Collateral Damage, business and the mining charter. Guess who draws the last straw (and it is very short indeed)

As defined by Wikipedia

Collateral damage is a general term for deaths, injuries, or other damage inflicted on an unintended target

The chances are that the average reader of this blog could be regarded as collateral damage.  This thought occurred to me when I attended an Afrisake business forum a few months' ago.  My Afrikaans is good, I was somewhat forced to learn it in the army.  I sat through a few of the presentations - all were informative, but there was one that really stood out and that was the one delivered by Frans Cronje (Dr).  I am translating the gist of his speech from Afrikaans and memory.  He described how the national government (read aNc)

is driven at its core not by the Constitution, nor by any of the formal economic policy blueprints it has adopted, but rather by the ideology of the National Democratic Revolution or the NDR

There's a link above to the article that I took this from - the sentiment was reiterated by Cronje at the forum.  He explained 

What, then, are the current ideological/policy goals of the South African government?

• liberate South Africans from the exploitation still implicit in ‘colonialism of a special type’ – and of which Western investment is seen as both a symptom and an extension;
• ‘eliminate apartheid [ie existing] property relations’ through the ‘redistribution of wealth and income’, which implies a need  to reduce or take control of Western interests/assets in South Africa;
• establish an ‘African hegemony’ in political, economic, and social life and so reject and limit Western influence;

The overarching goal is to push forward with the NDR because it:

•  offers the most direct route to a socialist and then communist society.

 Cronje then took us through the mentality of large (big) business.  Big business will do whatever it takes to cosy up to the government.  They might not agree with government privately but it is very unlikely  that they will do so publicly, the only example I can think of is FNB and that didn't go down well - even if they were correct in their approach and remarkably restrained. We would be under a false impression if we thought the big business will come to the aid of the economy if it doesn't serve them.  However they are very vocal when it comes to the Mining Charter.  This has everything to do with the sheer incompetence of wabenzi zwane.  He was so useless that they stopped bothering talking to him, they just litigated.  The Mining Charter has gone through yet another iteration under Mantashe.  And once again, following the NDR, Mantashe has produced a document that the mining community is not interested in implementing. 

Most of the issues revolve around ownership and related concepts.

In a nutshell, the new charter:

• Recognises the "once-empowered, always-empowered" principle, unlike Zwane’s charter. This means companies that did empowerment deals will still get credit for those transactions, even though black investors have since sold out;
• • Raises the requirement for black equity investment from 26% to 30% for existing mines;
• • Requires mines to have a minimum of 50% black directors, and 20% black women directors;
• • Stipulates that mining companies must pay a minimum 1% "trickle dividend" to communities and labour from the sixth year of a mining right;
• • Requires 30% black shareholding for new licences, but stipulates that labour and communities must hold 8% each. Of that 8%, the mine will have to give each group 5% for free. Taken together, that amounts to a 10% "free carry".
• The "free carry" is the most contentious clause. While it commendably seeks to extend wealth beyond the elite to include communities, the Minerals Council SA argues that the "free carry" makes it "uneconomical" to build new mines.

The most vocal critic is AngloGold Ashanti chairperson Sipho Pityana.

South Africa risks driving away new investment and crippling its mining sector if “reckless” new rules are implemented.  The latest Mining Charter, which is aimed at sharing the benefits of the country’s mineral wealth more equally among South Africans, doesn’t provide solutions to the industry’s challenges and will make it difficult for companies to buy and sell assets, Pityana said on Thursday.

 And here's where the collateral damage comes into the picture.  The table below shows the proposed procurement scorecard.

Element Description	Measure	Compliance Target %	Weighting %
Goods Procurement: A minimum of 70% of the total mining goods procurement budget must be spent on South African manufactured goods with a 60%+ local content value must be sourced from compliant manufacturing companies.	Percentage of the total mining goods procurement budget spent on South African manufactured goods by BEE Entrepreneurs.	21%	10%
	Percentage of the total goods procurement budget spent on South African manufactured goods from companies BEE Women Entrepreneurs or Youth owned and controlled company	5%	5%
	Percentage of the total goods procurement spend on South African manufactured goods from BEE compliant companies	44%	5%
Services Procurement: A minimum of 80% of the total spend on services must be sourced from South African based companies.	Percentage of total services budget spent on services from BEE Entrepreneurs	60%	5%
	Percentage of total services budget spent on services from BEE compliant companies	10%	5%
	Percentage of total services budget spent on services from companies who are 51% youth owned and controlled companies or BEE Women Entrepreneurs	10%	10%

 A few definitions.

“BEE Entrepreneur” refers to Black enterprises that are at least 51% owned by black persons in which Black persons hold at least 51% of exercisable voting rights and 51% of economic interest or an organ of State excluding mandated investments;

“BEE compliant company” means a company with a minimum B-BBEE level 4 status in terms of the BBBEE Codes of Good Practice and minimum 26% black ownership;

What this scorecard shows is that 51% black-owned companies will be favoured, and those that don't want to go that route will be able to provide about 55% procurement if they are a level 4 with 26% black ownership.  This section is unlikely to be contested by the mining companies.  In fact they might push up these targets as a compromise if Gwede relaxes the ownership requirements.   This is the collateral damage.  Big business is not going to be concerned about the status of their smaller down-the-line suppliers.  They will push unreasonable targets on them, because it's the line of least resistance.

If the codes that these down-the-line suppliers had to implement were reasonable, fair and had achievable targets then my response would be different.  They are not.

Cronje recognised this and left us with four guidelines that he believed would ensure the survival of small and smaller non-black owned businesses.

1. Don't do business with the government.  They aren't great payers (ask Liviero) and frankly they've made it very clear they don't want to business with you.  I would include all the state owned entities in this equation. (They do love your tax ZARs though)
2. Don't do business with big business. For the above reasons. (Note that they will refer to you as their "valuable clients")
3. Don't over-capitalise
4. Try to expand into foreign markets.

I could be a bit off the mark with this, but if it's not Cronje's wisdom then you can call it mine.