The Perverse Effects of Mixing Local Economic Development and Community Development: An Example from South Africa

Jörg Meyer-Stamer

Note for Discussion, based on information obtained in a series of interviews in the Highveld Ridge Region, South Africa, as part of a PACA exercise ("Participatory Appraisal of Competitive Advantage") organized by CDG. Bernhard Adam (CDG) and Henning Banthien (IFOK) participated in the PACA and have commented on an earlier draft of this paper.

Sasol is one of South Africa's ten largest firms. It was founded in the 1950s as part of South Africa's effort to reduce dependence on imports. The country has little petroleum reserves but lots of coal. In the early 20th century, two German researchers had come up with a process to convert coal into gasoline and diesel fuel, a technology that had been employed on an industrial scale by Nazi Germany during World War II. This technology was adopted and consequently refined by Sasol. Its first plant was built on a greenfield site south of Johannesburg, called Sasolburg. In the 1970s, it was decided to build a second plant, this time some 100 km east of Johannesburg, next to major reserves of low-quality coal which was not exportable but perfectly adequate to be converted. Together with the second plant a city was built. More precisely, two cities were founded, one for the white employees, called Secunda, and a township for the black workers, called eMbalenhle. Both are located in a region which is called the Highveld Ridge, which includes four further cities (Trichard and Kinross, which date back to early 20th century, and Evander and Leander, which were founded for white and black employees of a gold mine in the post-war era).

Today, several of Sasol's profit centers are located in Secunda: Sasol Synthetic Fuels (SSF), the mining operation Sascoal, and Sasol Technology (Sastech, the company's R&D center), as well as branches of other affiliates which produce monomers and polymers, ammonia, fertilizer and explosives, as well as other products. Overall the group had more than 25,000 employees in 2000, roughly one fourth of them being employed in the processing plants in Secunda and one third in the Secunda collieries.

In the mid-1990s, SSF started a major reengineering effort, which among other effects resulted in a massive process of outsourcing of construction, maintenance, and other activities not directly related to the core business. The project lasted five years and resulted in major cost savings. At about the same time, the group as a whole began to implement a black empowerment policy. In 1990, 1.9 % of the employees at managerial level and 62 % of the workers were black. In 2000, the numbers were 11.8 % and 64.1 %, with the overall number of employees having shrunk from 30,596 to 25,139, i.e. the total number of black employees has decreased, and the share of black managers falls short of the agreed goal of 30 % (all numbers from the 2000 annual report).

In Secunda, Sasol has a community development department with more than 50 employees and an annual budget of more than Rand 20 million. This reflects Sasol's commitment with a community large parts of which would not exist had the firm not decided to locate a factory there. The main activities of the community development department are the following:

• The Osizweni education and training center. Sasol acquired the buildings of an abandoned gold mine in 1994 and started to convert it into the center. Some of the employees there continue to be on Sasol's payroll. Osizweni is involved in pre-school, primary, and secondary education, and skills development. It is located close to the eMbalenhle township, and the total number of students is around 1,200.
  

• Sasol is supporting various activities in eMbalenhle, in particular via the community development organization SANCO. A substantial part of housing in eMbalenhle has been constructed by Sasol for its workers.
  

• In 1996, Sasol founded an experimental farm which in training marginalized inhabitants of eMbalenhle, called Esperanza (for "hope"). The initial annual subsidy of Rand 1 million has been cut down to about Rand 200,000 as the farmers at Esperanza became more competent and business-oriented, identifying diversified markets for the vegetables and fruit they are producing. In late 2000, a project was underway to start some processing of agricultural products at the same site.
  

• Sasol is involved in sports development, including support for two sports centers (one in Secunda, the other one in eMbalenhle). It is also active in woman and youth development.
  

• In 1995, Sasol founded a support agency for small businesses, called the Highveld Business Development Center (HBDC). The center today is part of South Africa's network of Local Business Development Centers (LBDCs). The HBDC is catering for small and micro firms founded by blacks.
  

• In early 2000, Sasol was one of the main proponents in launching a Stakeholders' Forum which includes different provincial and local government departments, business associations, the trade union, and civil society associations. The Stakeholders' Forum is meant to be the focal point of strategy formulation and coordination of activities in various fields of local development. It is facilitated by an external professional and chaired by the highest ranking local SASOL managing director.

Taking all this together, two observations come to mind. First, the overall effort is significant, even though the money involved amounts to just 0.3 % of Sasol's profit in the 1999/2000 business year. Second, there is no clear dividing line between community development activities and economic development activities. And the latter point relates to Sasol's black empowerment efforts.

Let us take one example to clarify the problems which result from this confusion. One of the main activities of the HBDC is to support black businesses so that they are sufficiently qualified to be entered into a database which is used to identify potential vendors to bid for tenders published, first and foremost, by Sasol. For small businesses, many of which are in fact micro-businesses with an owner and maybe two employees, this registration involves a substantial effort and cost, for instance because they must rent a workshop rather than working out of their home. The expectations which are raised with this registration are substantial, whereas the results are disappointing. There are several small businesses which consistently bid for small tenders (a typical value may be Rand 20,000), with hardly ever or never winning one. This has to do with the fact that for Sasol these types of tenders do not make sense since the transaction cost is far too high, so that the number of tenders is limited. Accordingly, there is little demand but many offers.

