JOHANNESBURG (miningweekly.com) – Being an empowered vendor of services and goods to the mining industry will offer significant leverage in supply negotiations, once the draft Mining Charter is promulgated, says law firm Strata Legal MD Brandon Irsigler.
The Mining Charter, which Mineral Resource Minister Gwede Mantashe said would be promulgated by November, will have a significant impact on vendors and will place many mining suppliers in the same position as mining companies were when the Mineral and Petroleum Resources Development Act first came into effect in 2002.
Effectively, this means that suppliers, like mining companies, will have to ‘empower’ their shareholding to stay in business. As such, Irsigler states that suppliers that adapt early to the empowerment requirements of the charter will have a competitive advantage over their competitors.
“Suppliers to mining companies need to realise that empowerment is a competitive advantage, especially in the services space, where not every supplier will be able to meet the steep requirements set out in the Charter,” he explains.
According to recent revisions to the charter, compliance with procurement provisions is weighted at 60% of a mining company’s overall charter compliance obligations, and, to comply, procurement players will need to be empowered.
The baseline definition of an empowered supplier, Irsigler points out, is a company where 26% of the shares are owned by empowered investors and the company has achieved a Level 4 contributor status in terms of the broad-based black-economic empowerment (BBBEE) codes.
Empowerment obligations in the new charter comprise an 80% target for empowered services spend. There is a three-way split of this spend on empowered service suppliers:
In effect, 60% of all services spend should be allocated to BEE entrepreneurs, which are companies in which black South Africans hold 51% of the equity, with full company and economic rights attached to the equity holding.
Further, 10% must be allocated to BEE-compliant companies that have at least 26% black South African ownership and are Level 4 contributors in terms of the BBBEE generic codes.
Finally, 10% must be allocated to 51% BEE women-owned and -controlled enterprises, or to 51% youth-owned and -controlled enterprises.
The same concept will apply to goods, for both consumable and capital spending. The 70% empowerment target must comprise 44% from BEE-compliant companies and 21% from BEE entrepreneurs, with the remaining 5% comprising 51% BEE women-owned and -controlled enterprises, or 51% youth-owned and -controlled enterprises, supplying goods.
Once the draft charter has been promulgated, Irsigler points out that suppliers to mining companies, and mining companies themselves, will have six months from the publication of the Mining Charter, to submit a five-year plan indicating progressive implementation of inclusive procurement and empowerment targets.
To achieve this five-year plan, he explains that suppliers and mining companies will need to understand what their current empowerment levels are, while building a credible reputation for empowerment.
With regards to the spending on goods, mining companies must achieve 10:70 in Year 1, 20:70 in Year 2, 35:70 in Year 3, 50:70 in Year 4 and 70:70 in Year 5.
Compliance with empowered service spend is far steeper, Irsigler says, with 70/80 being targeted in year one and 80/80 in year two. He notes that the service procurement’s five-year phase in period, is misleading.
Suppliers will need to consult with mining companies and have the necessary facts and information on hand, when developing and identifying a strategy, he adds.
Mining companies, meanwhile, will need to confirm empowerment trends and records, while unpacking targets and scorecard weighting.
Irsigler further suggests that mining companies be aware of the all the elements contained in the mining charter and their specific sub-targets, as well as what the scorecard weighting requirements are in terms of the company’s procurement, employment equity and human resource development obligations.
“Work out what your wins are going to be, and where your stresses are going to be. Unpack what your business is doing now, against what it can do and what it should be doing,” he says.
A targeted approach is also beneficial, Irsigler adds, noting that mining companies could assist suppliers in becoming empowered through understanding the company spend, while implementing a strategy to reach a target in a certain timeframe.
“Ownership and the enjoyment of the rights of ownership, are where the stress for the suppliers is right now.”
However, Irsigler warns that BEE transactions are coupled with similar concerns, ranging from the choice of partner, to capital contributions and dilution, while also potentially locking in the obligation to remain empowered for a period of time.
“There must be an obligation to remain empowered, and that means that not only will this need to take place at the fundamental level at which you are doing the work, but further up the mining value and supply chain.”
A fundamental issue is that an empowered shareholder should be treated exactly the same way as every other shareholder, he says, explaining that “locking in” the shareholding obligation, moves slightly away from this principle.
However, “locking in” the obligation to remain an empowered partner became a commercial practice because the regulatory environment was so weak in the past, especially with previous “poorly drafted” charters, that it became the most acceptable way to secure a transaction that will continue.
Owing to this, and Mantashe openly acknowledging that mining is a decade-and-longer capital-intensive project, Irsigler notes that there is a push from government for black investors to remain invested for the long-term.
“My sense is that the Department of Mineral Resources would much rather see locked-in entrepreneurs, than no entrepreneurs at all.”
In this sense, legitimate controls need to be negotiated with potential BEE partners, while legitimate protections should be viewed as non-negotiable in any empowerment transaction, he adds.
Small Business Institute (SBI) chairperson Bernard Swanepoel believes that the amendments to the charter introduced under Mantashe make the draft a considerable improvement on the earlier versions under former Minister Mosebenzi Zwane.
Irsigler agrees, stating that it will remove some of the uncertainty that clouds South African mining, and will go a long way towards improving certainty for equity investment.
“With only 270 000 small businesses in our country, according to [SBI’s] recently-launched baseline study, transformation is a tool to set our country onto a growth path that will embarrass the rest of the world, and I think the charter can help us to achieve that,” Swanepoel enthuses.
Also in attendance at the seminar was co-host specialist construction and engineering attorney Adine Abro, who discussed various ways in which suppliers to the mining industry could avoid disputes when entering an empowerment partnership.
“In understanding what the charter will bring about, and how to address noncompliance within supply agreements, [suppliers] will hopefully be able to avoid legal disputes and unintended breaches of the obligations that [suppliers] have in [their] contracts.”