Paul Janisch

Does the Mining Charter have any teeth? Written by Allan Reid via BDLive

It's not often that I post an entire article. This is one of the most thorough analyses of the Minerals Charter. It was written by Allan Reid, who is a director and head of mining at Cliffe Dekker Hofmeyr. It was lifter wholesale from BDLive this morning. I have marked those points that I think are still relevant.

AS MORE and more mining companies are put through their paces during charter audits by the Department of Mineral Resources, the outcome of the participation process for the Mineral and Petroleum Resources Development Amendment Bill assumes greater and greater importance.

Compliance with the Amendment of the Broad-Based Socioeconomic Empowerment Charter for the South African Mining and Minerals Industry (known as the Mining Charter) and its precursors has been and remains a material concern for mining companies in South Africa, especially its provisions for black economic empowerment. However, as matters stand, a breach of the charter alone cannot result in the cancellation of a properly granted mining right.

Will the bill, if enacted, give Mineral Resources Minister Susan Shabangu the power to cancel a mining right in the event of noncompliance with the charter?

Clause 2.9 of the charter provides that "every mining company must report its level of compliance with the Mining Charter annually, as provided for by section 28(2)(c) of the Mineral and Petroleum Resources Development Act". It is interesting that neither clause 2.9, nor any other clause of the charter, refers to the scorecard attached to the charter. The purpose of the new scorecard is therefore unclear. Moreover, the ownership element requires only a "yes" or a "no" response, is given no weighting whatsoever and there is no indication in either the scorecard or the charter of the consequences of a "no" response under this column. The scorecard is consequently too vague for legal efficacy. It is only under the provisions of section 47 of the act that the minister has the authority to cancel a mining right. Section 47 does not refer to noncompliance with the charter. Although it does refer to conducting mining operations in contravention of "this act", by no interpretation can the charter be considered as being covered by the definition of "this act" and, consequently, section 47(1)(a) cannot be applicable to a contravention of the charter.

Clause 1(zA) of the bill seeks to overcome this enforcement difficulty by extending the definition of "this act" to include not only the charter, but also the Codes of Good Practice for the South African Mineral Industry and the Housing and Living Conditions Standards for the Minerals Industry. In addition, it seems likely that a section 25(fA) will be added to the act, specifically requiring the holder of a mining right (but not a prospecting right) to comply with the charter. This would appear to empower the minister to institute the cancellation provisions of section 47 for any noncompliance with the charter, the codes or the standards.

The charter, the codes and the standards are first and foremost documents of policy. They were not intended, nor were they drafted as instruments of legislation. Moreover, their content is sometimes contradictory and uncertain. Consequently, and leaving aside the possibility that the charter is itself ultra vires, giving these documents the force of primary legislation would be unconstitutional for vagueness as contravening THE RULE OF LAW PRINCIPLE OF THE CONSTITUTION. It is regrettable that the department has ignored the criticism of the Supreme Court of Appeal and seeks to give policy the force of legislation. It opens up a whole new area of uncertainty within the act. This is particularly so for mining companies which, under previous versions of the charter, received credits for black economic empowerment deals concluded by them.

Under the present Mining Charter, such companies can claim such credits only if these transactions were concluded before the act came into force. This is absurd given the fact that such transactions were done specifically to earn credits for purposes of the act. Clause 2.9 of the Mining Charter gives the department the ability to take into account, in its monitoring and evaluation function, the effect of material constraints that may result in a company not achieving its compliance targets.

Whether the department's changing of the rules by which mining companies must play would constitute a material constraint is unlikely. More likely, however, is that the Constitutional Court will have the final say in whether the charter does have teeth.

The italicised, boldened and underlined sentence rings ever truer for Rob's latest codes. The Rule of Law Principle of the constitution that is referred to above is discussed by the Institute for Accountability in Southern Africa (IFAISA) – Advocate Paul Hoffman's public interest group.

