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BEE ownership targets: an ineffective means of transforming SA’s mining industry

20th October 2010

By: In On Africa IOA

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In September 2010, South Africa's Department of Mineral Resources (DMR) released a review of the country's so-called Mining Charter, drafted in 2002 with the intention of facilitating the racial transformation of the local mining industry. The review process found that the sector's progress towards black economic empowerment (BEE) goals has been slow and has failed to live up to expectations. As a result, the reviewed Mining Charter proposes certain amendments and clarifications to the original document. Whether these revisions will serve to effect the desired change remains to be seen.

 

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While it is certainly not the only aspect to the transformation agenda,(2) the absence of significant change at the level of ownership has perhaps been one of the most visible and widely-reported failures of the empowerment project. The Mining Charter set quantifiable targets for such transformation, requiring that, by October 2009, 15% of mining equity be held by historically disadvantaged South Africans, increasing to 26% by 2014. The review of the Mining Charter showed that less than 9% of ownership had been transformed by the 2009 deadline.(3)


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The risks of imposing ownership transformation targets

 

The Mining Charter's setting of ownership requirements has always been hotly debated. For example, as was recently argued by the deputy general secretary of the South African Communist Party, Jeremy Cronin, the transformation of the ownership of an industry does not necessarily contribute significantly to job creation, growth or beneficiation.(4) Thus, BEE ownership targets have the potential to overshadow the need for transformation on a more ‘real' level, and while billions are being invested in the pursuit of transformation at the level of ownership, other aspects of empowerment with greater potential to redress the imbalances of the past are neglected.

 

Further, it is commonly argued that efforts to transform the ownership of the mining industry serve to benefit a small group of elite black business people, while the majority of the country's black population remain impoverished and disempowered. There are undoubtedly cases that lend support to this argument, although there are also notable exceptions. For example, certain companies have implemented employee share-ownership programmes, with varying degrees of success, while other companies have met ownership targets through empowerment deals in which local communities have been beneficiaries. The best known of these was the deal between the world's second-largest platinum producer, Impala Platinum, and the Royal Bafokeng Nation.

 

Tied to concerns that BEE at the level of ownership serves only to benefit a small group of elite business people, are concerns that many of these business people have strong ties to the political elite. Certainly it appears that there is a group of politically-connected business people who are using their relationships with the ruling party to advance their business interests. This raises the risk that the pursuit of transformation at the level of ownership could entrench a culture of political favour and cronyism. In addition, it raises concerns among investors over the potential for corruption. Of course, taking on a particular BEE partner because of that partner's connections to government does not amount to corruption and, in many cases, represents astute business reasoning. The risk, however, lies in the potential for political leverage to be used to circumvent regulatory requirements.(5)


New challenges in meeting BEE requirements

 

The revised Mining Charter has not changed the 26%-by-2014 ownership target, to the relief of many mining operators. What it has introduced, however, is the requirement that black shareholders receive a portion of dividends as a direct benefit, instead of the full dividend being used to service transaction debt. This will make it more expensive and more difficult to finance empowerment deals. It may also mean that some transactions will simply be unable to access the required finance. At the same time, the revised Mining Charter introduces the potential for mining licences to be revoked if its requirements are not met.(6) As a result, mining companies are facing an environment in which it will be more difficult to effect BEE ownership transactions, while at the same time being aware that failure to secure such transactions could result in the cancellation of mining and prospecting licences. Thus, while the target itself has not been raised, companies could face increasing challenges in meeting the target.

 

Both these new requirements vest government with wide discretionary powers. For example, the DMR has not sought to prescribe the proportion of dividend flows to BEE participants, but will rather evaluate the sensibility of a proposition upon receipt of an application. Also, in instances where the requirements of the charter are believed to have been breached, those companies in good standing with the department are likely to be able to negotiate the retention of their licences, while those whose relationships with the department are less strong, could be at risk.

 

The broad discretionary powers granted to government have long been a concern relating to the Mining Charter and the Mineral and Petroleum Resources Development Act, and the ongoing presence of discretion in the revised charter has done little to improve confidence in the sector.

 

Nevertheless, there are areas in which the revised Mining Charter does offer additional clarity in terms of definition and target - e.g. employment equity, skills training, enterprise development and procurement from empowered suppliers. This clarity has been welcomed by industry participants, although some of the targets, such as the requirement that 40% of capital equipment be purchased from empowered suppliers by 2014, are unrealistic.

 

In addition, many aspects of the charter continue to be vague. For example, the revised charter requires that multinational suppliers of capital goods contribute a minimum of 0.5% of their locally generated annual income towards a "social development fund" for the benefit of local communities. However, it fails to deal with the manner in which the fund is to be administered.

 

A need for more radical measures?

 

It is the very presence of targets that are deemed unrealistic, and the vagueness of how these targets are to be achieved, that have brought about a lack of respect for the transformation process. This lack of respect has resulted in transactions that have met the letter but not the spirit of the country's empowerment legislation. Such transactions, coupled with the slow pace at which transformation is proceeding, are leading to calls for more radical measures - including calls for the nationalisation of the country's mines. While it remains to be seen whether such calls will be heeded, they are evidence of growing dissatisfaction with the transformation that has been achieved to date.


Written by: Shona Kohler (1)

 

NOTES:

(1) Contact Shona Kohler through Consultancy Africa Intelligence's Eyes on Africa Unit (eyesonafrica@consultancyafrica.com)
(2) The Mining Charter seeks to effect transformation in nine broad areas: human resource development; employment equity; migrant labour; mine community development; housing and living conditions; procurement; beneficiation; sustainable development and growth of the mining industry; and ownership.
(3) Speech by South Africa's Minister of Mineral Resources, Susan Shabangu, on the occasion of the launch of the Mining Charter Review and Scorecard, 13 September 2010.
(4) Faurie J, ‘BEE targets overshadow ‘real transformation' - Cronin', Mining Weekly, 8 September 2010, https://www.miningweekly.com.
(5) Business Day, ‘BEE - Political business of mining', 26 August 2010, http://www.businessday.co.za.
(6) Business Report, ‘Charter raises new doubts', 20 September 2010, http://www.busrep.co.za.


 

 

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