Alexkor update briefing on Pooling and Sharing Joint Venture (PSJV) at Richtersveld

NCOP Public Enterprises and Communication

18 February 2015
Chairperson: Ms E Prins (Western Cape, ANC)
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Meeting Summary

Alexkor briefed the Committee on the Pooling and Sharing Joint Venture (PSJV) in the Richtersveld area, and set out in brief the history of the area. Alexkor was a mining company, operating since the 1920s, but it had no land of its own and had never been particularly profitable, with many activities being conducted by its French partners. A major land claim was lodged by the Richtersveld community, which was firstly refused in the lower court, but then confirmed by the Supreme Court of Appeal and embodied in Deed of Settlement. The land that the community claimed was valued at around R10 billion and the State simply could not afford to pay out, so the agreement was, amongst others, that all mining rights on the land would accrue to the Richtersveld community but marine mining rights would remain with the state, and a PSJV would be set up, pooling the rights and creating profit and sustainability. There were further agreements around the responsibility to engage in corporate social responsibility, part of which involved setting up townships and working with the municipality. In practice, however, the PSJV had fallen into disarray, experience problems in complying with the Public Finance Management Act, and in October 2012 a new board inherited a host of problems, which it was gradually sorting out. In addition, Alexkor ended up maintaining a water pipeline, at a cost of around R17 million, recognising that whilst this was not its responsibility, the municipality could not pay and if Alexkor did not pick up the costs, the communities and mines would be without water and it would not be meeting its obligations in terms of the settlement agreement. There were still problems with the township, and the compromise agreement where the community owned all land rights made it problematic for the state to mine without land. Although there were inherited problems Alexkor asserted that there had been progress that the rehabilitation plans for the mine were drawn well and it was engaged on a turnaround strategy. Its main incentive and mandate was to achieve sustainability rather than massive profit and to that extent it was also looking at diversifying activities, into coal, recognising that the marine mining had a life of around 15 years.

Members felt that the challenges which the PSJV were facing had not been fully elaborated and suggested that an oversight visit would be needed to really get to grips with the issues. The Committee asked Alexkor to make written reports on the background, history and strategies, and to more clearly articulate the challenges and proposed solutions. They sought clarity on a number of issues, including employment and the reasons why so many employees were not unionised, where communities were employed, whether labour brokers were used. They asked for more detail on Alexkor's planned activities, heard about its farm that had been handed over to the community and immediately experienced fall-off and how the Department of Rural Development and Land Reform was now involved. They asked for more detail on the impediments to property transfers, municipality obligations, how the split in percentages came about, and why the PSJV was failing to achieve targets and whether the targets were realistic. They also asked about the decrease in cash reserves and whether Alexkor was financially viable, what it had done to address the concerns of the Auditor-General, the new Board's plans for purchase of affordable machinery, how its was empowering the communities, how skills were being transferred, and why and how it was planning to diversify. Members also asked about the problem of diamond theft, why less profit was being shown and whether there was local beneficiation. The Department of Public Enterprises also gave input on some of the questions.

Meeting report

Chairperson's opening remarks
Welcoming Members to the first meeting of the New Year, the Chairperson hoped that they were ready to deal with challenges around discharging the Committee's mandate and responsibilities, and called on Members to deal with matters constructively and pool their energies. She welcomed the Department of Public Enterprises and Alexkor, and noted the apologies of the Minister, Ms Lynne Brown and Deputy Minister Mr Bulelani Gratitude Magwanishe.

Alexkor briefing on Richtersveld Community claims, Pooling and Joint Venture Scheme progress
Mr Rafique Bagus, Chairperson: Alexkor SOC Ltd noted that Alexkor worked differently from other companies. He drew the Committee’s attention to the fact that Alexkor and its mines had been the subjects of a land claim by the Richtersveld Community (RVC). Initially, the community lost the claim in the lower court, but this decision was reversed on appeal to the Supreme Court of Appeal (SCA), which decided that the assets must be divided. The State was awarded the marine mining rights in the area, but the community was awarded the land rights. The decision of the court was enshrined in the "Deed of Settlement”, which required the state and the community to bring their assets together in a Pooling and Sharing Joint Venture (PSJV). The PSJV was an unincorporated joint venture, operating independently from Alexkor and the mine. However, the interest of the state was administered by the Alexkor, and the interest of the Richtersveld community was administered by the Richtersveld Mining Company (RMC).

