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The finalisation of the draft ICT Charter has caused a flurry of black empowerment deals, and the outlook for the industry is good for the first time in five years. - IT companies are attractive again. THE ICT SECTOR in South Africa is experiencing an upsurge in popularity again, after a few years of being the wallflower at the ball. This is due to impetus provided by the ICT BEE Charter and an upsurge in spending, by both the public and private sectors.

Latest research published by ICT analysts BMI-Techknowledge shows that the IT market in South Africa grew handsomely in 2004, above inflation levels, reporting an 8.5% increase in 2004 to R45 billion - from R41.5 billion in 2003.

BMI-T also reports that government spending is expected to be a strong driver in the domestic IT market in the next few years. "IT expenditure is set to reach R6.5 billion in 2007/8, growing at a CAGR of 7.8%, up from R4.8 billion in 2003/4, excluding parastatals. The public sector IT market is seen by most vendors as an attractive market, since it is large and characterised by extensive projects. It is also not as influenced by international fluctuations and other economic changes as the commercial sector."

In the last year alone, a number of small and high-profile empowerment companies have bought into IT companies, as the ICT Charter headed towards finalisation. The draft charter was wrapped up earlier this year after two years of negotiation.

Broadly, the main objectives are that the key players - government, labour, community and industry - will form an ICT Charter Council to ensure the penetration of BEE principles into all high-technology sectors. Other goals include supporting skills development and training, bridging of the `digital divide` by actively promoting access to ICT, and providing transparency, fairness and consistency when adjudicating BEE in the ICT sector.

This will be achieved by setting an equity target of a minimum of 30% for black shareholders.

Like the other sectoral charters that have been negotiated, the ICT Charter has provided a guideline for both buyers and sellers, and provides certainty about the way forward in the industry. This has allowed various parties to begin the process of empowering businesses.

One of the largest transactions - although the value of deal was not disclosed - was the purchase by BEE investment firm Yard Capital, of a 30% interest in the South African arm of Japanese-owned Fujitsu, announced in March this year.

Fujitsu is the world`s third largest IT company, with annual revenues topping R300 billion, and over 150 000 employees.

Yard Capital chairman Leslie Maasdorp - who in a previous life was the deputy director general of Public Enterprises - regards Fujitsu as the firm`s core investment in the ICT sector.

"The starting point was obviously the (ICT) charter. After the Mining Charter was implemented, you saw a flurry of BEE deals in that sector, and it is the same in the ICT sector now that we know what the expectations and parameters are.

"We always considered that the ICT sector would be one that we would focus on, although it did go through the boom-and-bust phase. So we viewed it opportunistically. We see that it has potentially high growths that is currently undervalued," Maasdorp says.

He says that in the UK, Fujitsu is the largest IT service provider to government, and has been instrumental in modernising the UK Inland Revenue, Department of Trade and Industry and National Health Service. "We are keen to bring these kinds of efficiencies to SA national, provincial and local government."

"The July Cabinet Lekgotla stated that a key objective for the South African government was to enhance service delivery, especially at local government level.

This can only happen with enhanced skills, capacity building, and improved IT systems, including call centre management, billing systems and financial management systems at municipal level. Fujitsu is already active in delivering these services to more than 50% of municipalities across South Africa."

While Maasdorp is acutely aware of the increase in government spending around IT - the state being the single largest procurer of IT products and services in the country - he says the timing of the investment was also opportune because of the growth in spend by the corporate market.

"There is a lot of potential growth that can come out of the private sector, because the market has bottomed out."

, MD of Synergy Computing, echoes Maasdorp`s words. A year ago, JSE-listed Sekunjalo Investments bought 81.5% of Synergy, which provides business intelligence solutions based on the Cognos platform.

Sekunjalo has been active in the ICT space for some time. Its other investments include a stake in , Health Systems Technologies, and XN Corporation.

Connold says that BEE investors have primarily been considering IT on an opportunistic basis until now. "IT has only now started to emerge from the tight position it has been in between 2001 and 2004, driven by Y2K and overspending. The confidence crisis after the terrorist attacks on 11 September 2001 [further] resulted in a major slowdown, from which we are only now seeing a recovery."

Connold says that fortunately, companies are starting to spend now, especially in the area of integration. "We are seeing steady growth at the moment, which has made IT, from an investment perspective, a more attractive proposition to empowerment companies."

He says that government is likely to be the biggest single source of IT spend over the next five years, with the focus on improved services, improved capabilities by digitising the Department of Land Affairs, the Deeds Office, and improving the capacity at the Department of Health. "This will be a focused area for Sekunjalo, which is one of the reasons the group has invested heavily in health over the years."

Connold quotes that government plans to invest billions over the next five years on the departments of Social Development, Public Works and Home Affairs, and to a lesser degree, Correctional Services and Land Affairs, including R25 billion on health alone. "Obviously IT will form a major component of this investment."

Having said this, corporate investment is also set to be robust, Connold believes, particularly in the financial services sector, with government`s emphasis on making products and services more affordable to the mass market.

"We expect to see a lot of activity in the medical aid, banking and insurance markets, for instance, with the drive to make access to products and services more efficient and affordable for consumers in the middle to lower Living Standard Measurements (LSMs - measurements, which categorise consumers broadly by their income and spending patterns)."

He says IT can and will have to play a big role in bringing costs down and understanding spending patterns.

"Another big growth area for the country is tourism, and IT will be used to assist various tourism-related businesses to identify the best avenues for growth by monitoring spend patterns, understanding needs as trends change, and staying ahead of the game. The players in this market need to monitor and analyse historical data to predict future requirements."

Analysts don`t believe that there is any particularly special reason that empowerment companies are jumping onto the IT bandwagon now.

"It is the reality of doing business in South Africa today," says one, who asked not to be named.

"IT companies, now that the ICT Charter has been formalised, have greater clarity about the rules of the game, and with government being such a large spender in this sector, it is obviously good business practice to be empowered.

"From the other side, it makes good business sense for BEE companies to be looking at this sector, as it is coming out of a down cycle, and there are many signs that there will be good spending patterns, both in the private and public sector, in the coming years."

, chairman of Cyberknowledge Systems Investments, which in August bought 30% of Unisys Africa, a subsidiary of Unisys Corporation, says that legislation makes a difference.

"It makes a space for transactions to be done, and creates an element of opportunism, but anyone would be foolish to be opportunistic if there is only a short-term benefit."

He believes too that the "defocus" on IT post the millennium has caught up, and the cycle is turning. "At the grassroots level, more is being spent on IT, software and technology services, which can only be good for all of us in the IT space. "

He says, however, that Cyberknowledge Systems, which is a consultancy, had noted the consolidation in the IT sector, and believes that only larger players can withstand the boom-and-bust cycles that have plagued the industry.

"It is a good industry in which to be invested, but it seems only the larger players, especially those with the critical mass, can withstand the down cycles."

Like the other BEE players, CKS is banking on a strong combination of public and private business, although Madhi says the largest portion of the client base is parastatal work.

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