Paul Janisch

An overdue comment on entrepreneurship

Many years ago when I was at university I used to wonder why the cleverest people in my class at school could study anything other than medicine.  To my mind if you were that clever then you might as well do a course that required cleverness - like medicine.  

This same sentiment occurs within South Africa, here we don't understand why black people bother with getting a job when there was so much opportunity for them to start their own business.  An article in the FM, written by Willie Thabe who  is MD of the Black Management Forum Investments Company, puts this whole concept into persepctive.

global statistics tell us that only 5% of all people — black or white — are entrepreneurs at heart.
Empirical evidence from development finance institutions such as the IDC and Khula Finance suggests the failure rates of investee companies are high in spite of the fact that their core mandate is developmental. It’s a well-known fact that 66% of startups survive the first two years of business and only 44% the next two.

He then poses the relevant but politically thorny question

The moral of the story: new businesses carry a level of risk. So what is the economic benefit to a local business of developing a second enterprise purely for a good BEE score?

And he concludes with

we can’t ignore the fact that the type of entrepreneur that emanates from the provisions of BEE policy may qualify for the opportunity due to previous economic displacement but may not have the appropriate background or savvy to operate a successful enterprise despite its size.
Therefore it makes no difference where the BEE emphasis lies. The lack of a strong entrepreneurial culture is the fundamental problem. Government’s expectation of the private sector succeeding where developmental institutions have not makes the new move untenable in practical terms. For corporates and individuals to be bullied by government into a development mind-set can’t possibly be the way to broad-based economic success.

 This is very hard-hitting and relevant.  And again harks me back to the absolute lack of decent entrepreneurial talent on the BEE council.  The same problems are going to continue until the DTI and ZumachineGat actually figure this out.

Well written Willie.

New state bid to make BEE more hands-on

New state bid to make BEE more hands-on (edited)

CAPE TOWN — Amendments to the Broad-Based Black Economic Empowerment Act, aimed at shifting its focus from equity deals to enterprise development, will be tabled in Parliament by July.

They would also address sharp criticism of black economic empowerment (BEE) as only benefiting a small elite and creating a class of passive black shareholders rather than entrepreneurs actively engaged in economic activity.

Department of Trade and Industry acting director-general Lionel October said the recommendations of the advisory council  would shift the focus of BEE away from equity investment and ownership towards productive activities.

Currently, companies scored high marks on the BEE scorecard for black ownership, which gave them a high overall score even when they performed poorly in areas such as enterprise development and procurement.

A proposal being examined by the economic cluster is that minimum scores would be required for enterprise development and procurement — or the overall score would suffer. This would compel companies to aim for achievement in all areas.

Mr Davies said what was under consideration was that points would be deducted from the overall score if minimum scores for enterprise development and procurement from small companies were not achieved.

It would also not be enough to merely hand over money for an incubator or enterprise development project. Companies would have to be actively involved in fostering small businesses.

"In Asia, small and big businesses have a symbiotic relationship where big business gets a lot of input from small business and works hard to ensure that it has the required capacity and the technology," Mr Davies said.
via www.businessday.co.za

So what do you do, clap your hands vigorously and chant "should have happened a long time ago".  

The italicised and highlighted sentences are relevant.  But there are concerns

1. What's with the stick - why punish companies for not achieving a sub-minimum.  The proliferation of BEE certificates in the economy shows how many companies are taking this BEE thing seriously. Many businesses cannot purchase from smaller businesses because they buy 90% of their products from a single supplier.  And if that supplier is improving on their own BEE scorecard then we are seeing progress.  
2. I have a huge concern about companies now having to become involved with their ED beneficiaries.  This is stupid and won't work - I don't care if it works in Asia. Here companies do what they do best which is run their own businesses - not helping other businesses.

Come on Rob, the ED principle has done wonders for so many businesses - why do you want to overhaul something that isn't broken, it just needs a little refinement which includes tax breaks and other types of incentives.  And also fire that useless Zungu, what the hell has he done for any business in South Africa - other than being a professional black.

Richard Ferrer just called me and asked if outsourced incubators and other types of ED facilitators are now going to be out of a job.  I don't think so - they will need to get closer to the companies who are paying them.  They'll also need to become the bridge between the two entities.  It'll take a little creativity but they will become more relevant than ever.

What about those entities that think they might need a BEE scorecard but don't

This is a repost of one of my informative Caird Code Rules as per a reader's request.  I've added in another little feature that I've never done before - if you place your mouse on the underlined text it will show the sections in the codes that I'm referring to.

