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MINERALS AND ENERGY PORTFOLIO COMMITTEE
2 April 2003
BLACK ECONOMIC EMPOWERMENT IN THE MINING SECTOR: BRIEFING BY ASSOCIATION OF BLACK SECURITIES AND INVESTMENT PROFESSIONALS; AFRICAN MINING FUND; KHULA ENTERPRISE FINANCE; INDUSTRIAL DEVELOPMENT CORPORATONS
Chairperson: Mr M Goniwe (ANC)
Documents handed out:
Presentation by Association of Black Securities and Investment Professionals
Presentation by the New Africa Mining Fund
Presentation by Mineralco (Pty) Ltd
Presentation by Industrial Development Corporation
The Committee heard submissions from the Association of Black Securities, Investment Professionals (ABSIB) and the New African Mining Fund (AMF) on the financial challenges facing black economic empowerment (BEE) projects in mining. In particular they addressed capital-intensive exploration ventures. Presentations from Khula Enterprise Finance and the Industrial Development Corporation (IDC) focussed on the financial instruments and services used by each to facilitate BEE along the value chain. Successes in the arenas of BEE contract mining and partnerships with established mining companies illustrated the considerable progress made in securing control and operational involvement in BEE mining following the demise of many of the purely paper transactions of the early 1990s.
The Chairperson opened the series of hearings and briefings on financing black economic empowerment (BEE) in the mineral and energy sector. A briefing from representatives of the Department of Trade and Industry (DTI) was being arranged for the following week. He noted that the Minister of Finance earmarked R 10 billion for BEE over the next three years. The Mining Charter required industry players to raise one R 100 million in support of BEE ventures by way of surety; the Chamber of Mines would be invited to provide details of progress on this. Negotiations on a BEE charter for the financial sector were already at an advanced stage. It was therefore to be hoped that, by the time the Committee's engagement with the representatives of banking institutions took place, tangible progress would have been made.
Association of Black Securities and Investment Professionals (ABSIB) submission
Mr Motloba: President, ABSIB, briefed Members of the background to the formation of ABSIB, noting that the Association represented all professional disciplines in the financial sector except accounting, which had its own forum. The Committee was advised that ABSIB continued to play a key role in negotiating the BEE charter for the financial sector.
Although there were a number of large BEE companies with significant investments in a range of sectors, few of these had generated sufficient cash resources to make large investments in new BEE ventures without the assistance of funding institutions. Neither was equity owned by successful BEE
individuals sufficiently liquid to allow them to invest in other companies to the extent that they could control those companies and be involved operationally.
Citing successful BEE deals with Harmony Gold Mines as an example, Mr Motloba advised Members that the minerals and energy sector was particularly well suited to project-based financing secured against anticipated cash flows in joint ventures with established companies. The use of vendor financing by the established company in the partnership could then facilitate new acquisitions for the BEE venture. The potential of this approach for BEE was significant despite flaws in the Companies Act in terms of which the balance sheet of a subsidiary could not be used to support a BEE venture if that balance sheet was owned by the holding company. This has obvious implications for joint ventures with the mining giants and needed to be addressed.
Mr Motloba told Members of other impediments to accessing funding for BEE groups to secure direct investment in established companies. These included the limited pool of available capital, onerous rates of return required by most financiers. It also included the unwillingness of funding institutions to consider financing periods in excess of five years, the negative implications in terms of financial market perceptions of financiers buying discounted BEE shares and the generally high-risk nature of BEE investments. He proposed a number of ways in which Government and government-controlled financing institutions, such as the Industrial Development Corporation (IDC), could assist BEE ventures in overcoming these obstacles. Established BEE companies also needed to be encouraged to support emerging black entrepreneurs in the sector by assisting with project evaluation and the appropriate structuring of funding proposals. Secondments in established companies could be one way of facilitating skills transfer. Using BEE sweat-equity in terms of operational involvement in new ventures or acquisitions also needed to be explored.
