The controversies surrounding the Sishen and Lonrho mineral rights have raised old questions about black economic empowerment (BEE), including the undeserved enrichment of elite individuals. But now, under the Jacob Zuma regime, there is growing concern about cronyism, patronage, and the role of government officials.
This time the appearance of patronage can be traced to the top. Some individuals, including the president’s son, Duduzane Zuma, could be greatly enriched by gaining ownership of mineral rights in a questionable process. Unease about the process has become more widespread.
The National Union of Metal Workers (Numsa) has commented scathingly on what it calls “the ArcelorMittal and Imperial Crown Trading looting scheme”. Minerals & resources minister Susan Shabangu’s decision last week to place a moratorium on new awards of mineral rights demonstrates that even government has concerns.
These events raise important questions: how are BEE policies working, what are the achievements and weaknesses — and are the effects in line with government’s intentions?
In more than 16 years, BEE has achieved many successes and some failures. It started in the early 1990s with companies such as Thebe Investments, launched by senior ANC officials, and Nthato Motlana’s Corporate Africa, which gained control of New Africa Investments (Nail). Thebe remains a successful enterprise, and there are other enduring black-controlled businesses. Some have grown through strong share price gains, buoyant markets and productive investment.
Among these are Patrice Motsepe’s African Rainbow Minerals, with a R34bn market cap, and MTN (R225bn market cap) which is run by CE Phuthuma Nhleko. One of the most successful is the unlisted Royal Bafokeng Holdings, a community-based investment company . It started with royalties from Impala platinum mining . Under chairman Kgosi Leruo Molotlegi and CE Niall Carroll, a former investment banker, it has diversified into mining, financial and industrial investments. At its financial year-end last December, it had a R30bn investment portfolio and minimal debt.
Nail started as a 20% shareholder in Sanlam’s Metlife, then attempted to become a conglomerate but collapsed . Mvela Group gathered stakes in companies such as Absa and Life Healthcare, but is now being dismantled . Having made his fortune, founder Tokyo Sexwale has returned to politics as human settlements minister.
Throughout these years, there has been debate about how BEE can best be achieved, and it has worked — but also created risks and unease on many fronts. In an institutional or legal sense, rules of the game were set through the Broad- based Empowerment Act of 2003 and the publication of industry codes and charters over the next few years. These changed the way companies and other stakeholders think about the process.
In the 1990s it was mainly about deals and ownership. The codes and charters have formalised a broader approach. They use a balanced scorecard, giving only a 20% weighting to ownership. Companies also gain credit in other areas including preferential procurement, employment equity, skills development and enterprise development (see table). Management control, where influence over a business is large, gets only 10%.
However, ownership of equity in companies and access to other assets such as mineral rights still play a big role in the process. This is where some old themes and questions are constantly at play. Since the charters and new regulations came into effect , most big companies have done deals over the past few years.
In each case, there are familiar questions: how can the deal be funded when the BEE investors have limited or no capital? Should key individuals benefit from the deal, or should the shareholders be entirely broad-based? If lead individual investors are involved, what value will they add to the business? Will they assist in running the business , adding new perspectives on the board — or provide influence among cronies in high places?
The Sishen/ArcelorMittal case has attracted special attention, partly because valuable mineral rights are involved and there are individuals who have direct links to senior politicians. (See next story). In other large BEE deals announced recently, companies have opted for broad-based empowerment shareholders. That includes the Sasol, SABMiller and MTN deals.
Government and other stakeholders have backed the broad-based empowerment principle, which usually seems intuitively more beneficial. But there is still leeway for companies when designing BEE deals and choosing their partners.
The benefits of broad-based empowerment deals are not always achieved as hoped. Funding arrangements linked to the share price can unravel when product prices or financial markets weaken, as occurred two years ago. Sasol’s R30bn Inzalo deal — which gave 10% of the group’s share capital to the black public, broad-based BEE groups, trade unions, employees and the Sasol Inzalo Foundation — was announced in May 2008, when the share price rose to R490. It’s now R284. Other companies, such as Barloworld, have restructured BEE deals for similar reasons.
Jenny Cargill, founder of BEE consulting company BusinessMap, gives several examples of communities that have been disadvantaged by BEE ventures or decisions made by government officials . The Richtersveld community in the Northern Cape is one. Cargill describes the potentially negative effects on communities as BEE’s “powder keg”.
In planning BEE deals, dilemmas on issues such as funding and the shareholding structure can arise. As the Sishen/ArcelorMittal case has shown, the actual or perceived ability to influence decisions on access to those rights through special relationships can be a valuable card for black investors . For some investors, the special relationships may be their only currency .
When they do play that card, and stand to be greatly enriched , investors and other stakeholders are quick to link the decisions — by government and companies — to a culture of corruption and cronyism, though weak laws, poor transparency and inept officials may be part of the problem. That’s a risk that government cannot afford .
WHAT IT MEANS
The empowerment field is not level
ArcelorMittal deal is just plain rotten
Source: Financial Mail
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