The nitty gritty of empowerment projects – not a one size fits all

By Mariette Kotzé

A recent enquiry regarding how empowerment transactions work sparked this article.  There are so many factors and variables to consider. It can be very complex or quite simple depending on your exposure and or understanding of business models, and corporate and/or ownership structures.  In this article, as I reflect on my own experiences gained over more than a decade, I will try and provide a balanced perspective that will hopefully provide insight and assist in highlighting key aspects to be addressed for futureproofing your business or possibly new business venture.

The South African pome and stone fruit industry is a long-term crop, highly capital and management intensive linked to high risks (and rewards).  To materialise and capitalise on investments made requires careful planning and adherence to legal and regulatory frameworks. In the case of empowerment transactions, it is even more important to make sure that the identified beneficiaries are included, informed and exposed throughout the process as that will result in understanding, ownership and accountability.  In other words, EMPOWERMENT, making sure that there is proper transfer of skills and knowledge. In most cases easier said than done because business models and ownership structures are very technical, associated with plenty of legal terminology and onerous contracts and agreements that provide the operating framework and legal responsibilities.  There is no one size fits all approach and each business model and ownership structure is different adding to the complexity.

The most common business models applied within the empowerment fraternity are:

• Sole ownership or wholly black-owned enterprises where a farm or business in the fruit value chain has been acquired through:
• Government grant funding for individuals or groups through programmes such as Land Redistribution for Agricultural Development (LRAD), Pro-Active Land Acquisition Strategy (PLAS), and grants from various other Departments such as the Department of Trade Industry and Competition (DTIC).
• privately acquired finance from own funds or through obtaining a loan from a commercial financier.
• Blended finance which consists of a combination of grant funding, commercial finance, industry contributions and own funding.
• Equity ownership/Joint Venture is where designated shareholders acquire a percentage of the company’s shares through
• a combination of debt from commercial financiers or shareholders’ equity (loans), and/or,
• other third-party funding such as government grants (mostly LRAD) not repayable only accessible by Historically Disadvantaged Individuals (HDI’s),
• blended finance in any case suggesting the blending of various financial funding and finance instruments to make the transaction more favourable. In many instances where the Government bought the shares on behalf of the beneficiaries these transactions were mostly structured into Trusts holding the shareholding in the business.  These transactions were typically characterized by large groups of people, however, recent transactions were more focused on identifying the right individuals with different ownership structures.
• Trusts, Community Property Associations (CPA’s) and Cooperative models are typically where ownership is transferred to a trust or cooperative that represents a broader group of beneficiaries such as employees or communities. These types of transactions are typically where farms and/or businesses were acquired by the State on behalf of the beneficiaries.  Trusts can ensure community-wide benefits but need to be managed carefully to ensure that the real intentions are realised, whilst cooperatives provide other advantages of pooling resources, machinery and equipment and increased bargaining power, especially in rural areas with resource-poor farmers.
• Employee Share Ownership – a structure where workers become part-owners of the company through shares allocated as part of their employment benefits.

The above seems simple enough right?!  I am afraid not quite…each of these business models has a company ownership structure that could once again consist of one or various company forms such as:

• Private Company (Pty) Ltd – shareholders own the company, and their liability is limited to their shares.
• Joint Venture – two or more companies collaborate on a specific project or venture
• Trust – where the Trust owns and controls the company for the benefit of the beneficiaries
• Closed Corporation (CC) – also known as a private company with a limited number of shareholders not publicly traded.

Typical examples of ownership structures in our industry consist of more than one ownership structure for instance the shareholders in a company can be a Private Company, and/or a Trust and/or a CC. Each ownership structure has its advantages and disadvantages, and the choice of structure depends on various factors such as the objectives of the company, the goals, the industry and the company size.

So apart from the ownership structure – more important is understanding the roles and responsibilities linked to ownership and ensuring participation and management control (see table below)

In conclusion, the devil is in the detail.  Ensure all parties understand the legal and binding agreements as they are jointly or severally liable for the company.  It is also good practice to annually review these agreements and ensure that everyone charged with oversight and management is aligned.  During the appointment of the Board of Directors, Trustees, and company representatives make sure that individuals are selected on merit and can act in the interest of the beneficiaries they are representing.  An independent director/Trustee is always a good idea as such a person only acts in the best interest of the company and does not have any vested interest.  Operationalise the structures and ensure regular meetings, keep people informed, and decisions are made and recorded – this safeguards all involved.  Hortgro as the industry organisation can assist in unpacking and understanding our efforts towards sustainable transformation and real empowerment.