Mr E Lucas (IFP) asked whether green-fields ventures started from scratch would be a more effective mechanism for BEE than investment in established operations. He emphasised the importance of skills transfer and the need to put an end to BEE fronting.
Mr S Mongwaketse (ANC) expressed concern about the extent to which the control of BEE ventures remained in the hands of white capital.
Mr I Davidson (DA) asked what the extent the relationship of risk and reward could be managed in such a way that high-risk-low-reward ventures would be attractive to financiers, noting that someone had to bear the risk and implying that there should be concomitantly high rewards for doing so. He also asked whether the relatively high failure rate of BEE ventures could be attributed entirely to the way in which funding arrangements had been structured, suggesting that other risk factors might have come into play.
In response, Mr Motloba advised that the capital-intensive nature of green-fields mining ventures made them far more difficult to finance than buy-ins to ongoing concerns. Noting the low rate of entrepreneurial skill in South Africa when compared with the United States and Europe, he suggested that the right combination of entrepreneurial spirit, risk capital and technical skills would undoubtedly fast-track BEE in mining. ABSIB could assist the Committee in examining the dynamics of previous BEE deals with a view to providing insightful information on the factors underpinning failures and successes.
He again emphasised the need for Government and government-controlled development funding institutions (DFIs) to facilitate BEE exploration initiatives by mitigating risks in order to overcome the almost insurmountable challenges posed in financing these. Financing rates also required urgent and ongoing review. He suggested that a commitment to greater transparency in respect of BEE-related transactions would more adequately prepare prospective new BEE groups in understanding the risks entailed, noting that media coverage of BEE failures tended to lower morale and impact negatively on BEE as a mechanism for redressing historical imbalances.
Ms N Mtsweni (AN) commented that participants in BEE ventures should be led by their consciences, refusing to participate in fronting.
In summarising, the Chair expressed doubt about the practicality of encouraging involvement by established BEE concerns in supporting aspiring BEE initiatives. He suggested that a highly competitive business environment might not be conducive to information sharing at that level. He asserted that the starting point of BEE as an instrument for redressing historical injustices might need to be revisited, and financial institutions fundamentally transformed in order to respond accordingly. He confirmed that the Committee would welcome access to insightful information on BEE failures and successes in the mining sector.
New African Mining Fund (AMF) submission
Mr A Mashiatshidi: Chief Executive Officer, New Africa Mining Fund, was then introduced to the Committee and invited to proceed.
He appraised Members of the background to the AMF as a practical response to the impediments facing junior mining opportunities as BEE ventures and the Fund's approach to financing these. While minerals and mining-related policies and legislation had undoubtedly paved the way for BEE ventures in the mining sector, the financial climate in South Africa continued to be averse to risk-taking. Technical expertise remained largely in the hands of non-BEE population groups, while Afro-pessimism affected attitudes towards foreign investment in BEE initiatives despite the strong macro-economic fundamentals underpinning the South African economy.
As investment fund managers, the AMF sought to facilitate access to risk capital for BEE junior mining ventures by offering investors competitive rates of return on risk taken. AMF focused on providing capital for the pre-feasibility, resource definition, feasibility and early production phases of new ventures, with a view to assisting in kick-starting new mining projects and supporting them to a point where returns on production were sufficient to merit debt financing from the banking sector. AMF therefore participated in new BEE mining ventures as an investor, with no presumption made about repayment. The return on that investment would itself be the reward for the risk entailed. The greatest challenge facing AMF was to find committed backers, although in excess of four hundred and sixty million rand had already been committed by a range of private companies and government-controlled financing institutions. AMF also sought to serve as a conduit for skills transfer by way of mentoring programmes, for which funding was yet to be secured.
Noting the high expectations placed on BEE in mining, it was likely that other funds similar to AMF would emerge over time. However, a perception that investing non-BEE risk capital in BEE ventures could compromise the principles underpinning BEE should not be overlooked. In other words, AMF itself might need to be structured as a BEE entity. He drew the Committee's attention to the need for creative investment incentives in support of BEE along the lines of Canada's flow-through share mechanisms. There was also a need to put regulatory frameworks in place in Canada and Australia aimed at facilitating junior mining initiatives. Royalty payments and compliance with the beneficiation requirements of the new policy framework could present additional obstacles to the sustainability of BEE junior mining ventures.
