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