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Is equity equivalency truly equitable?

Four out of seven approved programmes have come from the ICT sector, but have they added any value?

Construction starts at the IBM research lab, part of R700 million investment, in downtown Johannesburg.

Construction starts at the IBM research lab, part of R700 million investment, in downtown Johannesburg.

ICT multinationals are leading the rest of SA's economy when it comes to pumping billions into equity equivalency deals, but the outcome of these programmes has yet to be quantified, with some arguing the schemes have failed.

So far, four multinationals – HP, Microsoft, IBM and Dell – have received permission from the Department of Trade and Industry (dti) to do equity equivalency deals; this puts ICT ahead of the rest of the economy as only seven deals in total have been approved. Yet, argues Inforcomm CEO and empowerment commentator Andile Tlhoaele, most of the initiatives – apart from Microsoft's scheme – don't embrace the spirit of SA's empowerment law because they don't transfer a tangible asset – ownership.

The latest plan to be launched is Dell's R120 million IT academy, which is set to open in January 2016, with the aim of training up to 200 students over ten years. The deal, inked with the dti and the Centre for High-Performance Computing, will see students trained in high-performance computing skills as well as business and life skills.

Executive director of emerging markets, Stewart van Graan, says Dell will use field agents to seek out deserving graduates and matriculants from poor rural backgrounds, students who would normally not have the funding to embark on additional studies. "We know the ICT industry has a skills challenge and we want to address this."

The dti's deputy DG of incentives administration, Malebo Mabitjie-Thompson, welcomed Dell's investment – the fourth to be made in the sector since 2007 – noting it was another milestone in the implementation of SA's empowerment policy.

Yet, Tlhoaele says equity equivalency deals should be a last resort when multinationals really cannot sell an equity stake. He points out equivalency deals don't allow South Africans to hold shares in the parent company, and – apart from Microsoft's wins – all have focussed on developing enterprises and skills, which are requirements under the law anyway. "It's not a perfect system," he says.

Keith Levenstein, CEO of Econoserv SA, disagrees, arguing that equivalency deals are not a copout because other targets in the broad-based empowerment codes are exceeded. "They're spending far more on skills development and enterprise development than other companies, up to an equivalent of 25 percent of their net value. I like spend on skills far more than a minority ownership where the black participants (sometimes) get no real benefit."

Levenstein argues any money spent on skills helps the true beneficiaries of empowerment. "The same applies to helping small black-owned businesses to grow and employ more people. Jobs and skills are perceived by most people as the biggest economic and social problems of this country."

Equity equivalency deals date back to 2007, when HP became the first company to take advantage of the dti's offer to swap investment for empowerment points. According to a cable sent from the US embassy in Pretoria to Washington in August 2007, HP aimed to set up an HP Business Institute to skill up 1 800 students in IT, over six to seven years, with the first set of students due to start in August 2008. It took over a year for HP's plan to be signed off by the dti, with staff turnover delaying approval.

It's not a perfect system.

HP predicted at the time that future equity equivalency proposals would go through the works much faster as the dti got up to speed.

Despite HP being the first multinational to dip its toes in the empowerment water, it is Microsoft that is seen as the trailblazer when it comes to equity equivalency. This is because of its innovative approach, and HP's silence; no old statements are readily available online and its investment has all but been lost to industry's collective memory. HP was contacted for comment, but did not respond.

Proposals

Microsoft initially mooted its seven-year plan in April 2010, but was held up for almost a year because of concerns within the dti over how to measure outcomes. Microsoft, which set aside R475 million to fund start-up enterprises and provide business knowledge so companies can become global software players, received more than 680 applications from its first call for proposals.

It whittled this list down to 141 before initially settling on four companies (BUI, Chillisoft, Home Grown and Maxxor), adding another two to the plan in November 2011 (iSolve Technologies and Mmapro IT Solutions). Last year, it issued another round of proposals to add another company to its scheme, with an announcement expected later this year. So far, it says, companies have successfully expanded their wings thanks to its scheme.

In 2011, the dti indicated it was looking into leveraging Microsoft's plan to unlock future potential investment of about R40 billion from other multinationals in SA. In total, Microsoft spent two-and-a-half years working on the plan, which included 18 months of talks with the dti.

The dti's acting deputy DG, Sipho Zikode, noted that ‘there was a lot of fighting between Microsoft and the department', but the end result was worth it. He said these plans enable multinationals, which often can't sell a stake, to invest in the economy and help small companies become globally competitive.

Payoff

The Microsoft deal was the most challenging equity equivalency deal the department has dealt with, says Zikode, but we ‘learnt our lessons' during the process. At the time, then Microsoft MD Mteto Nyati said the deal could be used by other companies as a model for their plans.

Professor Barry Dwolatzky, a director at the Johannesburg Centre for Software Engineering, whose students will benefit from IBM's R700 million investment, says equity equivalency plans are fantastic, as long as they are genuine, and not exercises in box-ticking. Dwolatzky adds IBM's investment is making progress, as the project at the heart of the plan – a research lab – is under construction. He says the target is to get the lab finished by the end of the year. "They're on quite an aggressive timeline."

At launch, science and technology minister Naledi Pandor said the investment marked the first time an international company chose to invest in research and development as part of an equity equivalency programme. SA is one of 12 countries outside the US to receive this accolade. "We welcome IBM Research to South Africa and offer our very best scientific talent to ensure its long-term success," Pandor said.

The local lab will focus on big data, cloud and mobile technologies, and will also create new technologies for global consumption. It will be based at the University of Witwatersrand at its Tshimologong Precinct in the re-emerging Johannesburg area of Braamfontein, and work will be carried out in collaboration with the Department of Science and Technology as well as the Council for Industrial and Scientific Research. As part of the investment, IBM will also provide bursaries for science students from undergrad to Master's level and support start-up and maturing tech companies to get to the next stage.

This article was first published in Brainstorm magazine. Click here to read the complete article at the Brainstorm website.


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