Mining Charter 2017 – Why did the Dept of Mineral Resources add potentially contentious clauses? Read about the “trumping” clause.
I like to understand why someone takes a particular action. In this case “Why did the dept of mineral resources take the step of writing and put in some very contentious clauses in the new charter?”. Many simple minded people will state that it was written “by the Guptas for the Guptas”. As will be shown this is simply untrue. Others will say it is a further result of corruption, to benefit cronies. This is also substantially untrue. Others will say pure incompetence, and this is somewhat true.
Transformation, charters, BEE, all evolved from the new South Africa and the Constitution. Many will remember the RDP (reconstruction and development program), Gear and other activities. It is true to say they never worked the way the country would have wanted, but there was some positive impact. In 2003 the original BEE Act was issued (by Thabo Mbeki). It is this act that is at the heart of all transformation efforts. The Mining Act of 2002 had similar intentions, and it is the mining act, together with the Amended B-BBEE Act that helped create the mining charter of 2017. A separate discussion can decide how well the BEE Act has worked. The point of this document is to try to explain the thinking that went into the mining charter.
Section 3 of the B-BBEE Amendment Act contains the so-called “trumping clause”. The BEE Act takes precedence over all other acts when it comes to transformation matters. This applies to the mining charter as well. The department, however incompetent they may be MUST implement a charter that will be in sync with the BEE Act. It must also, of course, make sense from being in the nation’s interest, and be constitutional, which is why the chamber of mines is likely to be successful in its court case even if it somewhat misses the boat in some of its arguments.
Some of the issues and why they were inserted into the mining charter:
The definition of “black” has changed prompting many to accuse the Guptas of being involved, or other corrupt actions by the government. The truth is this is the same clause as used by the B-BBEE Amendment Act of 2013. Instead of using “historically disadvantaged” individuals, the B-BBEE Act is using “SA Citizen prior to 1994” and “naturalized prior to 1994, or “entitled to naturalisation prior to 1994.” Of course none of this applies to the Guptas (They struggled to be naturalized in 2015). The mining charter HAD to use this definition due to the trumping clause.
The new requirement of 30% black ownership is a precedent set by various BEE charters (officially called sector codes). The original BEE codes (established by the BEE Act) used an ownership target of 25% (plus one vote). The mining charter used 26%. The original construction sector code of 2009 used 27.5% for the first five years going up to 30%. The original tourism sector code of 2009 has a target of 21% going up to 30% in 2017.
With the advent of the amended Codes in 2013, targets for ownership using the generic scorecard remained at 25%, but other sector codes increased their targets. The Media, Advertising and Communications Sector Code (MAC) issued in May 2016, set an ownership target of 40%, going up to 45% in 2018. The ICT Sector Code has an ownership target of 30%. The mining charter can rightfully say, that from a BEE viewpoint that they are now consistent with the rest of the codes. While there is unhappiness with the ICT sector code, no court challenge has been made. The MAC sector code also has had no challenge and it has been signed, and therefore approved by all the major associations representing the largest corporations in the country. They could rightfully be aggrieved that the mining charter is being challenged while they are (at least publicly) supporting their own codes which have far higher targets. It does make one wonder if this is lip service or if the major players really support transformation.
“Once empowered, always empowered”. The phrase “once empowered always empowered” has arrived into our lexicon, a bit like”white monopoly capital”. This phrase does not exist in the BEE Codes. The closest that the BEE Codes have is a concept called “recognition of ownership after loss of sale of shares” which is fairly different to most people’s vision of “once empowered, always empowered”. The Amended BEE Codes of 2013 refined this to be even less applicable to “once empowered, always empowered”. In 2013, no one took the codes on review or tried to change any of the clauses. Now that the mining charter has to be reconciled with the BEE Act it is a bit late to complain that the BEE Act does not have a once empowered, always empowered clause.
