SA’s fight against unemployment: The importance of pet food, popcorn & detergents in the quest for growth

Johannes Wessels
@johannesEOSA1

On a sunny autumn morning in Bloemfontein I visited a business hand-picked by Government as a National Gazelle: one of the firms Government believes has the potential for massive growth and substantial job creation to attack the three-headed dragon of inequality, unemployment and poverty.

Popcorn & Flat Bread

The National Gazelles Programme is financed (well, by tax-payers) through SEDA (Small Enterprise Development Agency) and the Department for Small Business Development (DSBD). In the first phase 40 firms were identified in “10 priority industry sectors aligned with the National Development Plan and SEDA’s SME strategy”. The recruitment of the next batch is underway. (In enterprise literature, a Gazelle is defined as a company that grows by at least 20% per annum for 4 successive years)

Having covered  the decline in the number of formal businesses and how company losses now exceed taxable company income , as well as Government’s failure to create a business-friendly environment , the focus is now on the positive steps Government has taken to promote private enterprise.

The 40 Gazelles selected to break the shackles of slow and unequal growth, each received a grant of R1 million for equipment and business skills development in addition to technical support that includes a detailed business diagnostic analysis and growth strategy advisory services.

The first batch of National Gazelles included:

• A flavoured popcorn & flat bread producer in Cape Town;
• A panel-beating firm in Pietermaritzburg;
• A supplier, installer and servicer of air-conditioners in East London;
• A manufacturer of steel window and door frames in Pietermaritzburg;
• A Stellenbosch based software developer for the health and water sectors;
• A cement brick manufacturer in Trichardtsdal;
• A processor of dates in Durban;
• A spa-hotel in Tzaneen…

Since the logic and strategic considerations from both a sector and locational perspective remain obscure, EOSA tried to access data from company websites. For 12 of the 40 Gazelles, EOSA could not locate a company website or an email address. Those with websites shed some light on the operations: one of the gazelles stated it “aim(s) to become a construction company”.

Pet Food & Secrecy

Another major thrust to support the development of firms to lead South Africa from the Egypt of Inequality & Unemployment to the Promised Land of Plenty, is the Black Industrialist Scheme (BIS) of the Department of Trade and Industry (Dti). The objective of the BIS is to “accelerate the participation of black industrialists in the national economy… by creating multiple and diverse pathways and instruments for black industrialists to enter strategic and targeted manufacturing sectors and value chains”. This wording clearly indicates that growing the economy is less important than demographic economics engineering.

BIS is funded by DTI grants (courtesy of tax payers) as well as loans by the IDC. A cost-sharing grant ranging from 30% to 50% to a maximum of R50 million is available and “the quantum of the grant depends on the level of black ownership and management control as well as the economic benefit of the project and the project value… The maximum grant of R50 million may be fully utilised on capital investments or can be split between capital investment and other support measures”. The sequence of words shows the emphasis is again more on the extent of black ownership than on the economic benefit…

In his May 2017 budget vote speech Rob Davies showcased 4 recipients of BIS grants but refused to release the names of other grantees, arguing that “the heightened interest in discovering their identities” might have racist undertones and that he would only release such information in consultation with the grantees.

Two of the companies paraded were:

• K9 – a 100% black female-owned company in the Western Cape producing frozen, wet and dry pet food. They supply Woolworths that previously imported similar dog and cat food.
• United Industrial Cables – a 90% black youth owned company producing cables for the energy, transport, communication and mining sectors. On the DTI website, it is stated that the “the aim (is) to fight the scourge of unemployment in Ekurhuleni”.

Davies on visiting UIC promised Eskom and Transnet would procure cables from the new company in their roll-out of infrastructure.  Following intense criticism, Davies released end September a list of recipients of BIS in conjunction with recipients of other DTI grants, but refused to reveal the value of each grant.

What is in the open, is that the DTI had decided manufacturing of pet food is a crucial strategy to propel South African from the doldrums of low growth. Apart from the grant to K9, Maneli Pets Food in Edenvale, Gauteng received (on the basis of an equity contribution of R8 million):

• A grant of R12.5 million from the BIS, and
• A loan of R26.6 million from the IDC.

The company claims to have created 42 jobs and aim to create a further 80 jobs over five years.  At least 62 firms have received BIS grants to date. 

Fabricating Detergent Manufacturing

The massive creation of black-owned enterprises through the Cooperative Drive is a third strategic thrust. Launched in the Mbeki-years as a DTI strategy it shifted to the DSBD and is a trademark of the Zuma Administration with at least 125 000 cooperatives registered with the CIPC.