A split of rights into RMC and Alexkor had resulted in the creation of the PSJV and the appointment of the Board on 07 October 2012, which established a five-year rehabilitation plan. The plan included sustainability and socio-economic programmes. Mr Bagus noted that the only objective not achieved to date was the PSJV production target. Included in the achievements was the handing over of a township. The turnaround strategy had focussed on three key areas, inter alia, production, trust-building, and rehabilitation.

Mr Bagus stated that Alexkor owned 51% in the PSJV, and the RVC owned 49%. When the new board of directors took office in September 2012, corporate governance at Alexkor and at PSJV was very poor. No proper minutes of the board and committee meetings were kept, budgeting was poor; and there was no proper record of mine dump allocations. Documentation and/or agreements with the contractors were not in order, and this had included documentation relating to the Public Finance Management Act (PFMA) compliance, such as tax clearance certificates for contractors. As a result of these findings, attention was paid to governance and proper structures were then put in place. These included the establishment of the PSJV Technical Committee, Remuneration Committee and Audit and Risk Committee.  Alexkor independent non-executive directors (INEDs) held positions on the PSJV Board as well as on sub-committee structures.

Mr Bagus returned to the question of handing over the township to the municipality, and said that the main problem related to the municipality's lack of financial means to maintain infrastructures. He cited an example where the Alexkor distributed water to Port Nolloth community. The Alexkor administered a several kilometres of piped water pipes, although such administration/maintenance was not part of Alexkor’s core responsibility. However, if Alexkor was to withdraw its support there would be serious social and economic impact on the community, and also on mine production, since the mine could not operate without water. Maintenance of this pipeline infrastructure was costing Alexkor R17 million but it recognised that if it did not do so, and thus did not supply water to the community, this would be inconsistent with the terms of reference and principles of the land claim settlement.

Mr Bagus noted that the Deed of Settlement required that any overdue historic rehabilitation responsibilities should remain the responsibility of Alexkor. An amount of R200 million had been received from the National Treasury for that purpose and an amount of R56 million was in Alexkor’s Trust for rehabilitation.

Mr Bagus took the Committee through the graphs illustrating the comparative annual diamond production and sea-days over the last decade (see attached document for details).

He noted that the PSJV had 1 087 staff. The figure included casual, temporary, and permanent employees as well as external contractors, who fell under either of two unions. However, the number of non-affiliate members had increased from 15.6% to 37%.

When the Board was appointed, it was given a twofold mandate:
- the commercial imperatives included the stabilisation of mines, appointment of a Chief Executive Officer and Chief Financial Officer for Alexkor, and production expansion
- the socio-economic imperatives included aspects of engagement with the communities, re-establishment of the relationship with the Community Property Association (CPA) and ensuring that the community greatly benefited from Alexkor's work.

He noted that the Alexkor was now facing a challenge emanating from the fact that the PSJV was an unincorporated venture, which made it difficult for it to comply with the Public Finance Management Act (PFMA) and a joint venture had no obligation to comply. The community had challenged PSJV in court, because the community insisted it had to have a functional corporate board. yet the path to doing so was still far of because of the potential financial implications.

He reminded the Committee that Alexkor inherited a joint venture which had been making a loss for the preceding consecutive 12 years. However, he was proud to report to the Committee that there was, over the last two years, a significant turnaround of the company. Alexkor had made significant contributions to the socio-economic transformation of the communities and to production increases, even though it was still facing some challenges. Alexkor was exploring other possibilities that would lead to more production and profit, including engaging with other companies. If the company did not come up with new ventures it could run out of money in a short period. Mining alone was not going to turn around a huge profit and the main focus was to provide sustainable profitability through other diversification activities.