Defining the rule of law has proved to be a policy laden and tricky affair since time immemorial. The most comprehensive and internationally acceptable definition is that of the World Justice Project, which is dedicated to advancing the rule of law around the world. As used by the World Justice Project, the rule of law refers to a rules-based system in which the following four universal principles are upheld:

• The government and its officials and agents are accountable under the law;
• The laws are clear, publicized, stable and fair, and protect fundamental human rights, including the security of persons and property;
• The process by which laws are enacted, administered, and enforced is accessible, fair and efficient;
• Access to justice is provided by competent, independent, and ethical adjudicators, attorneys or representatives, and judicial officers who are of sufficient number, have adequate resources, and reflect the makeup of the communities they serve.

Now go back and take a look at gazette number 36928 and compare it to the four principles contained above. These codes cannot pass the first three universal principles. And again I have to ask the question, why are we tolerating this? The miners aren't tolerating this vagueness anymore, they are willing to go to the Constitutional Court for clarity on the "once empowered, always empowered" principle. They are up against the MRD who claim "once empowered, not always empowered". There was an article a few years ago where Susan Shabangu callously told the press that if a black shareholder exits a mining deal then they need to do another one. There'll be more on this once empowered principle in my next post.

Related articles

Mining Charter Reporting Guidelines in the Pipeline | SabinetLaw

Corporate dissent - mining the pits that the ANC have descended into

Intervention coming in mining sector - includes the Mining Charter annual assessment

Mining Charter and multinational suppliers – can anyone help me with this problem?

There is a little dilemma facing a client of mine who is a multinational and a supplier to Anglo. The BBSEE Charter has these targets for procurement

Description	Measure	Compliance Target by 2014
Procurement spent from BEE Entity	Capital Goods	40%
	Services	70%
	Consumable goods	50%
Multinational suppliers contribution to the social fund	Annual spend on procurement from multinational suppliers	0.5% of procurement value

The dilemma is this:

1. Does Anglo have a definition for multinationals?
2. The Charter is clear that multinationals who supply capital goods must contribute 0.5% of the procurement value to the social fund (which I assume would be Anglo's social fund). What happens with consumable or consumer goods that a multinational supplies? I can see a few possible options

 

• They are regarded as non-discretionary spend and therefore eliminated from the procurement calculation
• They are lumped in with capital goods and the multinational contributes that amount to the social fund as well.

And the real problem is that Anglo can't answer my questions and I've asked a few people in Anglo about this. What I have heard is that Anglo does not report on the multinational spend and they don't know what this social fund is – although my reading of the Mining Charter suggests that each mining house has their own social fund.

Harmony in their 2012 annual report have the following to say about both the social fund and multinational suppliers

with the definition of a multinational supplier now established, Harmony will negotiate participation with relevant suppliers and develop an appropriate system to track these commitments.

But they don't elaborate as to what this multinational is – so I suppose we can use any acceptable definition. A common feature in every definition is a company this is headquartered in one country with a subsidiary in at least one other country. The B-BBEE Codes of Good Practice define a multinational as a "Measured Entity with a business in the Republic of South Africa and elsewhere which maintains its international headquarters outside the Republic."

We know that the mining companies are putting more pressure on their suppliers to meet the definition of a BEE supplier – take a look at this Kumba letter from last September, but they do not make allowances for multinationals.

Is there anyone out there in the interland who can help me with this problem?

Mining Charter and beneficiaries

A journalist called me last night to ask me about the mining charter. I am quite familiar with it but it did require a little bit of touch-up research. The BEE codes of good practice are badly written, to put it politely, a feature that almost every other code that has followed the generic codes has adopted (the FSC is actually quite well drafted even though it does refer to the generic codes on occasion). And because the codes are not so much legislation but practice, the interpretations are very broad. The mining charter is very different – this document is analysed down to the last word by lawyers, not BEE consultants. So it follows that what we as BEE consultants might regard as being a simple typo, is regarded as something serious by a lawyer. For instance the mining charter calls for meaning economic participation – it means the HDSA (more on this below) shareholders must get some of the dividend money in their pockets and the balance used to service a debt. This has serious implications for shareholders.