Referring to Afro-pessimism in international financing circles and its implications for South Africa, Mr I Davidson (DA) commented that expropriation clauses in the early drafts of new mining and minerals legislation had tended to reinforce this. He suggested that the AMF could be of assistance in introducing the flow-through share option as an incentive to investment in BEE, endorsing the need for a regulatory framework appropriate to the needs of the junior mining sector.
Ms Mtsweni (ANC) requested insight into what might be done to ensure the sustainability of junior mines, referring to problems encountered by the South African Women in Mining Association (SAWIMA) shared with Committee Members at the preceding meeting.
Mr S Mongwaketse (ANC) asked how ordinary South Africans could access information on AMF and what interest rate was levied on AMF loans.
In response, Mr A Mashiatshidi conceded that policy makers faced considerable challenges in attempting to transform and normalise South African society without compromising basic commercial principles. He expressed concern at the extent to which powerful vested interests continued to seek to drive the transformation process. He citec the leakage of information on the Mining Charter prior to its official announcement as one example. Improved communication could address the issue of Afro-pessimism. He reiterated that the AMF invested in junior mining ventures and therefore expected to benefit from these investments by way of dividends. AMF was not a lending institution. AMF investment incentives would soon be available on its website, together with information on the Canadian flow-through shares option. He advised Members that the AMF was exploring the possibility of assisting the DTI in developing a regulatory framework more appropriate to junior mining but that it was difficult to find funding for this.
With a view to overcoming the serious obstacle to the sustainability of BEE junior mining ventures posed by imposing royalties on small projects, Mr Mashiatshidi suggested that developmental institutions might need to look at writing down start-up costs to zero before receiving royalties. He commented that mineral rights should be more accessible to BEE groupings like SAWIMA under the new legislation and in terms of the Mining Charter. It was relatively small and had only recently been launched, so the AMF needed to stabilise before establishing regional structures. However, it was hoped that media coverage and ongoing exposure through industry-related journals would help to familiarise members of the public with the mandate and work of the AMF.
In thanking Mr Mashiatshidi for his presentation, the Chair expressed the hope that the AMF would continue to interact with Members of the Committee even though they might not have the necessary influence to galvanise private sector financial support for the Fund. He suggested that the AMF might need to expand its mandate to include junior ventures in oil.
Khula Enterprise Finance submission
Mr M Mofokeng, Corporate Communications Manager, Khula Enterprise Finance, appraised Committee Members of the organisation's mandate as a DTI initiative and the programmes and facilities on offer to aspiring entrepreneurs. These sought not only to facilitate access to finance through credit guaranties, equity funding and low interest start-up loans but also to build the capacity of entrepreneurs from South Africa's historically disadvantaged (HDSA) communities and to encourage skills transfer where necessary.
He referred to the Anglo-Khula Fund as one example of Khula's joint ventures with industry specialists in creating industry-specific funds for BEE. The Fund would focus on the coal mining industry and would also facilitate downstream procurement opportunities for BEE companies. All funding arrangements required a contribution of ten per cent of the amount invested from the entrepreneurial group concerned, which was why Khula programmes reached only six per cent of the small, medium and micro enterprise (SMME) sector. Nevertheless, the impact of Khula on job creation over the years had been significant. He advised Members of growth strategies aimed at expanding Khula's range of services and financial products in order to impact on greater numbers of emerging entrepreneurs in future.
Ms F Mathibela (ANC) enquired whether the ten per cent own contribution applied to groups of women seeking start-up funding, especially in the rural areas where they might experience difficulty in meeting this requirement.
Mr E Lucas (IFP) expressed concern about the obstacle to BEE created by the own contribution requirement, suggesting that this implied that Khula was no different to a bank.