Mr Bagus expanded on some of the financial difficulties being faced by Alexkor. The Deed of Settlement stipulated that certain property must be handed over to the community. These properties had a book value of around R202 million rand, but if they were not handed over, then the court judgment stated that the community must receive reimbursement. However, it was clear from a recent meeting with National Treasury (NT) that it was not prepared to fund that, and so it remained a major financial challenge.

Mr O Sefako (North West, ANC) appreciated the fact that Alexkor had inherited some financial and managerial challenges and appealed to the Committee to appreciate its achievements to date. He sought clarity on the issues related to employment and asked whether there were labour brokers involved. He commented that the company, as it was stood, seemed to be doing well but it should engage in more activities to increase its profit and thus ensure sustainability. He noted the reference to its soci0-economic activities but wanted more clarity on what it actually engaged in to uplift the lives of the members of the community. He also asked for more detail on the impediments to the transfer of property.

Ms C Labuschagne (Western Cape, DA) sought clarity on why it took the state 12 years to intervene, and how long the land claim took to be finalised. She asked why Alexkor was alleging that it had no interest in other commercial activities. She wanted more detail on the township establishment issues. , She asked what kind of help Alexkor was requesting from the Committee that could contribute to the process to transfer the properties.

Ms Labuschagne questions how the division of 51% : 49% came about. She asked about challenges stemming from the division of land rights and marine mining rights, and wondered if there were activities taking place within the land rights framework. She also wondered what skills were transferred to the communities, in terms of training programmes to expand their abilities to run businesses. Finally, she asked why Alexkor was aiming at diversifying activities rather than focussing on reducing the products that South Africa was exporting, and focusing more on beneficiation through the cutting and polishing of mined diamonds.

Mr C Smith (Limpopo, DA) referred to slides 8 and 22 and sought clarity on why there was a significant drop in the cash reserve. He asked if it was correct to say there was gross operating profit if there was a decrease in cash reserves.

Mr A Singh (Kwazulu Natal, ANC) sought further clarity on the reasons why the PSJV did not achieve its target, and wondered if the target was beyond the PSJV's control. He asked whether there was any guarantee whether the incomplete objectives would be realised. He commented that the presentation had not clearly set out any activities that Alexkor was engaged in, nor its response to the report by the Auditor-General. He also sought more clarity on the extent to which the community had been socially and economically developed by Alexkor since taking over the land, and whether Alexkor was able to control the loss of diamonds through theft. Finally he wanted more detail on what Alexkor was intending to do in terms of its diversification programme.

Mr J Parkies (Free State, ANC) commented that the presentation lacked detail in that it did not precisely enumerate the challenges that Alexkor was facing in terms of carrying out its mandate and in stabilising and rehabilitating the mine. The presentation should have clearly pointed out the inherited and existing challenges. He sought clarity on why only two bursaries were granted, and asked who the beneficiaries were. He sought further clarity on the casual workers and temporary workers.

Ms B Masango (Gauteng, DA) asked why non-affiliate members on the mine were increasing, and why they were not opting to join labour unions.

The Chairperson remarked that Members had a lot of questions,and believed that the answers by Alexkor would need to be supplemented with a visit to Alexkor so that Members could get a first-hand indication of the conditions. She sought clarity on whether there was an attempt to buy affordable machinery to reduce the expenditure. Speaking to the marine mining rights, she sought clarity on whether there was existing cooperation between Alexkor and the government's marine projects aimed at improving productivity.

Mr Bagus reiterated that the Board was extremely working hard to meet its mandate. He welcomed the suggested oversight visit, stating that it would help Members to grasp the difficulties that the PSJV was facing.

Speaking to issues around labour and sub-contractors, Mr Bagus said that the Board firstly had inherited labour related problems. In fact, the company did not have the money to do the mining work itself. The company had been operating since 1928, but it did not have its own land, and most of the work was done by its partners from France. Its financial capacity was then affected by the subsequent land claim which culminated in a splitting of rights. The company had used small contractors, who employed people from the surrounding communities, but it was not using labour brokers.