Charities and other section 21 companies that are looking for SED money

Paragraph 5 of Code 000, statement 004 states very clearly that their BEE status is not a consideration in determining whether they will be beneficiaries of SED contributions

There are some NGOs/section 21s who provide certain types of services to corporates to raise money for their core activity. Under these circumstances they become a supplier to that corporate and might be required to produce a specialised enterprises BEE scorecard (statement 004).

Entities or companies providing enterprise development services

Now this is a very common occurrence. There are many private companies providing these services, Endeavor and Raizcorp are two that I know rather well. This practice is contemplated by code 600, paragraph 3.2.5.12.  It does not appear that these companies actually need to produce a BEE scorecard to provide ED services. One of the exclusions under Code 500 (Preferential Procurement) is empowerment related procurement – more specifically (paragraph 6.5.2)

investments, loans or donations qualifying for recognition under any statement under Code series 600 or 700

This strongly suggests that that expenditure is excluded and hence a BEE scorecard is not needed.

Mazwai's views on empowerment

TOWNSHIP communities need to be empowered to develop their own economies so they can set up and sustain small businesses, said Thami Mazwai, director of the University of Johannesburg’s Centre for Small Business Development (CSBD).

I found this in today's Business Day.  This is typcial of Thami Mazwai's sentiment on empowerment.  He is part of that school that doesn't want 25% of an established company - he advocates 100% black ownership of a competitor to that company.  And he has my full support in this. 

I wrote about Mazwai before.  And I am so pleased to see that he is starting to lay the foundation for this plan.  His position as director of the Centre for Small Business Development at the University of Johannesburg, Soweto campus puts him in the perfect place to start effecting this.

Mazwai is advocating township people supporting their local businesses and not heading into Sandton or town (or any other main CBD) for their purchases.  It is a noble idea and with the correct support from ED funds it can certainly happen.  There has to be a benefit for some companies helping develop small township based businesses - these guys could open up new markets for you.  Nestle has done it quite successfully.

There was a programme in the US (Chicago) where a couple decided to only support black businesses for a year.

I think that if you do not have a structured ED policy you would do well to contact Thami at UJ, I am sure he will put your ED ZARs to good use.

Things startups do and don't need

Courtesy of Fred Wilson (love the reference to Microsoft)

Things startups do need

Sunny office

Windows that open

Democratically controlled music system

Two forms of internet access

Beer on fridays

EVDO cards

Video game system

Good coffee maker

Proximity to public transportation

Proximity to park

Heating that goes all night

Health care plans for everyone

Mac laptops with second monitors

Plants

Lots of in-person interaction

Gmail and Google docs

Soft lighting

Things startups don’t need

Fancy (Aeron) chairs

Expensive art on the walls

Vacation policy

PR firm

Dress code

Private offices

COO’s and GMs

Business cards

Microsoft products

Dental plans

Free lunches

Central air conditioning

Doorman

Phone system

Set time you need to arrive in morning

Meetings

Carpeting

Caird Code Rule #1 – Is BEE applicable to you

A while ago I was doing a presentation to the American Chamber of Commerce on Equity Equivalents. One of the delegates was an apparel manufacturer who asked my why his company should consider the programme I was proposing. I was a little surprised that such a company would even consider equity equivalents as an option. Why would they need to, they sell takkies, T shirts and caps. Every single one of their products are sold to a consumer who is very unlikely to use BEE status in their decision to buy their product. Edgars etc might ask them for their BEE status but I have my gravest doubts that they will not stock those products in their stores because that company does not comply with their BEE wishes. And it is also unlikely that Edgars will incentivise their sales staff to push a local product over the imported one. Can you imagine the conversation

Consumer: I'd like to try on these Adidas shoes.

Sales assistant: Please sir would you consider these Dlaminis. They are locally manufactured and Edgars will get more BEE points if we sell these.

Consumer: No I will not you horrid sales assistant you. I'm off to Sportsman's Warehouse.

This fictitious interaction exposes the deepest flaw in the implementation of BEE viz if the average joe is the end user then BEE is not going to be very important. This means that BEE can really only be applicable when the consumer is some sort of a corporate or government entity.

The general rule here is that if your business caters for consumers then it is unlikely that BEE will ever affect you. This would include restaurants (that don't serve alcohol), shoe shops, clothes shops, plumbers, electricians, pool companies, record shops, news agents, retail jewellers. As with any rule there are exceptions.