Mr G Oliphant (ANC) requested more information on Khula's land acquisition programme, enquiring about its relationship with the Land Bank in facilitating commercial farming as a mechanism for BEE. He expressed concern about references in the media to Khula's ongoing roll-over of funding.
Ms Mtsweni (ANC) endorsed Mr Oliphant's concern about high levels of roll-over and asked for comment on the long delays experienced in securing Khula loans through its retail financial intermediary (RFI) programme.
Mr S Mongwaketse (ANC) expressed dismay at Khula's low impact level, enquiring why so many small BEE ventures had failed in the former homelands. He endorsed concerns expressed by his colleagues in respect of roll-over and the own contribution requirement.
The Chair commented that, in the experience of Members of his own constituency, not all banks accepted Khula credit guarantees.
Mr S Louw (ANC) enquired about the location of Khula's eight regional offices, how many BEE mining initiatives Khula had assisted, and how many women's projects. He also asked whether there were any specific, mining-related criteria for loans for mining ventures.
In response, Mr Mofokeng advised Members that the own contribution requirement did not apply to micro loans of between R 300 and R 15 00.
The Chair asked whether micro loans could be pooled to start a larger group venture.
Mr Mofokeng replied that each individual micro loan was monitored with a view to granting additional micro loans repetitively. This would assist individuals to a point where they could then qualify for more substantial funding. He reminded Members that Khula was a wholesale and not a retail bank. Khula's programme for facilitating land acquisition for commercial purposes by HDSAs focused on groups of people, while the Land Bank focused on individual loans for commercial agriculture. However, the Land Bank had been instrumental in designing the Khula programme for fast-tracking land acquisitions in HDSA communities.
Since Khula sought to invest in a way that would not erode its capital base, roll-overs were inevitable. He acknowledged that the RFI programme had experienced difficulties, advising that more stringent measures were now in place to discourage abuse of the programme and improve delivery. Capacity continued to be a problem at micro credit outlets and a monitoring system was being introduced to address this. Ways of making the Khula credit guarantees programme more attractive to banks were being explored. However, while all four major retail banks did make use of the programme, its requirement that banks demonstrate commitment to resuscitating failing business ventures by way of support and follow-up were generally perceived as onerous in banking circles. Government's ongoing business relationship with certain banks might need to be used as leverage in encouraging more widespread use of the Khula credit guarantee programme.
It was hoped that the expansion of mentorship offices would improve access to Khula programmes and their impact on SMME development. The Khula regional offices were located in eight major cities. However, Khula would in future make use of the Ntiska local business service centres to improve access to its programmes. The high failure rate of SMMEs in the former homelands was due largely to the relocation of government offices to the new provincial centres, eroding the base of economic activity in some areas. The ten percent own contribution requirement sought to ensure some level of commitment by aspiring entrepreneurs themselves to the success of their ventures, noting that no business depending entirely on debt financing for start-up capital was likely to succeed.
Mr Mofokeng conceded that the Anglo-Khula Fund had, to date, been Khula's only intervention in the mining sector. The Fund would focus on the exploratory phase of new mining ventures after which the IDC would become involved. While Khula's RFI and micro-lending programmes focussed mainly on HDSA women at the lower end of the market, since its inception Khula had provided start-up funding for seventeen small businesses owned and managed by HDSA women. More detailed information on the full range of Khula products and services was available from the parliamentary library.
The Chair thanked Mr Mofokeng for his presentation before welcoming Ms A Maule to the meeting in her capacity as Chairman of the Empowerment Evaluation Committee.
Industrial Development Corporation (IDC) submission
Ms Morathi: Executive Vice President, IDC, briefed Members on the IDC's long history of developmental financing as the largest DFI in South Africa. She noted that, unlike most other development financing institutes (DFI), the IDC was entirely self-funded. The IDC funded entrepreneurs engaged in competitive industries at a higher level than those funded by Khula. The minimum amount available to a single venture from the IDC was R 1 million. Capital was injected into industrial projects using a broad range of financial instruments with the emphasis on flexible deal structuring. In the mining and minerals industry, the IDC sought to facilitate HDSA share acquisition in going concerns aimed at placing control and ownership in HDSA hands. It also assisted green-fields BEE projects and broad-based BEE through procurement-related initiatives.
