In many developed and leading emerging markets the technology industry is at the forefront of entrepreneurial activity and the start-up of new industries. But this has happened to only a limited extent in SA - the mobile telephony sector is an example. For the most part, though, the growth of technology companies has been constrained by extensive red tape, regulatory uncertainty and a shortage of funding.
The lack of competition has made SA's telecom costs among the highest in emerging markets and has thus restricted the growth of companies, not just in telecoms but also in IT.
The Industrial Development Corp 's (IDC) techno-industries strategic business unit (SBU) has to work within the confines of these policies. It is therefore not surprising that more than two-thirds of deals it approved over the past few years were black economic empowerment (BEE) transactions in the industry as opposed to the expansion of existing businesses or new technology projects.
Since its inception, the SBU has backed more than 100 deals, valued at about R800m. In the past year alone 83% of these were BEE deals, resulting in the creation of almost 3 500 new jobs.
Unit head Willie Fourie says the slow liberalisation of the telecom industry and regulatory uncertainty were holding back growth in the sector. But he believes now that key regulatory and business developments are coming together "opportunities in telecom s and IT will become more frequent".
Fourie lists these developments as:
- The awarding and launch of the second network operator to the Neotel consortium under the leadership of India's Tata group. The roll-out of its network, which Neotel says will cost R11bn over the next 10 years, "will not only affect the cost of telecom s in SA, but will also create opportunities for entrepreneurs involved in the roll-out and provision of services to the company", Fourie says.
He adds that the IDC is also considering participating in the funding of Neotel itself, but talks are at present only in the initial discussion phase.
- The recent enactment of the Electronic Communications Act, which provides for greater convergence between IT, telecoms and broadcasting and should result in lower telecoms costs and new opportunities for entrepreneurs. Related to this are new broadband developments and the convergence of voice, data and video.
- The expansion of telecom services to rural areas through community payphones and the state-regulated under-serviced area licences (Usals).
- Government's promotion of the business process outsourcing sector - call centres - under the Asgisa economic programme, with a target of 100 000 new jobs over the next eight years.
Supporting the call centre industry has proved to be one the most successful strategies for the IDC in terms of job creation. Fourie says the IDC is approached mostly by the smaller call centre operators because the larger companies normally secure bank and venture capital funding. The three deals it backed in the 2006 financial year created 400 jobs; so far this year a further two deals have been approved.
"If they are smaller call centres, the risk is higher, but once they have contracts from clients it becomes easier to finance," Fourie says. He adds that these operators qualify for the IDC's jobs scheme package, comprising a range of benefits, including an interest rate of 500 basis points below prime.
Another job-intensive initiative that has been backed by the IDC is the provision of payphones in rural areas. Last year the IDC approved a R35m loan to Fundisa Telecommunications (see next story) and a further R6m facility to a cellphone airtime distribution firm.
Less successful has been the provision of Usals amid what Fourie terms "continued regulatory uncertainty".
In 2005 the Independent Communications Authority of SA awarded seven licences for operators to provide telecoms infrastructure and services in rural areas. However, a recent report by research house BMI-T found that the rural operators were headed for failure if their licensing conditions were not amended.
Of the seven, only four licensees had reported their financial results and managed to make only a combined R2,5m in revenue. Fourie says the IDC is finalising a funding package for one of the operators.
In terms of BEE transactions, the techno-industries SBU is well ahead of its targets and continues to be one of the main funders of larger deals in the sector. Its recent list of deals include:
- Funding the growth of IT group Gijima with R49m. Gijima subsequently merged with listed AST to form GijimaAST in which the BEE group holds 35%. Of the IDC funding, R35m in repayments are outstanding.
- Financing the growth of Mthombo IT Services (MIT), which was subsequently taken over by listed EOH. The BEE owners of MIT have become significant shareholders in EOH.
- The IDC funded a deal by BEE group Canal Square to take a stake in Enterprise Connexion. When the latter was acquired by Faritec, Canal Square became a material shareholder in Faritec.
- Funding of the Women's Development Bank's 25% stake in IT group Paracon for R43m.
The expansion of other technology businesses is also part of the SBU's mandate. In this sector the IDC has backed, among others, antenna manufacturer Poynting Antennas and gas detection equipment group SureGas (see "More to this than a lot of hot air").