This is not to say that Sasol is not trying to support black businesses. On the contrary, there are several firms located around Sasol which are operated by black former Sasol employees. They include outsourcing activities, such as a big labor brokering firm, and downstream operations, such as a firm which produces and markets cleaning chemicals. These firms are located in the outer ring of the Sasol complex, thus benefiting from, inter alia, Sasol's security service. Moreover, they are paying a rent which is substantially lower than going market rates in Secunda, or in fact even in eMbalenhle. These firms are thus being supported in more than one way, and this is probably due to the fact that SASOL managers feel obliged to do something in favor of black businesses. One might even argue that they are overpromoted, and there can be no doubt that the benefits they receive are creating market distortions and thus barriers to entry, in particular for other black businesses. To put it differently, in trying to promote black businesses Sasol is pretty much achieving the opposite.

Overall, this situation is creating not just confusion but actually massive frustration. Some of these frustrations come down to complaints about the fact that markets are competitive. This refers to local white businesses who explain their lack of success in dealing with Sasol by pointing at Sasol's preference for black businesses, rather than looking into their own lack of competitiveness. This also refers to black businesses benefited by Sasol, who complain that Sasol is preferring their white competitors without acknowledging the degree of benefits and advantages they are enjoying.

Other frustrations are more plausible, especially those of small businesspeople. They complain a lot, and one is actually tempted to point out the fact that they often are not really dynamic entrepreneurs but rather have the mindset of subcontractors, waiting for Sasol jobs to come in rather than trying to understand the idea of marketing, market research, and identifying promising niches. They often do not really have a business idea but rather expect their technical skills to be sufficient to survive in a competitive market.

What can be done to remedy these problems and create more adequate expectations? First, Sasol ought to be consistent in its black empowerment policy with regard to subcontractors. It is essential to create a level playing field rather than benefiting a happy few, i.e. in particular cut down the benefits for small- and medium-sized businesses located on the SASOL estate. Moreover, Sasol might consider to terminate its practice to invite micro and small firms for tenders, since this is unsustainable for both sides. It creates high transaction costs for Sasol, and is enormously costly for the small black businesses, who develop a core competence in preparing tenders rather than improving their service. Instead of dealing directly with small businesses, Sasol might consider to set up an affiliate which is operating as an intermediate between Sasol and small subcontractors. This intermediate would receive a guaranteed, annually increasing share of Sasol's subcontracting volume, and it would be competing with other subcontractors for tenders beyond the guaranteed share. In order to be able to do so, it would have to have a fund dedicated to small business development, similar to supplier development programs which in some cases have been run by large car manufacturing multinationals. Obviously, the intermediate would suffer from high transaction costs.There are different options to deal with this. One option would be to quantify the transaction costs implied by the current system. Thus, a value would be identified which would then be the point of reference for a specific item of the budget of the intermediate. Another option would be that the intermediate charges Sasol with a fee for the managerial work involved in project and quality management; this fee might be negotiated on an annual basis. The intermediate co-ordinates the work done by the small sub-contractors, monitors the quality of work and conducts the market-communication with Sasol and other potential costumers. Hereby, Sasol saves transaction costs and establishes transparent market-relations, (black) SMMEs engage in alliances with the intermediates by which they can build up stable market-relations, and can benefit from the centralized marketing and the quality-management that will also professionalize their operation.

Second, HBDC ought to redefine its focus. It ought to terminate any activities involving tenders with Sasol. It might continue its tender-related database and firm registration effort, but even this should be evaluated critically. Instead, HBDC should strengthen its entrepreneurship development effort, in particular by using existing methodologies such as CEFE or CDG's small business promotion methodology. Moreover, it should strive to enhance the effectiveness and significance of its activities. Currently, somewhere between 60 and 80 micro and small businesses are being supported by HBDC. This number might be increased significantly if HBDC decided to deal with small groups businesses (between six and twelve) rather than individual businesses. Moreover, right now it appears that HBDC is considering to start some credit business. It will be essential to separate this organizationally from the non-financial small business development activities, since otherwise it would create another lack-of-focus problem. Instead, there is the option to combine such an activity with the coaching and business angel program we have suggested in our presentation.

Third, Sasol may consider to try to draw a clearer line between community development and business development activities. The current practice, to repeat it, is creating unrealistic expectations and frustration, thus jeopardizing the goal Sasol pursues with its community development effort. A practical way of progressing towards a clearer distinction would be to create a kind of corporate identity for the community development department, for instance by creating a special logo and by producing and distributing more information material. Such an identity would help the community in distinguishing between Sasol community development and all the other Sasol business activities.

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