1. Any restaurant, hotel, pub or anything that serves alcohol requires a liquor licence. And those licenses are handed out by the DTI. And the DTI asks a bunch of BEE questions in allocating these licenses. I have written countless BEE plans for liquors wholesalers and retailers that have to be submitted with each renewal.
2. Shops looking to rent in malls that are owned by parastatals like Transnet or Eskom. I have heard that your BEE status is important to these types. ACSA is another example – the annual tender for renewals for shops in the airports require BEE credentials. I don't know who drafted those BEE questionnaires but they are so badly written they are an embarrassment (mind you so is ACSA). I haven't come across private property owners asking for BEE credentials.
3. Manufacturing jewellers have to comply with the Mineral and Petroleum Resources Development Act of 2002, (MPRDA). The requirements for this are exactly the same as those for a mining licence. I won't comment on this right now but suffice to say – this abomination requires its own future post.
4. Anything that can be used under section 10 of the BEE Act. I haven't really seen this being used, although I have worked on PPPs where the legal advisors have anticipated it in the PPP agreement. The DTI has taken a cautious path when it comes to section 10 because I believe that they recognise that over-regulation will stifle the development of the South African economy (as if we aren't over-regulated already). Technically speaking they could shove section 10 in the way of almost everything to achieve the BEE Act's transformation goals.

What about those entities that think they might need a BEE scorecard but don't

Charities and other section 21 companies that are looking for SED money

Paragraph 5 of Code 000, statement 004 states very clearly that their BEE status is not a consideration in determining whether they will be beneficiaries of SED contributions

The status of Socio-Economic Development Contributions made to any of the types of entities in paragraphs 1 and 2 under Code series 700 is not dependent on such entity's scorecard result, but rather the nature of the contribution itself and the identity of that contribution's beneficiaries.

There are some NGOs/section 21s who provide certain types of services to corporates to raise money for their core activity. Under these circumstances they become a supplier to that corporate and might be required to produce a specialised enterprises BEE scorecard (statement 004).

Entities or companies providing enterprise development services

Now this is a very common occurrence. There are many private companies providing these services, Endeavor, Raizcorp and ED Alliances are three that I know rather well. This practice is contemplated by code 600, paragraph 3.2.5.12

payments made by the Measured Entity to third parties to perform enterprise development on the Measured Entity's behalf

However it does not appear that these companies actually need to produce a BEE scorecard to provide ED services. One of the exclusions under Code 500 (Preferential Procurement) is empowerment related procurement – more specifically (paragraph 6.5.2)

investments, loans or donations qualifying for recognition under any statement under Code series 600 or 700

This means that the expenditure is excluded and hence a BEE scorecard is not needed.

The changing face of BEE deals as per FM?

Taken from an FM article on BEE investment houses who end up being benificiaries of deals and their overall performance.  The article concludes that BEE deals need to evolve, suggesting perhaps that a move toward entrepreneurship and away from passive hand-out involvement.

Recent broad-based empowerment deals from the likes of SAB, Tiger Brands and Adcock Ingram point to a changing trend in the structuring of black economic empowerment (BEE) deals. The tide has swung away from those that favour one black company or group of individuals. "The BEE deals of today are different to the way they were structured five years ago," says Sanlam Investment Management portfolio manager Ricco Friedrich. "Staff and related communities are now the preferred beneficiaries in deals that are broad based. They are more sustainable than the kind that favoured the usual suspects'. Those are dead in the water."

And then there is this quote from Jenny Cargill of BusinessMap.

"Current policy has effectively placed a 25% ceiling on BEE equity ownership. The acquisition of controlling interests by BEE investors is no longer evident and this has led to a more opportunistic character to BEE ownership."

I have always noted the sterility of the 25% target.  Once you set a target then people go for it and rarely exceed it - ask any sales manager.  Could this be why jungle (speaking predictably out of turn) is suggesting a 30% equity target by 2017?  Got to love his exemplorary knowledge of BEE and affirmative procurement.  And why not leave this post with a quote from my esteemed aficianado

Manyi said the BMF was changing its focus to concentrate on ownership, affirmative procurement and enterprise development instead of employment equity.

Does this mean that it's his other hat as DoL DG that will be looking after the EE side?

Cumulative targets?

I'll tell you what I know about the art of BEE (as opposed to it being a science, which it clearly isn't) and that is that every person in the industry interprets each element differently.  Goodness knows that I have, convincingly I stress, interpreted all the elements in the most business friendly light and will generally go out of my way to prove that my interpretation is right.

