Mteto Nyati

Mteto Nyati leads Microsoft into new era
Microsoft faced an uphill battle to get its empowerment equity plan approved by the Department of Trade and Industry (DTI), but the company’s victory has changed the face of transformation in South Africa.

The software giant has now joined an exclusive club – becoming one of only a handful of multinationals that have invested in empowerment deals.

Microsoft’s empowerment plan is groundbreaking – creating a new model for transformation, never before seen in South Africa. It could pave the way for more investments into the empowerment economy, worth around R40 billion across all the country’s sectors.

Microsoft’s partners Johannesburg-based BUI provides security software solutions and services to clients such as banks, the South African Police Service, the Department of Justice, National Prosecuting Authority, Primedia and Famous Brands. It is a level one empowerment contributor and has 18 staff, with branches in Johannesburg and Cape Town. Durban-based Home Grown designs and develops of custom application software, and has been in business for the past five years. It has designed a prepaid electricity open-platform solution for municipalities. It has six staff members. Cape-Town based Maxxor is a custom software and Web development service, developing applications on the Microsoft platform. A level one empowerment contributor, it has 30 staff members. Pietermaritzburg-based Chillisoft develops software for the healthcare sector. Its clients include government and parastatals, manufacturing, forestry and paper, software companies and the health sector. It has 22 staff members. Source: www.itweb.co.za

Multinationals have historically been reluctant to sell equity stakes to gain empowerment points, and there are only a handful of companies in the ICT sector that have done so.

Adding confusion to reluctance, the ICT Charter has yet to come into effect to provide clarity on what national companies in the sector should do to empower. Instead, firms have had to rely on the trade and industry’s codes of good practice.

One of the earliest deals was when SAP sold a stake in the local operation. The German software company sold a 10.5% stake to the Black IT Forum about six years ago, a move that was unusual at the time.

In 2004, SAP said it would sell 25% of the local entity to black investors, but this was shelved because there was no clarity about what exactly was required in terms of empowerment policy.

In 2007, Nokia Siemens Networks sold a 26% stake in its local entity, Nokia Siemens Networks Holdings SA, to the Sekunjalo Group and Africom. The deal happened seven months after Nokia and Siemens merged their network services.

HP bucked the trend when it followed an equity equivalency route in 2007, becoming the first company government approved to invest, and not sell. The DTI’s BEE Codes of Good Practice allow multinational companies to make equity equivalent investments instead of selling a stake.

The international company invested more than R150 million in the HP Business Institute, which focuses on up-skilling graduates in the small and medium enterprise (SME) sector to develop scarce and critical skills in high-growth areas in the IT industry.

Microsoft took the concept of equity equivalency a step further: the software giant decided to put almost R500 million into small start-up empowerment companies to give them a boost.

The company’s plan is to invest into a maximum of 10 start-ups to turn them into global giants. Both money and advice will be poured into the entities, which can also leverage off Microsoft’s global footprint.

And the company isn’t taking a cent – or a shareholding – in return.

However, it wasn’t an easy path to take and the company had to fight to finally get the plan approved, dragging out the announcement for several months as it and the DTI fought over Microsoft’s idea. The announcement has been a long time coming, as Microsoft first stated its intention to invest R475 million in a handful of small empowerment companies in the sector last April. Microsoft SA MD Mteto Nyati" rel=tag>Mteto Nyati explains the equity plan was two-and-a-half years in the making.

The first handful of wining partners should have been announced in October and then in February, but last-minute snags pushed the news out to March.

Where is the charter? An ICT sectorial charter would have made it much easier for companies to get empowerment going, because it would have focused on the sector’s specific needs. However, it seems to have disappeared into obscurity. The charter has been in the pipeline for at least the last seven years, and was held up several times as numerous “final” iterations have been completed, but not gazetted. Work on the charter started in 2003, which was followed by the launch, two years later, of the first “final” version. Then it had to be aligned with the DTI’s codes, which were released in 2007. But then the Electronic Industry Federation wouldn’t sign off on the charter, holding it up yet again. The charter was meant to finally be gazetted last month to come into effect in April, after everyone’s issues were sorted out. The charter has been submitted for gazetting, but the DTI’s Web site does not give a timeframe for when it will be out.

Nyati says many companies have been on “this journey” for longer than Microsoft and “are still nowhere”.
The local software company and the DTI spent 18 months in talks to iron out differences over funding. One of the stumbling blocks was how Microsoft would be monitored to ensure it earns the 20 points that will take it from a level four empowerment contributor to level two, the second-highest tier possible.

Another issue, says Nyati, was that the DTI wanted Microsoft to ring-fence the entire investment amount upfront. This would have crippled the software company as it’s funding the deal locally.

The parties reached a compromise: Microsoft will invest 4% of annual revenue over the next seven years, which could increase the value to beyond the initial R475 million.

The DTI’s acting deputy DG, Sipho Zikode, notes: “There was a lot of fighting between Microsoft and the department” to get the deal wrapped up. The Microsoft deal was the most challenging equity equivalency deal the department has dealt with, says Zikode, and different to all other projects it has looked at.
Zikode bemoaned a trend in empowerment deals where people benefit, but don’t even know how the company operates and don’t really contribute to SA’s economy.
Beneficiaries “just get a cheque at the end of the financial year”, without adding value to the company or SA’s economic growth, says Zikode.

Long path

Empowerment has come a long way from when it was first put on the table by SA’s first democratically-elected government in 1994.

The concept was formalised in 2003, when government promulgated the Broad-Based Black Economic Empowerment Act, which was then followed by the publication of the codes four years later.

However, despite the concept being well entrenched, there have only been a handful of deals involving multinationals in the ICT sector, Black IT Forum (BITF) general secretary Motse Mfuleni notes. He says Microsoft’s deal is a step in the right direction, but doesn’t fit in with the spirit of the law.

Mfuleni explains Microsoft’s deal won’t result in any of the partners having a say in the running of the software giant, and they can’t influence its direction and make sure that it ups empowerment spend in areas like procurement.

The BITF wants direct ownership, but would rather have a half-full glass than an empty one, Mfuleni adds. The organisation wants to see more multinationals empowering.

Zikode explains equity equivalency plans enable multinationals, which often can’t sell a stake, to invest in the economy and help small companies become globally competitive. Nyati says, as the deal is finally wrapped up, other companies can use it as a model for their plans.

The DTI has “learnt our lessons” through the process and is looking at how it can leverage Microsoft’s equity equivalency plan to unlock future potential investments worth at least R40 billion from other multinationals operating in SA, Zikode says.

The department is encouraging multinationals to invest in funds that collectively can be put into similar programmes, says Zikode.

Mvuzo Mtyhobile, the department’s director of BEE transformation, adds the department is consulting other government departments to locate investment areas. He explains that these would be offered to multinationals as an investment “menu”, which would speed up empowerment in SA.