The purpose of this post is the use of the term HDSA. This is a term that has fallen out of favour in the PPPFA which has replaced it with the word black. The mining charter defines HDSA as

"Historically Disadvantaged South Africans" ("HDSA") refers to South African citizens, category of persons or community, disadvantaged by unfair discrimination before the Constitution of the Republic of South Africa, 1993 (Act No. 200 of 1993) came into operation which should be representative of the demographics of the country

We must break this down into components to understand what it means

South African citizens, category of persons or community, disadvantaged by unfair discrimination

This is simple enough. We know from the HDI in the PPPFA that this includes white women

before the Constitution of the Republic of South Africa, 1993 (Act No. 200 of 1993) came into operation

The date of commencement of the Constitution is the 4^th of February, 1997. That is about 16 years and two months' ago.

which should be representative of the demographics of the country

The dreaded Economically Active Population (EAP).

What this says is that HDSAs must be reflective of the EAP (which puts African at about 85% of the population) and they must be older than 16 years, two months and 19 days (as of today). I suppose you could argue the Nasciturus Rule and include those children who were in utero 9 months before the 4^th of February, 1997. I think this is clear. But it does have an impact on HDSA's as beneficiaries. Under "Meaningful economic participation" in the charter it is stated that

BEE transactions shall be concluded with clearly identifiable beneficiaries in the form of BEE entrepreneurs, workers (including ESOPs) and communities

It is possible that the 16 year olds could find themselves as employees of a mine and be part of an ESOP, younger than 16 years olds could find themselves as members of communities. The only problem is that these people cannot be regarded as HDSAs by definition. They are too young to have suffered any discrimination before February 1997. What are we then left to assume – it must be that the usual suspects (ANC cadres typically) are the best beneficiaries for your mining deal.

I haven't run this past Percy Abelkop or Peter Leon. And I'm sure they are both aware of this. I suppose this is just another one of those ridiculousnesses that is contained in empowerment legislation. If you would like to read a very humorous article on the MPRDA you should read Peter Leon's tragicomic analysis of a good mining regime and how South Africa's is the antithesis of this.

A good news post on this blog

Good news is hard to come by these days and this blog doesn't exactly stand out as the great good news blog. At the moment the mining industry is not happy with our esteemed leaders' incompetence (that's plural) that manifests itself in (this list in not exclusive) mixed messages, inconsistent BEE policies and the application thereof and the perpetual threat of licence withdrawal by the ANC (read government because they are unable to differentiate between the two). At long last certain miners are starting to tell these myopic politicians that there polices aren't nice and that they won't invest in South Africa whilst they are in place.

In spite of all this there is some good news. Those with a keen BEE eye might view this story as even better than the article makes out. Business Day ran a story about Woolies' ED programme last week.

Johannesburg-based Classique Bags and Boxes is one of 40 small businesses that have benefited from Woolworths' enterprise development programme, producing and supplying recyclable paper shopping bags for Trenery and Country Road stores. Through the Woolworths enterprise development programme, Classique received a R100,000 loan to secure separate premises and additional equipment (to manufacture paper bags). "The programme boosted our business and helps us manage our monthly cash flow since beneficiaries of the programme are on shorter payment terms and invoices are settled within seven to 14 working days. We can also lean on them for business advice and guidance relating to anything from finance to improving eco-friendly practices."

For those who are new to the concept of ED then you'd do well to look at this paragraph critically. Pay special attention to the following

• A R100,000 loan
• Purchasing from the ED beneficiary (yes this is Rob's wish – but Rob has missed most of the point with his supplier development concept)
• Shorter payment terms
• On-going assistance and guidance

All of these make for an effective ED programme. The codes are desperate for companies to dish out money to beneficiaries for free in the form of grants. This is plainly counter-intuitive. Nowhere in the world does money come for free. It is a pity that the codes reward interest free loans without any security more than other loans. But in this case the story tells us that Woolies loaned money to gear this company up to deliver the products. Woolies now has a bunch of skin in the deal – they require the merchandise otherwise they'll have a bunch of unhappy customers so they go to extra lengths to ensure that this company's cash flow remains optimal.