Answering the question of what the company was doing to make itself more viable and sustainable, Mr Bagus said that there had been significant work done on coal mining. In December 2012 the Board decided that coal mining presented good opportunities because this was the product most needed by Eskom, as reported by a study done by the public and private sectors, both of which concluded that Eskom was likely to face coal shortages in the near future, partially because the private sector was unhappy with the way the electricity was being charged out. He explained that the main objective of the PSJV was not to make an immediate profit but rather to make sure that it was smoothly operating. In order to do so, it had to rely on Eskom, as if the country had power, business could run as usual. Government had also suggested the need for diversification to make the activities of Alexkor more sustainable. The Social Responsibility Programme was being run in conjunction with the municipality, on whose programmes it also relied, with Alexkor's main duties lying in monitoring.

Mr Sefako sought clarity on whether there was a cooperation agreement between Alexkor and the Departments of Environmental Affairs, of Water and Sanitation, of Land Affairs, or of Agriculture, Forestry and Fisheries, or whether any of these were actively working together.

Mr Bagus replied that there had been many developments going on over the last two years which he had not specifically highlighted. Alexkor used to administer farms, which produced dairy products, including more than 1   000 head of cattle and employing more than 500 employees. The court ruled that, as part of the settlement, Alexkor should provide farming expertise. However, the community rejected that assistance on a basis that they had been in the farming business from the 1960s but within eight months of that farm being handed over, productivity had dropped by comparison to the previous months. Eventually, the farm was decimated by the community. R35 was also paid out of the community trust account and paid to consultants. The companies that came to partner with the community were focussing on fertilising the farms. The Department of Rural Development and Land Reform was mandated to actually manage the farm, although Alexkor was providing water as part of the route to ensuring sustainability.

Mr Sefako asked that the historical background of the problems should be submitted to the Committee in writing.

Mr Parkies seconded that suggestion. He sought clarity on the statement that the PSJV mandate was not to make a profit. If that was indeed so, then he questioned why the presentation referred to sustainability and profitability, asked who the partners had been who intervened, and who were the shareholders.

The Chairperson sought clarity on the role of the Departments in transferring the farms to the communities, and said that this information was needed to assist the Committee should it need to intervene.

Mr Bagus said that he would prepare a report that would provide an overview of the role of the Departments, and also including the historical background to the problems. The Committee should note that Alexkor was not involved in the agricultural activities, for this was something dealt with between the That was a matter dealt between community and Department of Rural Development and Land Reform, who had committed R200 million to the farming projects, although that money had not yet been released. The community and its partner companies were looking somewhere else for funds. Alexkor's energy was focused on the mining, especially coal mining, and on seeking sustainability in its activities. Alexkor would like to be profitable, but was not aiming for this to the same extent that other private companies were profiting. 

The Chairperson remarked that Mr Bagus was not giving the right answers to the questions posed.

Mr Kgathatso Tlhakudi, Deputy Director General: Manufacturing Enterprises, DPE, explained that there was a huge land holding in the hands of the disadvantaged people, but the Department of Rural Development and Land Reform was best placed to answer those questions. It had been quite involved. He asserted that the Alexkor was facing various challenges in its running of the joint venture. The Minister of Public Enterprises had engaged with the Minister of the Rural Development and Land Reform on these issues. The Department of Water and Sanitation and of Agriculture, Forestry and Fisheries were not involved, although there was a good relationship with these departments.

Mr Parkies suggested that the Committee should liaise with the Select or Portfolio Committees on Rural Development and Land Reform in order to follow the thread of the community farming developments, and that this Committee should guard against establishing a monopoly with regards to mining and agricultural activities. It did not matter whether a company was a black or white-owned company.

The Chairperson accepted that viewpoint, and agreed that there was a need to call a joint meeting in which all concerned committees would participate.