Two business units were dedicated to facilitating BEE in mining in South Africa and the continent as a whole: the Resources and Beneficiation Small Business Unit (SBU) and the Entrepreneurial Mining and Jewellery SBU. Through its investment in the AMF, the IDC also assisted the resource evaluation, pre-feasibility, feasibility and early production phases of exploration projects. IDC funding for contract mining had proved particularly successful as a mechanism for BEE. This provided opportunities for BEE groups to operate junior mines at a fee, eliminating risk while facilitating skills transfer and development. The Crown Gold Recoveries contract with East Rand Mining Properties (ERPM) was one example of contract mining deals facilitated by the IDC with a view to taking advantage of opportunities generally considered too small for the mining giants.
The IDC had developed and introduced a social scorecard at the beginning of 2003 similar to that of the DTI and aimed at stimulating downstream BEE in all IDC-funded projects. In view of the scale of IDC project finance, the own contribution requirement had been lowered to two and a half per cent. In the arena of wholesale and bridging finance, the IDC provided guarantees to assist BEE firms in tendering for contracts or purchasing franchises. One example of this was an arrangement recently finalised with Pick 'n Pay aimed at facilitating opportunities for BEE groups to operate and own Pick 'n Pay outlets in the townships.
Ms N Cindi (ANC) enquired about the IDC's plans for addressing problems being experienced by Sechaba Mining.
Ms N Mtsweni (ANC) asked when Pick 'n Pay outlets would begin opening in the townships, noting that she had not seen any to date.
Mr S Mongwaketse (ANC) enquired whether the IDC had financed any alluvial diamond mines or small-scale mining initiatives.
Professor I Mohamed (ANC) asked whether the IDC made provision for managing the environmental and social consequences of reprocessing mine dumps. He also requested clarity on IDC policy in respect of funding non-South African ventures.
Mr E Lucas (IFP) commended the IDC for lowering the own contribution requirement, commenting that this provided hope for BEE exploration projects and similarly capital-intensive BEE ventures. He enquired whether any grace period was attached to IDC funding.
In responding to the technical aspects of these questions on behalf of Ms Morathi, Ms J Coetzee told Members of a tendency for alluvial diamond ventures to fail because of inadequate resources to address security issues. The nature of these initiatives made diamond theft relatively easy and the ventures themselves were not usually of the scale to merit the installation of expensive X-ray equipment. Difficulty in assessing the resource-base of an alluvial diamond project also created obstacles to attracting finance. She advised Members that the IDC would consider supporting any industrial project meeting its funding criteria, regardless of whether that initiative was foreign-based or local. The draw down period for loan repayment was generally five years, although each IDC deal was tailored according to individual cash flow projections.
Ms Morathi undertook to look into the Sechaba Mining issue, noting that she needed more information in order to respond. She assured Members that due diligence assessments were conducted prior to granting IDC support for all environmentally sensitive projects. Noting that identifying suitable entrepreneurs to operate township Pick 'n Pay outlets would take time, she assured Members that the programme would be implemented. A national steering Committee had been established to co-ordinate DFI interventions through partnerships and the pooling of skills and it was hoped that this would facilitate BEE ventures at the lower end of the value chain. One example was a project in Newcastle linking a group of rural women making bricks to South Africa's largest established brick manufacturer.
Thanking the IDC for an informative presentation, the Chair advised Members that this brought the first phase of briefings and hearings on BEE to a close. He encouraged the IDC to continue interacting with Members of the Committee in the best interests of the national BEE agenda, in which the Committee had a special interest.
He noted that the next session would be used to address outstanding issues emerging from the budget.
The meeting was adjourned.
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