Black empowerment ‘scorecard’ dominates Indaba

Cape Town, South Africa — Some 1,740 delegates from 38 countries attended the 2003 edition of the Investing in African Mining Conference (Indaba), held here recently, making it the busiest ever. The centrepiece was the South African government’s long-awaited “scorecard,” unveiled by Phumzile Mlambo-Ngcuka, minister of minerals and energy

The scorecard is a checklist of the provisions contained in South Africa’s new mining empowerment charter, and is designed to give mining companies benchmarks against which to measure their progress in complying with the charter.

Under the new laws, companies operating in South Africa are required to have 15% of their assets in the hands of sanctioned black economic empowerment (BEE) groups within five years; in 10 years, the BEE stake must be 26%. The aim is to redress the imbalance still lingering after the dismantling of apartheid, nearly a decade ago.

The charter also calls for 40% of South African mining companies’ management to be made up of historically disadvantaged South Africans, and 10% of the industry’s labour force to be made up of women within five years.

The plan also calls for white-owned companies to help raise the R100 billion needed to achieve the objectives. Mlambo-Ngcuka said mining companies will not be expected simply to write cheques, but will need to provide loans and guarantees to help their BEE partners.

Under the deal, the state will assume “custodianship” of mineral rights. Holders of “old order” mining rights have five years in which to convert them into “new order” rights by applying to the government for licences.

When applying for a new licence, each company will have to include a copy of the scorecard along with documentation on each checklist item. Failure to meet the requirements could cause the licence to be revoked.

The minister said the government would be flexible in considering each company’s scorecard, taking into account a range of factors including the particular commodity in question and its performance.

“We have to take the view that government needs to give companies a break,” she said. “The scorecard is not a punitive measure.”

Key elements of the scorecard include targets for human resource development, including plans to offer employees the opportunity to become functionally literate by 2005. The scorecard will also look to track a company’s progress in improving communities around active and depleted mines and major areas of labour supply.

The following is a complete list of checklist items:

q human resources development;

q employment equity;

q migrant labour;

q mine community and rural development;

q housing and living conditions;

q procurement, ownership and joint ventures;

q beneficiation;

q reporting.

Companies will be required to tick either “yes” or “no” to indicate whether they have met the prescribed 5- and 10-year goals for each element. The document notes that the minister will take into account the entire scorecard when deciding whether or not mining companies have met the targets.

A matter of trust

Mlambo-Ngcuka bristled at a questioner who sought assurance that South Africa would not “shift the goalposts” on the level of equity transfer required under its mining charter.

“How much do you trust a democratically elected African government?” she asked. “You have to take us for who we are.”

When asked when empowerment would be complete, the minister replied: “We will all know when the time is right — when it’s a white guy who’s bringing the tea.”

The minister said the government wants to encourage the mining industry to find new partners in an effort to create a more diversified mining sector. The idea is not to sell equity stakes to silent partners: “We will discourage ‘fronting’; we are going to do our best to make fronting a crime. If you cheat there will be trouble.”

Mining companies are encouraged to scrutinize potential black empowerment companies, and the minister said the government will also watch the BEEs and weed out those looking to make money based on the colour of their skin.

“They can’t sit in the boardroom and wait for dividends,” she said.

“I keep warning people the longer you wait, you’ll end up with the worst possible [black empowerment] partner.” She quipped: “You could end up with me if you’re not careful — I’ll be the only one left around.”

The minister said she hopes the government’s role in the mining industry will gradually decrease.

“You have to take people with potential and commitment and spread them through the mining industry so that they can grow and learn. Ultimately, the goal is a self-sustaining industry.”

In reply to a question concerning BEEs dumping newly acquired interest for a quick profit, Mlambo-Ngcuka said the warehousing of shares with the government-owned Industrial Development Corporation (IDC) would protect the parent companies’ licences.

While the warehousing plan wasn’t discussed in detail, Roger Baxter, chief economist for South Africa’s Chamber of Mines, indicated the industry will be creating incentives to encourage black partners to retain their interests. In some cases, companies may be required to find a new BEE partner and jump through all the administrative hoops again.

BEE credits

After indicating that companies that have already made empowerment deals would “start from where they are,” with regard to equity transfer, the minister pointed out that companies would get credit for previous deals. The credits will be calculated when companies re-apply for mining licences, and they’ll be based on the value of the deal and the size of the company.

Credits will also be available under the scorecard’s beneficiation category. The scorecard contains provisions that allow companies to negotiate for an offset between the beneficiation and empowerment elements. Still, a company is not allowed to record a zero on any one part of the scorecard.

Said Mlambo-Ngcuka: “We don’t expect every company to do beneficiation itself; companies can offset beneficiation with equity. The bottom line is that every company must contribute in some way.

“If you do more beneficiation, you can negotiate a decrease in empowerment. There will be some negotiation — it will not be one-size-fits-all.”

The minister described the beneficiation strategy as “tedious” insofar as there are 59 different minerals mined in South Africa and each requires its own legislation, though some will probably be combined.

Also, the Department of Trade and Industry will offer incentives to encourage beneficiation, and the government is looking at legislation aimed at improving the jewelry industry in South Africa. A bill spelling out the details of beneficiation is expected before year-end.

Also pending is the government’s oft-delayed Money Bill, which will outline the new mining royalty regime. Mlambo-Ngcuka said the bill would be outlined by Finance Minister Trevor Manuel during his budget speech in late February, but Manuel made no reference to it, and it still had not surfaced by presstime.

The minister said the new royalties would be “competitive with any other in the world,” comparing them with royalties in Russia, Botswana, Chile and Canada. “The royalty system will not place any additional burden on mining companies,” she stressed.

Under the new system, all mineral resources belong to the state, and once the new act is promulgated, prospecting fees and royalties will be payable whenever a potential resource is prospected or a proven resource mined. The new act applies regardless of whether or not the rights were previously owned by the state or private interests.

Pragmatic

Looking ahead, Jack Jones, executive director of UK-based CIBC World Markets, said that while South Africa seems to be establishing a “pragmatic empowerment regime,” depressed share prices and ratings suggest investors are remaining cautious.

He said that in the near-term, investors want legislative certainty and an end to drafting risks but that in the longer term they want ownership certainty without what he calls “value leakage.” The leakage arises f
rom potential new costs as mining groups seek to achieve their empowerment ownership targets.

“It’s disappointing that legislative uncertainty remains high,” Jones said.

Gerard Holden, head of mining and metals at London-based Barclays Capital, echoed Jones’s remarks. Holden believes the economic damage caused by last year’s leaked mining charter has not been fully repaired, and that royalty levels need to be tabled soon to regain investor confidence.

Holden ended his talk on an optimistic note, stating that the talent that exists in South Africa and beyond has yet to be nurtured and developed. “It will not happen overnight, but it will in due course put Africa’s developing companies on the map of international commerce.”

South Africa’s Trade and Industry Minister Alec Erwin told delegates that the rest of the world could take a lead from South Africa’s policies on addressing inequality.

Erwin assured investors that while empowerment is government policy, the plan is to achieve it without impeding the country’s growth rate. “We will carry out empowerment in a pragmatic way,” he said. “Empowerment needs to go hand in hand with growth. It takes time to achieve a balance.”