Mr Bagus stressed that the land claim took between five and six years, and to conclude the Deed of settlement also took some time. When the new board took over, there was no clear management or structure, and at that stage the management was not in the hands of the PSJV, which meant that there was substantial information that was simply not available, due to mismanagement. He pointed out that the land claim cost the state R10 billion The community won the case, but there was not R10- billion to hand over, hence the agreement that the community should own land rights and the state own marine mining rights which were to be compiled within the PSJV.  Although an independent manager would need to be appointed, this manager would not operate independently and must take instructions from both sides. The major problem was that the state could not exercise its rights without access to land. The granting of land rights to the community was essentially a compromise position to appease their anger at the fact that the state did not have R10 billion to pay over to the community.

Mr Bagus explained the implications of establishing the township. There used to be a task team comprising local, provincial and national government, with the municipality being part of all discussions. Alexkor was a major funder of the township project because if it did not fund it, the mining project would fail. It had therefore entered into an agreement with municipality to develop the township on behalf of the municipality, until such time as the municipality was ready to take over. Alexkor employed people to work on that project. Alexkor was expecting to conduct its  mining activities for the next 15 years, by which time the mining reserves would be depleted.

Mr Bagus noted that employees were members of communities, predominantly from four townships. Many of the employees had benefited from the land claim and were actually shareholders, and they also took benefits derived from diamond beneficiation that was happening. However, Alexkor did not have a particularly good production. The Board was looking into how it could purchase the necessary equipment at an affordable price.

Mr Bagus believed that once it was well-organised, the PSJV should be able to achieve its targets. At the moment, less money was being gained because the precious stones mined were of smaller size. The company did not yet conduct mining in middle and deep water. What the Board would do was to establish a straight target. The life of the mine was estimated at 15 years, and so the PSJV was trying to find other activities that the community could do. Members of the committee were awarded some sub-contracts. All mining work was done by PSJV. It was doing quite well despite its placement in a divided community.

Mr Bagus noted that the audit findings had concluded that the PSJV had been mismanaged, and Alexkor had been taken to court and agreed to the necessity for a turnaround. With regard to the decrease of cash reserve, he responded that there were various distribution related activities that were being conducted. The company was on the right track.

Mr Bagus noted the comment on the stealing of diamonds. A new security company was employed but it was difficult to contain thefts of diamonds, and Alexkor estimated it was losing about 10% of the diamond to theft, making this a huge problem Those caught stealing or trespassing on the mining activities were charged, but a major problem was that they would often be released on bail and return immediately to continue with their criminal activities. Most of the businesses in the area were selling illegal diamonds, but in order to identify the real culprits, stronger intelligence was needed and more stringent investigation to be able to recover some precious stones that were stolen.

Mr Bagus clarified that the previous Committee had decided that Alexkor could only grant two bursaries and it was only possible to fund university studies to this extent.

Ms Labuschagne welcomed the clarity but sought further clarity on the diversification of activities and how coal mining was linked to Eskom. She commented that a business plan was needed which should illustrate how the narrated visions could fit into the marine mining projects.

The Chairperson expressed her concern about the cooperation between the PSJV and Eskom, which was a private company, and sought clarity on whether there were likely to be repercussions.

Mr Bagus replied that the main focus of the new board was that the company remain sustainable in its activities and thus benefit all stakeholders. He noted that several studies had shown that there would be a good business in coal because Eskom was facing shortages. The shortages derived from the fact that other companies demanded more profit, which was not the case with Alexkor.

Mr Sefako accepted that explanation.

Mr Tlhakudi explained that most of the problem that were being highlighted could not be analysed in isolation, and there was a distinct link between the current problems and the injustices of the past, so that the bad history should be recognised and acknowledged, as it was largely the reason why targets were not achieved. The Department would do its best to ensure that the property transfer was done.

The Chairperson thanked the presenters for their explanations. She concluded that Mr Bagus should clarify some matters in writing and that the Committee would find the time to conduct oversight.

The meeting was adjourned.

 

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