“The usual suspects”. There have been many complaints that the “usual suspects” always get the deals. That the same people get to be even more involved in deals over and over. The original BEE codes awarded extra points for involving “new entrants” – black people who had not done deals worth more than R20m previously. Many people saw the points available and high threshold as being too “lenient”. The amended codes raised this to R50m and only awarded 3 points, meaning there is little incentive to involve new entrants. At the time the DA was outraged that “the usual suspects” were being favoured over new entrants and wanted the codes to be more broad-based. The mining charter seeks to dictate the shareholding of the 30% ownership target: 8% to ESOPS (employees), 8% to mine communities, 14% to BEE entrepreneurs (could be the usual suspects). The dept could say they ARE trying to limit the value accruing to the usual suspects, and once again being blamed. Again, at the time that the Amended codes were issued, there was no court challenge.
1% of turnover. This is one of the most controversial aspects of the mining charter, and one that the courts will likely overturn. Unfortunately this is a wrong reaction of the dept to a real implementation problem of BEE ownership. This manifests itself often via trusts or other financial mechanisms where a BEE shareholder is an owner of shares but never received any value from his continued ownership of those shares. Shares are often “taken away” at the discretion of the real owner of the business. Employees are only owners (ie can place a picture of their shares above their bed at night) as long as they do not sell the shares, do not resign, are not dismissed. When that happens the shares revert back to a trust that passes them onto the next employee under the same conditions. Even when employee dies his shares are often repossessed by the company. Some enterprising companies offer to pay tuition fees or give other small benefits to the “shareholders” who, being grateful for small mercies support this practice. The dti has been concerned about these practices for a long time, but has no clue how to solve this problem. In May 2015 the dti minister issued a gazette that completely missed that mark to the extent he had to revoke the gazette and appoint a task group to take pressure off him. Two years later he has yet to comment on the report of the task group. This does not mean that government is not aware of these problems. The argument between the JSE that says the JSE is 24% black owned and the President who states that the JSE is only 3% black owned is a result of this exact issue.
It is not surprising that the dept of mineral resources would be aware of this issue, and knowing that the dti does not know how to solve it, would want to come up with their own solution. It is a hare-brained option that they put into the mining charter, but they will be able to say there is method in their madness. Their requirement that shares owned by the mining community must be held by a trust created and managed by a Mining Transformation and Development Agency, decided upon by the minister is another hare-brained scheme. Obviously people will suggest that there is room for corruption never mind inefficiency. This is a typical socialist, Marxist reaction to a problem – central control of everything.
The procurement options around the mining charter look like they were written by someone with minimal understanding of the BEE codes and even less of the mining industry. Some of the clauses make little sense and needed far more explanation, for example the definitions of “foreign supplier” and “SA Manufactured Goods”. The targets are even more impossible to achieve, without wholesale fronting taking place by those suppliers, notwithstanding the mining charter does have a transitional period for procurement. We are already seeing this trend happening.
The clauses around employment equity and skills development are fairly similar to the BEE Codes which is why they have been included in the charter.
A Proposed Solution:
The mining charter should be scrapped in favour of the generic BEE Codes, and a proper sector code established. The dept of mineral resources can set a minimum level to be achieved eg level 3 this year, level 2 next year. The precedent for this has been set by the gambling and liquor boards. At the same time the BEE Commission should be strengthened to take stronger action against fronting.
There are reasons for the mining charter: the need for transformation, requirements of the BEE Amendment Act, precedents set by other charters. Nevertheless that charter remains fatally flawed because it has to achieve the objective set out by the BEE Act in 2003. “promote the achievement of the constitutional right to equality, increase broad-based and effective participation of black people in the economy and promote a higher growth rate, increased employment and more equitable income distribution;”
EconoBEE will be hosting a Breakfast on the 12th of July to inform you about all the changes related to the newly gazetted Mining Charter and how that will affect Mining companies and suppliers to the Mining Sector.
Date: 12 July
Title: Mining Charter
Duration: 7:30 for 8:00 till 10:00
Price: R800 excl VAT per delegate
Venue: 435 Rugby Avenue, Ferndale, Randburg
Lookout for our next information packed newsletter. Call us for expert help and advice to achieve successful transformation and not fall foul of the provisions of the Act.