Ownership Transformation in the Metals and

Engineering Sector: IDC’s Black Industrialist Development

Framework

MEI Indaba 2018

Mazwi TunyiswaHead: Basic Metals & Mining and Machinery &

Equipment SBUs

21 September 2018

Contents

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A More Inclusive Manufacturing Sector

Barriers facing Black Industrialists

Concept of Black Industrialists

IDC Interventions

IDC Case Study

Challenges

Radical Economic Transformation in Context

Increasing Black ownership and control in the economy is one of the key pillars of Radical Economic Transformation

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Direct black ownership and control in the country remain elusive – only 3% of JSE (NEF study)

Established businesses have only adopted minimalist approached to transformation – more reformation than

transformation (Mncani Mthunzi – BMF)

Not uniquely South African problem - similar policies observed elsewhere:‒ Malaysia introduced the New Economic Policy in 1971 to achieve inter-ethnic economic parity with the Chinese after deadly race

riots in 1969 – empowering the Bumiputera - the politically dominant but economically poor Malay

‒ Zimbabwe recently relaxed some of its Indigenisation rules requiring 51% ownership for locals

‒ United Arab Emirates limits foreign ownership to maximum 49% to protect local entrepreneurs

‒ Indonesia limits foreign ownership of mines to 49%

‒ China limits foreign ownership depending on the sector

And in the past:‒ 1920s Civilised Labour Policy – preferential wages for White workers to enjoy a White standard of living through the Wage Act of

1925

‒ Afrikaner Empowerment (Volkskapitalisme) extended White privilege by using the coercive force of the state through

institutionalised racial policies such as land expropriation, job reservation, preferential procurement, higher wages and market

exclusion of other races to increase economic participation and well-being of specifically Afrikaners, but also Whites in general

‒ Represents more than 70 years of legislated compounded wealth accumulation (not counting the pre-1920s Colonial period) in

favour of White citizens – which give them a head start in any commercial undertaking

The transformation ideal would be:‒ Eradicate the triple crisis of poverty, inequality and unemployment particularly among Black citizens

‒ Economic participation through ownership and management control of Black citizens in key economic sectors

‒ Narrow the income gap between Black and White citizens

‒ Empowered Black citizens to further industrialise and develop the economy

We don’t have to reinvent the wheel to get there:‒ Implement the same policies of preferential procurement, land expropriation, affirmative action and market exclusion using

constitutional power of the state to enact positive discrimination regulations and policies allowed under the constitution to close

the economic gap

IDC’s Black Industrialists framework aims to develop a more inclusive manufacturing sector

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Transforming the ownership patterns in the manufacturing

sector to reflect the country’s demographics

Promote structural transformation of the South African

economy through spatial integration, ownership

transformation, employment creation, industrial growth

and diversification

Facilitate the development of a class of Black

entrepreneurs to take ownership, leadership and

managerial control of industrial enterprises

Address the high levels of industrial concentration by

enabling more competitive, inclusive and growing

manufacturing sector

The IDC empowers the Black Industrialists as owner, leader and manager of the enterprise

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Provides strategic and operational leadership to the

business

Has a high level of ownership (>50%) and/or exercises

control over the business

Identifies opportunities and develops business to take

advantage of these opportunities (entrepreneurial)

Takes personal risk in the business

Does business in manufacturing and related sectors, with

particular reference to IPAP and IDC focus areas

Makes a long term commitment to the business and is a

medium to long term investor

The IDC will not condone or support any transactions where there is evidence of

fronting

Barriers to entry in manufacturing facing Black Industrialists

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Access to capital – unlike the compounded generational wealth accumulation

of her White counterparts – the Black Industrialist have access to very limited

resources often with no own contribution, collateral security or track record –

which is exactly the market failure the IDC addressed for Afrikaner industrialists

during apartheid

Access to supply and markets – due to previous market exclusion, Black

Industrialists to not have access to business networks, supply chains and

distribution networks with incumbents fiercely locking out any new entrants

High levels of market concentration – many sectors are dominated by a few

players with smaller players fighting for survival and sustainability

Lack of access to technology and proprietary IP – Black Industrialists largely

to not have access to OEM technologies and did not build up sufficient time and

experience to develop proprietary technology

Management capacity and skills – Black Industrialists need time to develop

management capacity and skills

Exclusion from state procurement opportunities – due to the lack of

experience and track record, Black Industrialist are largely exclude from state

procurement opportunities particularly for manufactured capital goods and

services and are confined to menial procurement such as cleaning, security and

other low value add services

IDC interventions to support Black Industrialists transactions

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Business Support

Acquisitions

Own Contribution

Market Access

Provide business support to BI entities to strengthen

management capacity and skills

Where required IDC will provide 50% of business support

funding as a grant and the other 50% as a loan

Enable BI to acquire business in key manufacturing sectors

Focus on expansions to ensure that >50% stays in the

business for expansion

Provide funding for strategic acquisitions >R75m

Low own contribution from qualifying BI entities in

exchange for deep and tangible commitments

Use of direct equity and or quasi-equity in BI start-ups and

expansions

Partner with the dti to co-fund BI transactions

Preferential interest rates for BI entities below IDC

thresholds

Partner with SOEs to identify procurement opportunities for

BIs

Partner with private sector to identify BI opportunities

Leverage own projects to identify BI opportunities

Key Interventions

IDC approved R7.9Bn in funding for Black Industrialist last year

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National footprint with offices in all regions Performance Impact 2017/18

R16.7BnNet approvals of 202 transactions

29 885Jobs created or saved

R15.4BnFunding disbursed to industry

R8BnApproved for the manufacturing sector

R7.9Bn (R4.7Bn)Approved for Black Industrialist companies

IDC case study: Thakadu Metals Beneficiation/Lonix

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Thakadu Metals Beneficiation was founded in 2015 by Ruli Diseko, a young Black

Industrialist. His experience in the mining and metals industry stems from his employment at

Lonmin, the Department of Mineral Resources and as a commodities trader. Having

identified business opportunities in the mushrooming growth of raw materials used in the

manufacture of batteries, the company conducted a feasibility study to establish a

purification plant for the crude nickel sulphate by-product at Lonmin’s platinum mining

operations. The study confirmed the feasibility of such a venture and the IDC, having

maintained a close partnership with the company, approved funding for the plant.

Once completed, the facility will take the crude nickel sulphate by-product and process it to

99.99% pure battery-grade material. Lithium-ion batteries used in electric vehicles and

hybrid electric vehicles consist of 80% nickel. Nickel has additional applications in energy

storage batteries, rechargeable battery devices and the more traditional nickel-plating

market.

The project is also supported by the dti through a Black Industrialist grant.

DEVELOPMENT IMPACT

• 165 new direct jobs

• Support for newtechnologies

• Establishment of a

business owned by Black

Industrialists and youth

THAKADU METALS BENEFICIATION/LONIX

The production ofbattery-grade nickel sulphate is beneficiating and incorporating South Africa’s raw materials into global value chains for newtechnologies

However, key challenges remain

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The low economic growth trajectory has made it

challenging for new start-ups and expansions

Deeper supplier development and market commitment

required from SOEs to support BI entities in their

supply chains

Mining company supplier development and market

commitment needed to support procurement

regulations in the new Mining Charter

More industry consolidation to create large BI entities

with competitive scale to drive export industries

Strengthen competition regulation to facilitate entry into

highly concentrated sectors where BI entrants are

excluded

More grant funding and incentives required to develop

medium sized BI entities

THANK YOU

Advancing Transformative Industrialisation