But I was stumped on Friday.  And this is why.

I was told by a client that he had been advised that enterprise development is cumulative.  "True", I said.  According to what they'd been told this meant that the contributions are cumulative from the inception date (either Feb 2007, or a date five years prior) which means that the targets are cumulative too.  In other words,  say you contribute 2% of NPAT in the first year, then in order to make that full fifteen points the next year then you need to spend 4% of NPAT and so it goes on.

I disagreed with them but Vuyo's book is very vocal on this matter.  It is so important to Vuyo and Kyle that they have provided it with a heading on page 322

"Cumulative measurement of enterprise development contributions"

The targets and contributions for each year are cumulative.  The reason (for this) is to encourage a long term investment strategy...... A measured entity that does not contribute to the targeted amount to enterprise development in year one will carry the shortfall over to year two.  It will have to contribute a larger amount in year two to compensate for the shortfall in year one.

Not being one to allow Vuyo's opinion to be the overriding one when it doesn't suit me I phoned Obed.  And Obed had the same opinion as me and that was that you measure the contribution against the last year's target.  My next port of call is the codes themselves and the Interpretative Guide.

Code 600, paragraph 3.1.2
Qualifying Enterprise Development Contributions of any Measured Entity are recognisable cumulatively

BEE interpretative guide (page 84)
All enterprise development contributions are measured cumulatively from the earlier of the commencement of the Codes or a maximum of five years prior to the commencement of the codes until the date of measurement. This cumulative period will be limited to five years at a time – in other words the sum of contributions is averaged over the number of years (limited to a maximum of five years).

If Jack and Harris are correct (and I strongly suspect they aren't) then this is the second time the codes have opted for a stick approach to a  target; the other time with that ridiculous 40% minimum under employment equity.

To qualify my argument that the Jack/Harris interpretation is wrong.  Both code 600 and the interpretative guide talk about contributions being measured cumulatively.  Nowhere is it mentioned that targets are cumulatively measured.  This  is further confirmed by the description of the formula for calculating enterprise development spend; viz.

B is the value of all Qualifying Contributions made by the Measured Entity measured from the commencement or the this statement or the Inception Date to the date of measurement

C is compliance target in respect of the Qualifying Contributions as specified in the scorecard for statement 600 (which is clearly 3% of NPAT)

Is there anyone out there who would like to provide me with an argument that suggests Vuyo and Kyle are correct?

Enterprise Development and tax and thanks to Marisa

  Marisa is away on a two week holiday so she'll only read about this when she returns.  She and I were discussing enterprise development and ways of making contributions, most of which are contemplated in the Benefit Factor Matrix.

I hadn't noticed that there was a 100% benefit factor for an "interest-free loan with no security requirement supporting enterprise development", it was Marisa who pointed it out to me.  A recent judgment in the Supreme Court of Appeal now makes these loans taxable (reported in the Business Day on the 14th of September, 2007).  And I quote:

The appeal court ruled in favour of the South African Revenue Service (SARS), holding that the receiver had correctly assessed the companies to tax on the basis that the right to use loans interest-free had a money value and formed part of taxable income.

Now there is a thing for beneficiaries.  They will be taxed on this income - at least there is some justice in this world.

I must qualify this last statement.  I cannot comprehend the ludicrousness of an incentive to give interest free loans with no security (you'll notice that standard loans only carry a 60 - 70% benefit to the loaning company).  If they pay tax on the loans then they will at least experience some type of real world business practise.

Where in the real world do people get money at no interest rate and with no collateral.  I would hazard a guess and say NOWHERE!!!!!!!!   If beneficiaries just get used to this kind of loan they will fall horribly short when they go to any other lending institution, including the NEF,IDC, Khula. 

Enterprise development is about building sustainable businesses.  Sustainable businesses understand the cost of money and loans and the complexities of finance and the need for security on these loans.  Interest-free loans don't breed this kind of business.

I say get rid of that stupid nonsensical matrix and follow business principles and we will start getting somewhere.

Erratum sum meum (latin noticing)

I lamented somewhat miserably in my last post that the Big News website didn't work.  I was wrong - I can't see it on my PC (DNS settings are not happy).  The information about the enterprise development awards is available on their website.  But I still can't see it.

I learned this from Christoff Oosthuysen,  the publisher of Bignews, who politely pointed out that my DNS settings are in their moer in - and then sent me the information via email.  Thanks Christoff.