I love this. However we cannot assume that it will work in everybody's case. It was Anglo American who aptly explained that mines are not well suited to supplier development because they mine stuff out of the ground. They know nothing about supplying Caterpillars or toilet paper or guards (which mines need in abundance now). But they do know how to get raw material out of the ground. They would therefore have a much more interest in beneficiating that raw material and developing those companies is more akin to the nature of their business. At the very least it involves their basic product so they will have a basic understanding of some of the beneficiary's business. We need this type of flexibility in our ED programmes.

Mining industry needs transformation: Shabangu

"The mining industry is facing challenges, it is visibly clear that urgent interventions need to be put in place to enhance workers' skills," she said at a black business awards ceremony in Boksburg.

"The mining industry needs to transform to make sure that we are able to be competitive, but are also able to contribute positively and become a sector... that's a sunshine industry.

"The future is bright, we've got to do the right things."

For the transformation to take place various groups needed to become part of the skills development needed in the sector.

Shabangu said the mining industry could create many opportunities for the country.

"As we all know it is the backbone of the South African economy."

Broad-based black economic empowerment had to spread benefits beyond entrepreneurs and include communities, she said.

via www.timeslive.co.za

Is it just me or is there something positive that has been uttered by our Sue.

• Firstly she's not flogging that ownership dead horse notion. She's talking about something that we all can agree on - a skilled workforce.
• Secondly she refers to "broad-based black economic empowerment" which is substantially different to the "Broad-Based Socio-Economic Empowerment Charter for the South African Mining Industry."

It's long been argued that the Mining Charter in its current form poses problems and challenges.  It is my opinion that a closer migration toward the CURRENT AND UNALTERED BEE codes would be better for the industry.

The mining charter has two absolutes - ownership and reporting.  Reporting does require measuring compliance against the elements. As the CEO of Kumba Iron Ore writes in a letter to his suppliers (dated 25 September, 2012) 

Anglo American Kumba Iron Ore must procure from BEE entities. A BEE entity is defined as an entity of which a minimum of 25% + 1 vote of share capital is directly black owned as measured in accordance with the flow through principle.  B-BBEE ratings do not currently form part of the Mining Charter criteria for BEE procurement.

Norman Mbazima's hands are tied here.  The letter does seem to be linked to rapid mining charter compliance due to the Marikana Massacre, but this is conjecture.  The charter clearly states that they need to buy certain types of goods from BEE companies with the following consequences

You should be note that Kumba Iron Ore will, henceforth, be placing greater emphasis on the use of BEE companies in its procurement of consumables, services and capital requirements.  BEE ownership will be used as one of the key evaluation criteria in the awarding of contracts. Where you do not meet these transformation requirements, it is in your interest and ours that you embark on a process to do so. 

This is not about black business creation, this is about taking wealth from one sector of society and moving it to another.  An economy cannot grow under these circumstances.  Perhaps Sue's new found interest in skills development might be a softening of those ridiculous requirements that are contained in charters and daft codes of good practice.  It might be that the, so far useless, Black Business Council has whispered something in her ear.

Amendment to the BEE Bill

The Broad-Based Black Economic Amendment Bill was published by the Department of Trade and Industry for public comment on 9 December 2011. The period for public comment ended on 8 February 2012. One section of the Amendment Bill provided that:

“If any conflict relating to the matters dealt with in this Act arises between this Act and the provisions of any other law save the Constitution and/or any Act expressly amending this Act, the provisions of this Act will prevail.”

This clause created uncertainty as to the effect of the BEE Act and Codes on the Mining Charter and the Mining Codes. For the purposes of licencing and compliance in mining in South Africa, the DMR’s Mining Charter and Codes have been applied universally to mining companies, to the exclusion of the Department of Trade and Industry’s (DTI) more complex and nuanced BEE laws. But many questioned whether the effect of the provision quoted above would be that the DTI’s BEE rules would trump the DMR’s BEE rules.

