Can capital overcome the past?

By Ted O'Callahan

“For most of our history black people had very little opportunity to participate meaningfully in business,” says Nicky Newton-King, deputy chief executive officer of the Johannesburg Stock Exchange. With the end of apartheid in 1994, the country began an ambitious effort to rebalance power so that the majority-black population would be able to participate in all aspects of the political, cultural, and economic life of the country.

The national legislature, facing entrenched inequities, didn’t expect that simply removing the institutional barriers to participation in the economy would solve the problem. Ideas for bringing about black economic empowerment (referred to as BEE) were being considered even before the end of apartheid, and legislation reforming government procurement, education, and employment equity standards was implemented piecemeal until 2003, when the Broad-Based Black Economic Empowerment Act was passed (black is used as an umbrella term for all groups discriminated against by apartheid rules). At each stage, BEE sought to create incentives for companies to ensure that blacks had access to and ownership stakes in South Africa’s economy. “The goals were to effect the transformation of the ways business is owned and run in this country,” says Newton-King.

BEE provisions aimed at increasing black ownership of capital have had mixed success. “Unfortunately, the way BEE was implemented, initially, created too much of an opportunity for companies to choose select, high-profile black individuals with whom to partner in ownership, so you didn’t provide real broad-based ownership transformation,” says Newton-King. That has meant the poor have largely remained poor while a relatively small number of well-connected black individuals have become wealthy.

The history of efforts to redress social problems by redistributing capital — for example, Reconstruction in the United States following emancipation and the Civil War or the seizure of white-owned farms in Zimbabwe — shows how great the challenge is. BEE has been controversial within South Africa. And while it is likely too early to fully assess the impact of a program that includes efforts to form a trained and experienced workforce out of a population that had previously been denied quality education, BEE has at least created opportunities that didn’t exist before.

One example comes from the South African Clothing and Textile Workers Union (SACTWU), which is almost entirely black. A portion of dues paid by members have been placed in an investment fund, which began with $500,000 in assets and has grown to more than $500 million in the last 12 years. BEE policies have played a crucial role in this development.

Johnny Copelyn was head of the politically active SACTWU during apartheid. He was elected to Parliament in the post-apartheid elections. Along with Marcel Golding, who had followed a similar path to parliament after leading the National Union of Mineworkers, Copelyn moved to an investment holding company, Hosken Consolidated Investments (HCI), in 1997, when SACTWU’s investment funds were used to buy majority ownership in what was then a privately held company.

SACTWU’s stake in HCI qualified it as a black-owned business, which has resulted in additional opportunities and preferred terms in many of the company’s transactions. HCI obtained mining rights, fishing quotas, casino licenses, and TV and radio licenses through BEE rules. Copelyn says, “The truth is these are very special opportunities that have been made to black groupings that have allowed them to probably come from nowhere and do pretty well.” He adds, “This is state largesse that you still have to turn into a business. It is not just given to you on a plate; you have to do something with it.”

Copelyn, HCI’s CEO, has a reputation in the South African business press for being hard-nosed. He says that his duty is to grow the union’s investment through “pure commercial activity.” HCI is now publicly traded, with a $1.1 billion market cap; SACTWU owns 40% of its shares. South African companies that participate in BEE are rated; the 2008 Empower DEX list of top 200 companies put HCI top in its sector and number three overall.

In 2006, HCI wanted to diversify its investments outside of Africa, and ended up owning a power company in Pittsburgh. Through a subsidiary, the company bought into the New York-based private equity company Blue Wolf Capital Management LLC. Blue Wolf acquired Montauk Energy Capital, a Pittsburgh-based company that turns landfill gas into energy at sites around the U.S, for $101.8 million.

Blue Wolf co-founder Adam Blumenthal ’89 has a long track record of investing constructively in situations involving organized labor and has been advising South African unions on financial issues since 1993. He says, “HCI has become among the best known and most respected black empowerment entities in the country.”

The long-term approach HCI takes to building its capital — it mostly reinvests its profits — is not a simple choice. If SACTWU were to liquidate its holdings, it could generate nearly two years’ salary for each of its 100,000 members, according to Copelyn. For workers who struggle with daily needs, that is always a temptation, but the investments allow the union stability that it never had before.

As its holdings grow, SACTWU has expanded support for members in several areas, particularly post-secondary education scholarships for members and their children. Tuition for a year of university is only a bit less than a SACTWU worker’s annual income.

One beneficiary of the union’s support is Mark Van Wyk, who grew up in the Cape Flats, the area outside of Cape Town designated for non-whites under apartheid. He is the oldest of six children. His mother, a SACTWU member, was the sole support for the family for six years when his father was unable to get work.

Van Wyk received a partial scholarship from SACTWU and another from a private company that enabled him to attend college. “The alternative would have been either going into the army or continuing to work at the grocery store that I worked at when I was in high school,” says Van Wyk. After he qualified as an accountant, he worked for PricewaterhouseCoopers, both in South Africa and in the United States, before taking a position in Cape Town with Mettle, a financial services company.

At 29, he is married and has a young child. His monthly salary is equivalent to what his mother earned in a year, doing work that damaged her health. “Now that I’m financially stable, I was able to ask her to stop working,” says Van Wyk. He has also helped three siblings with post-secondary education. “None of us would have been able to go to university if the union hadn’t helped me to go.”

While HCI has built up significant economic clout through opportunities created by BEE, this hasn’t been a typical outcome of the initiative. “Disappointingly, not many other mass organizations have managed to combine successfully an entrepreneurial activity with those opportunities,” Copelyn says. His assessment is that though other unions have established investment companies, they have generally been absorbed into consortiums where they are small stakeholders and lose the ability to control the businesses and choose managers. “It has not allowed them to build up a big commercial enterprise that keeps the businesses and generates social programs out of the profits of those companies,” he adds.

In addition to funding social programs, some of HCI’s investments deliver subtle value to union members. HCI owns the bus line used by many SACTWU workers to get to and from work in Cape Town; it owns the country’s only non-government-run broadcast television station.

HCI’s most recent investment has a very direct benefit and demonstrates the value of having a significant pool of capital available. South Africa’s largest clothing manufacturer, Seardel, seemed on the verge of being sold for its assets in the face of significant losses and competition created by a surge in low-priced textiles coming from overseas. HCI bought the company, saving the jobs of as many as 15,000 union members. Copelyn believes the company can be turned around and run profitably.

Under BEE codes, requirements for participating enterprises evolve as time passes with the intention of driving incremental change. For companies to maintain their “black-owned” status, they must fill more and more positions with black stakeholders. For South Africa as a whole, nearly 15 years on, has the economic transformation accomplished what was hoped for? Nicky Newton-King of the Johannesburg Stock Exchange says, “Are businesses in their ultimately transformed state? No, the answer is definitely not. But we are making progress.”