions due to less liberal laws being
introduced. Liberal laws around drug use.
Threats – Big gap between the have’s
and the have-not.
Threats –. Widening gap between the rich
and the poor which will result in social unrest.
T
echnological
Strengths – Best engineering in water
management. 1st world technology in most
sectors in the economy. 1st class technology
in air travel.
Weaknesses – Not number 1 in IT and
software solutions. Being dependent on
countries like India for cheaper development
of software.
Opportunities – Globalization allows instant
migration of technology developed locally.
Threats – Globalisation – outsourcing to
cheaper geographies like India.
Strengths – Mobile voice; data and
banking solutions
Weaknesses – Weak technological
infrastructure
Opportunities – Hugh infrastructural
developmental potential in Transport;
Communication; Energy and It.
Threats – Outsourcing to cheaper
geographies.
Strengths – Mature infrastructure in
Communications; Digital Media and Banking
systems
Weaknesses – ADSL infrastructure
development which can hinder economic
investment.
Opportunities – Education of the population
for capacity building.
Threats – Lack of quality education.
E
nvironmental
Strengths – Best Practice in Water
Management and Environmental Laws.
Subscribe to the United Nations
Strengths – Best Practice in Water
Management and Environmental Laws.
Subscribe to the United Nations
Strengths – Best Practice in Water
Management and Environmental Laws.
Subscribe to the United Nations
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Environmental Program.
Weaknesses – Clear policies on Carbon
Emissions.
Opportunities – Leaders in water
management.
Threats – Global Warming which will cause a
rise in water level which might result in the
Netherlands being under Sea in 30 years.
This has been predicted by scientific
research.
Environmental Program.
Weaknesses – Green technology
industry still at its infancy.
Opportunities – To be leaders in green
technology in Flower farming.
Threats – Risk of not being leaders in
green technology in farming as this is
expensive for a developing nation like
Kenya.
Environmental Program.
Weaknesses – No Clear policy on Carbon
Emissions and Global Warming.
Opportunities – Could be African Leaders in
Carbon Credits Industry.
Threats – Triple bottom-line reporting of
business is not compulsory. Environmental
policy and recycling is most left to
Government to sort out.
Legal Strengths – Best Practice in Legal
Framework. Dutch Laws are enforceable.
Weaknesses – State is seen to be too
Liberal with Business adhering mostly to
international law.
Opportunities – Laws allow easier
facilitation of Globalization and trade.
Strengths – Legal Framework is solid
and enforceable
Weaknesses – Coalition Government
might take too long to put legislation in
place as consensus is required from all
parties.
Opportunities – Coalition Government
ensures all views are taken into account
which inform policy making and legal
Strengths – The South African Legal
Framework is well entrenched and
enforceable. The Law used is Dutch Law. The
Legal proceedings are well respected and
adhered to. There is an independent and
enforceable judiciary system in place.
Weaknesses – The Laws and Regulations
might be seen as too Liberal but all these are
guided by the Democratic Constitution.
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Threats – Recent proposed Immigration laws
are a threat to Immigrant.
framework.
Threats – Sensitive coalition
Government.
Opportunities – Laws are enforceable and
SA falls within the Internal Laws and
Commonwealth. The Legal system easily
facilitates international trade.
Threats – Maintaining independent law
making bodies.
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