Well here is some news: The DTI recently made available a copy of a revised draft of the Amendment Bill, following comments from interested parties to the gazetted version of the Amendment Bill, and the so-called “trumping provision”, quoted above, has been removed.

via belldewarmining.wordpress.com

This is a start.  Now what about the balance of this contentious bill especially section 12A.

The mining indaba, Susan, Tim and a dog named Boo (who is a front)

SA’s mining experts say the way the royalties tax works in practice leans away from the initial idea of a tax on turnover, and towards a tax on profits. In any event, it’s questionable whether SA’s tax is lower than the international average, particularly if the cost of BEE is included. The document itself tabulates mining corporate income tax at 28%. This is the same as Mexico, higher than Canada and a little lower than Australia.

via www.businessday.co.za

I wonder if they've taken the whole BEE cost into account here.  The shareholding cost pales in comparison to the other requirements in the Mining Charter.  Whilst we are looking at mining profitability, a new Deloitte Consulting report has this to say

only a small residual portion of the inherent value of an opportunity finds its way to original private shareholders. In our experience, there are many successful mining projects where this residual value is only a lower single-digit percentage of the primary in-situ value. The remainder, in fact the lion share of the inherent value of any commercial opportunity, ends up in the economy at large, either through state treasury or through private sector spending, where it benefits all and translates into wealth and jobs.

Citigroup Global Markets estimates that “only 7% of the value generated by SA miners gets distributed to shareholders i.e. the entrepreneur and risk taker. The biggest beneficiaries are in fact suppliers to the industry, mining sector employees and the government. To turn opportunity into this value (and many fail along the way) requires substantial upfront investment capital and specialised and scarce skills.

 7% is all you get once everything else is considered.  Not much left to nationalise, not that Shabangu is entertaining nationalisation, although she does say that all this "fronting" brought on nationalisation.  This is a head scratching moment

Manus Booysen, head of the mining, energy and natural resources practice group at Webber Wentzel said "I disagree with the minister for placing the blame for the nationalisation debate on fronting and on the inability of the mining industry to respond to the social needs of affected communities.  The debate was sparked by suspended ANC Youth League president Julius Malema as a political ploy to get support.”

I wonder who Susan was chatting to before the mining indaba?  This lack of transformation argument is getting old now, and it is largely incorrect anyway.  More on this in a later post

Empowerment by (wrong) numbers - mining charter differentials, losing battle

Instead of a plethora of verification bodies, the government and the industry need to set up a single, authoritative body that should be mandated to provide not just a final level of black ownership, but all of the significant details and proportions. Too much rides on this number to be sloppy or unclear about it.

via www.businessday.co.za

The editorial highlights two other issues facing the BEE verification industry

1. verification agencies differ in methodology, sometimes quite cynically. Beneficiary-aligned agencies find fault everywhere; corporate-aligned agencies find fault nowhere. 
2. some government officials set no store by the findings of verification agencies and claim high ratings can easily be bought.

There is a huge problem with standards in this industry, although I don't think this is why government agencies don't accept VA's findings - I suspect this is just plain bloody-mindedness. One verification agency described a few of the other agencies as monkeys - they may be right but these monkeys still issue certificates and these certificates are valid. It's no surprise that consultants like myself ally themselves to one or two verification agencies because we understand how those agencies work.

I suspect the quotes above refer to a competent DTI-type authority, something the DTI is not.

Something else about the numbers also bears consideration, you cannot come up with a contrary figure to government because they will refute them.  They however use consultants like Duma Gqubule and UdgeAy who will find the figures to support their continuous contention that transformation is not taking place.   

 

Overview of the mining charter (from Werksmans)

No it ain't all me own werk - in fact I didn't write any of it.  This is a somewhat brief update on the mining charter.  It's worth the read.  What it doesn't cover is where the charter sits at the moment.  Wessel Badenhorst suggests that it is in fact law, but with the recent consultations that have been happening around the country the view is that the mining charter is in fact not in effect.  

This is what Wessel says about the charter

It can be argued that the Charter is no more than a policy document containing the goals to be achieved by the mining industry in the foreseeable future.  But this ignores the flavour of subordinate legislation added to the Charter – particularly in its revised form.  It is accepted in certain circles that the Charter has the standing of law.  The Charter itself provides that any failure to comply with its provisions will render the mining company in breach of the MPRDA.