In August 2010 Maria Ntuli (then Deputy Minister of Trade & Industry) said that between 2005 and 2009 a billion Rand was in grants (courtesy of tax payers) went to cooperatives apart from the Public Service costs (salaries, offices, running costs devoted to the promotion of cooperatives). At that stage, there were already 22 000 cooperatives. Departments like Education, CoGTA, Agriculture, Social Development, Water & Forestry as well as most provincial governments launched cooperative directorates or departments and disbursed funds to promote cooperatives.

Pres. Zuma promised: “… government is to ensure that 30% of its procurement is accessed by these people’s enterprises. Government runs the Cooperatives Incentive Scheme, a grant dedicated for cooperatives with no repayment expected”.

These cooperatives were to create jobs, reduce poverty in communities, and play an ever-increasing role in the national economy.  Research on Free State cooperatives indicated none of these lofty ideals were achieved:

• Self-delusion about economic potential is supreme: the majority of cooperatives were multi-purpose vehicles e.g. one coop would pursue chicken farming, vegetable production, toilet paper manufacturing, catering & event management.   The manufacturing cooperatives (just under 3% of the total) were nothing more than traders:  those listed in the CIPC register as “manufacturing detergents” include the Tumahole New Generation Cooperative established in 2012 “to manufacture detergents, disposable nappies and run feeding schemes for schools”. Ms Molata of New Generation said the cooperative has not started since it did not get a contract for the feeding scheme or a grant for nappy-making machinery. She explained the process of manufacturing detergents: “They will give us a drum with concentrate.  We will then take plastic bottles and add some concentrate and fill the bottles with water and sell it. But we did not get a building to do this.”

• A 2014 survey of all 2273 cooperatives registered by end 2013 in the district areas of Lejweleputswa (Welkom as hub) and Thabo Mofutsanyana (Bethlehem-Harrismith as hubs) revealed an extraordinary enterprise death rate. Only 31% had a telephone number listed in the CIPC records. All these numbers were called, but just 8% (184) were functional: the bulk of the numbers were no longer operational. Of the 184, only 81 indicated the cooperative was still active with a mere 5 experiencing an improvement in their turnover compared to their informal days.

The real shock, however, lies in the following:

Ntuli admitted in 2010 in a formal DTI presentation to Parliament the cooperative initiative had extremely low impact. She also referred to a lack of knowledge amongst DTI staff. Staff from the Free State provincial department for economic affairs (Detea) in 2014 also knew the overwhelming majority of cooperatives were not operational.

Nevertheless, Detea staff continued to form new cooperatives: their Annual Performance Plan for 2013/14 on which their appraisal was based included the establishment of cooperatives as an output under Outcome 4 Decent employment through inclusive economic growth.  Staff, knowing very well that there would not be financially viable cooperatives continued creating them since their own “decent employment” and “decent promotion opportunities” depended on creating them.

Peter Westoby of the Queensland University of Technology in Brisbane, unearthed a similar situation involving the Community Development Workers (CDW): “When you look at the problem of CDW reporting, the one that gives me most points is when I form a cooperative with women, youth …Each year every CDW must submit 12 cooperatives set up by community. I can do that, but the problem is I can’t tell good stories about that. For several reasons, they have not continued – I have tried and failed – because of finance and training. I also do not really know how to start and sustain a cooperative.”

The baby boom of cooperative enterprises since 2007 can be ascribed to state organs fathering them for their own benefit, knowing well that it would end in either enterprise still-born or crib death. It is a dehumanising manner of gambling with the hopes of the poor and as dangerous in a socially brittle environment as smoking in a dynamite factory.

It remains inexplicable is that everybody in the public sector has decided to ignore the glaring evidence of failure of Government’s economic and enterprise policies.

Government has not the ability to choose the winners: in the world of enterprise, consumers choose the winners. Public sector selection of industrialists, gazelles and cooperatives to accelerate growth and to push back unemployment and poverty whilst ignoring (even hampering) the equity and potential of existing businesses and failing to provide a business-friendly environment, is doomed to fail systemically.

PS 1: The jury is still out on the National Gazelles and the Black Industrialist Programme. (EOSA is interested in conducting a multi-year monitoring program on the Gazelles and BIS grantees especially because of the lack of transparency, as well as conducting research on the cooperative drive in other provinces than the Free State.  Support to conduct such research to enable fact-based inputs into future enterprise policies and strategies, would be welcome.)

PS 2:  The gazelle in Bloemfontein selected to hit unemployment for a six is Urth (previously known as Roses for U).  It is a nursery with a coffee shop and it also renders landscaping services.  The coffee was good, but it is hard to see how this concern can play a major role in stimulating growth and job creation.  I left Urth baffled: what on earth sets this business on a level to guarantee a grant of R1 million?

(Based on the first two assessments of the Zuma administration’s legacy on the world of enterprise, I received several requests about what should be done to improve the situation in SA for investment and business development.  I will devote in the next month a blog to that.)