Play the Game of Life
Ryan Petersen's Blog

Last week Columbia Business School had the thrill to host Isaac Shongwe, a South African entrepreneur, trustee of the Aspen Institute and head of the South African chapter of the African Leadership Initiative.

Shongwe was one of the few black South Africans fortunate enough to receive a scholarship to study in the United States during the early 1980s. He attended Wesleyan University in Connecticut, and during his first summer worked at the ANC offices in New York City. Because it was still banned in South Africa, New York must have played an even more crucial role in the organization's operations. During this summer, he realized that while there were many South Africans working on political solutions for post-Apartheid era, nobody was working on economic issues. He realized that in order for the condition of black people in South Africa to be materially improved after the regime change, economic solutions would be critical. And besides, says Shongwe, he would make a bad politician because he likes to argue, asks too many questions and is too honest.

When he looks at the incredible progress that has been made in his home country in the last 15 years, he is always amazed. "If you asked those of us at ANC in that summer how things would turn out, they couldn't have dreamed that things would have progressed as far as they have today." Much of that progress is due to the miracle of 1994 and before that, the miracle of '91 when Mandela was released from prison. Then when the ANC rose to power, they legislated Black Economic Empowerment (BEE), a statute designed to enhance black involvement in the economy at both employee and ownership levels.

Shongwe's response to BEE is that it doesn't encourage entrepreneurship but it does encourage redistribution. At the outset, it was necessary because things were so badly skewed toward the whites that some level of redistribution was necessary, but in the long run the goal must be to have a society that does not require race-based legislation of this type.

In 1988 Shongwe, having finished his degree in the United States, returned to South Africa and joined one of the big companies there. By this time he had already decided to go the entrepreneurial route, but would first spend five years learning about the industries he was interested in. So he joined an industrial conglomerate and spent several years working there while living in a township. At that time, blacks in the township where he was living still were very much opposed to private enterprise because they felt capitalism provided the economic support that perpetuated an evil system of government. He was actually embarassed to tell people that he worked for a business at that time, and believes that to this day South Africa suffers from a lack of entrepreneurial and capitalist mindsets as a legacy of the apartheid years.

In 1989 Shongwe won a Rhodes scholarship to do his MBA at Oxford. He then joined Monitor Group, a consulting firm founded by Michael Porter. He spent several years there and eventually moved back to South Africa to help launch the firm's first office in the country. His stay with Monitor was really geared to ward acquiring the skills he would need to open his own consulting firm, known as Letsema Consulting focused on corporate transformations and BEE. He and a friend lined up one client and then launched a strategy consulting company.

Today they are a major local partner for McKinsey, employing sixty people and generating sizable profits for the partners. They have differentiated themselves from other BEE partners by creating intellectual capital that businesses in South Africa would really need. In '98 they set up the investment arm that began approaching firms in need of BEE partners (by law any company doing business with the government in South Africa must be at least 25% black owned), with the proposition that they would provide value-added consulting work that would vest as ownership stakes over a period of time. This allowed partners to meet their BEE requirements while receiving more in exchange than other BEE investors could offer.

Since '98 he has also launched a public relations and communications firm. Meanwhile the holding firm, which employs six full-time staff, is now invested in six companies.

His company’s largest investment to date is a 25% in Barloworld Logistics, a huge player in the South African transportation and logistics business. Because BEE laws mandate that all companies in the country must use suppliers that are black-owned as well, it made a tremendous amount of sense for a B2B firm like Barloworld to take on a BEE partner. And as noted above, Shongwe makes an ideal BEE partner because his company brings a tremendous amount of black intellectual capital as opposed to simply providing financing. So when his company purchased 25% of Barloworld, he became CEO of the firm, not just a BEE partner.

The motivation for him becoming CEO is that to finance the deal, his firm had to take on $150 million in debt. It was therefore very important to see to it that Barloworld was managed for growth while simultaneously providing the cash flow to meet the interest payments. They have since more than doubled revenues to about $6 billion U.S., exceeding forecasts so that his investment firm can pay down the debt faster than expected.

At the core of opportunities in the new South Africa is the massive expansion of opportunities for black people. The economy is really being fueled by new spending power on the part of the black population, which can be seen in the growth in mortgages, autos, and other spending on consumer goods. As the tax base has increased, the government is in a strong position to develop badly needed infrastructure. Huge sums are now earmarked for water, sanitation, and electricity.

Meanwhile, there is a backlog of housing, which has meant that construction firms are operating at full capacity trying to meet this demand. There are also huge shortages in education infrastructure as well as in roads, rails and ports. Add to all this the 2010 World Cup, with the first subway going into Johannesburg at a cost of $10 billion Rand ($1.3 billion US). All these projects are leading to surges in international interest, which we saw most recently with the Industrial and Commercial Bank of China’s $5 billion US investment in Standard Bank.

Perhaps the greatest shortage in South Africa remains a lack of entrepreneurship. According to Shongwe, this has its roots in an apartheid system that provided so few opportunities to blacks that they did not develop the mindset needed to develop their own businesses. A big part of this is simply the lack of education provided during that era, and building up that educational infrastructure is not something that can be done overnight.

In conclusion, Shongwe sees big challenges and some serious risks ahead for the country. However, as he looks around the world, he asks which country doesn’t have a risk of some form or another. But when you go to South Africa, things work, some parts are really like the first world. And in general, since 1994, the black government has done a great job to the point where democracy is now a way of life in the country. The next president of the ANC will be decided in December, so there is a polarized situation within the ANC. However, he is optimistic that sanity will prevail and that the country’s economic trajectory will continue to be pursued by the new government.

Labels: Africa, BEE, business, Columbia Business School, entrepreneurship, Investing in Africa, South Africa