Very often, conditions of economic empowerment of mining right holders are written into their mining rights and so become conditions thereof.  Section 47 provides that where right holders breach the MPRDA or any condition of such rights, the Minister may revoke the rights.

Before the Minister may consider a revocation of rights, she must follow due process.   Although one can split hairs as to whether compliance with the Charter is included in the concept of compliance with the MPRDA, it is an argument without an audience.  As the issuing and renewing of rights under the MPRDA fall within the power of the Minister, and Government clearly wants to see transformation and social upliftment in the mining industry, any mining company who discounts the Charter does so at its peril.

You can read the whole publication here.

Oceana challenges BEE in court

Oceana contests what it considers is government’s overly narrow interpretation of BEE.

CAPE TOWN - Fishing company Oceana and the government, represented by the Department of Agriculture Forestry and Fisheries came head to head last month when they met in court to contest what Oceana considers is government’s overly narrow interpretation of black economic empowerment.

At the heart of the matter is that departments transfer policy which allows the holders of fishing rights to sell their rights to another party – subject to certain conditions.

After 1994 the government set about transforming the fishing industry with some gusto. It was a complicated and often emotional process that was not without allegations of political interference and corruption. But the sector is now one of the most transformed in the country. From almost total control by whites, SA’s small-scale and large-scale commercial fisheries were 60% black-owned and managed by 2005.

This is an achievement that the government does not want to see unwound. “The problem with the approach of the application is that it would effectively undo past achievements, and prevent the department from furthering transformation,” the State says in its heads of argument (court papers).

However in the ordinary course of business, trading circumstances are dynamic. People enter an industry and leave it, sell their investments and buy new ones. Sam Montsi, CEO of Montsi Investments, a Cape based investment holding company, is one of these people. He attempted to sell his fishing rights to Blue Continent Products, an Oceana subsidiary. The application for transfer of these rights has been denied.

Oceana is arguing that the policy for the transfer of commercial fishing rights is unlawful. It wants the policy, or certain of its provisions, to be set aside.

The policy states that transfers will be assessed on the basis of “ownership and management control”. Oceana, a level 3 BEE company says this is an overly narrow interpretation of the law. The policy states its criteria more plainly when it goes on to say that applications will be favourably considered if the transferee is “at least as transformed as the transferer”.

Oceana argues that the gazetting of the B-BBEE codes in February 2007 marked a fundamental change in the legal framework regarding B-BBEE and placed the department as well as all other organs of government under a legal obligation to take into account and apply these codes in the measurement of transformation. It adds that these are intended to cover decisions affecting licences and concessions and therefore apply in relation to fishing rights

However, the State is arguing that the codes are not applicable to the transfer of fishing rights.  Instead, its transfer policy seeks to guard against the dilution of transformation in the industry. It accuses Oceana of failing to recognise the importance of transformation when it comes to the transfer of fishing rights. “Two issues will be considered: will the transfer lead to the consolidation of rights holders and effort? And how much will the black ownership of that catch change?” 

The department also argues that the transfer policy, as policy rather than regulation, does not prescribe hard and fast rules. Instead it affords the department and the minister the flexibility to deal with each application on a case by case basis.

A large part of the argument was taken up with legal technicalities surrounding policy and how it is applied.

It is not clear exactly how many transfer applications are outstanding, but it could be argued that there is a moratorium on the approval of commercial fishing transfers. Just one application has been denied, none have been approved, and the balance is

via www.moneyweb.co.za

This was bound to happen. I thought it would happen with Mining. What is interesting is that the regulations are effectively barring a black person from accumulating wealth.  In other words - the market is now being limited so that the government can pursue its transformation strategy.  Susan Shabangu said something similar,  when asked about selling mining rights she stated that a black person must sell to a black person.  

Not an easy problem to resolvem, the real issue here is whether the codes have superseded those rights that are legislated.  - but we wait for the court outcome with much anticipation.