The NEF flirts with a ‘Workerist’ empowerment model

The Kimberley venture of the National Empowerment Fund (NEF) comes with the noblest of elements within South Africa’s economic redistribution framework, broad based black economic empowerment (BBBEE). The ‘workerist’ element in the R35m transaction is admirable

The NEF unveiled last week a deal to fund takeover of a Kimberley based clothing manufacturing operation, Delswa Group, to the tune of R35m. The 82 years old corporate clothing firm, Delswa, is changing hands from its historically white owners into a broad based consortium made of management and workers. The deal will live the firm owned 42.3% by management, 9.1% by the general workforce and 25.1% by the NEHAWU’s Investment Holdings Enterprises.

The deal adds to a pile of commercial arrangements of the post 1994 South Africa which have been flirting with the worker-owner model, the Employee Share Ownership Scheme (Esop) to be precise. The Esop model is big, well organized and fruitful in the US, UK and Australia. For example in the US they have an ESOP association with more than 2000 schemes as members and they do claim superior economic value creation.

In South Africa, while billions of rands have gone into transactions tagged as Esops, the country worker-owner models are far from achieving the sustainability boasted by successful Esops around the globe. Arguably, the majority of schemes that claim the Esop tag in South Africa suffer from short termism, where the capitalists use the schemes for mere compliance. Success is largely defined by short term bonuses for workers after which it becomes business as usual. If the goal is to align interest between workers and the business and boost productivity, these schemes must take a long term view backed by impeccable legal and institutional grounds. Were it to be so, perhaps the South African government will be convinced to tax benefits to Esops as is the case in the US.

Where the NEF’s Kimberly venture is concerned, the proof of the pudding will be in the eating. The intention is noble. NEF CEO Philisiwe Mthethwa says “The transaction means the workers can now benefit from the hard work that has seen the Group earn its reputation over the eight decades of being one of the longest-standing and biggest clothing manufacturers operating in South Africa’s clothing and textiles industry. It is fitting that the workers who have contributed to Delswa’s weathering the storm, even with the influx of imports from China, get the first chance to own and ensure the Group’s continued existence and success”.

Delswa group employs about 500 people which makes it one of the biggest employers in Kimberly. Delswa’s private and public clients include the Standard Bank of South Africa, Swaziland and Namibia, DHL, South African Airways, Airports Company South Africa (ACSA) and Clinix Holdings. The business is positioned within a critical sector within South Africa’s reindustrialization hopes. While troubled by cheap imports from the East, South Africa’s clothing manufacturing sector has been identified as key industry and employer and one that government has promised to harness.

The industry can do with labour harmony which is promised by the Esop structure if undertaken properly. The turnaround of one of the largest players in the industry, Seardel under the guidance of another Esop wannabe structure is great source of hope. In a move campioned by the investment arm of the South African Clothing and Textile Workers Union (Sactwu), the JSE listed Seardel seems to have been saved from ruin. In partnership with investment firm HCI Sactwu Investments have taken control of Seardel and have turned around its fortunes. That is what the Delswa stakeholders are hoping for from the NEF deal.

Delswa Group’s new CEO Preggy Govender says, “It has been a long journey with many challenges along the way but we have finally reached our destination.  The NEF’s funding for our management and staff buyout gives a new lease of life to at least one business in the struggling local clothing industry, which for the most part has been resistant to transformation. All that is left for us as the new management is to push forward and aim for the sky.”

The NEF maintains 23.5% shareholding in the business to facilitate its required rate of return from the transaction. Mthethwa said when the term of the loan is over the NEF will give staff and management first preference to purchase the shares to ensure that the business remains fully empowered. “Some of the foundations to maintain the empowerment credentials of the business were an undertaking that in addition to the new CEO of the business being black, a black-female CFO is appointed. The Delswa Group Staff Trust comprises 82% women, and 78% of the women are black. The importance of women benefiting from NEF investments is always a critical criterion”.

Mthethwa added that “There is a need to grow black participation, and to sustain manufacturing capacity in the troubled clothing and textiles industry. This is critical to achieve across the value chain, from manufacturing, value-addition to retail, and for true and significant transformation to happen, the investments must be meaningful”.

Perhaps the NEF needs to join an attempt by the Industrial Development Corporation (IDC) to create sustainable institutional support for worker owner structures. Having invested about R500m in Esop like structures the IDC expressed an intention last year to facilitate creation of institutional support to ensure that its investments delivers sustainable results. The initiative was mulled during a conference held last year where the IDC imported Esop experts from around the globe. From that conference it emerged that putting money into Esop like structures is only the beginning of a complex job. Institutional support with a strong worker education element about rights and obligations is critical.

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