Are Mining Supply Companies Actually Subject to the BEE Codes or to The Mining Charter?

Mining Shaft In South Africa With Highlighted Orange Wheel.

Companies supplying the mines are measured against the Codes of Good Practice on Broad-Based Black Economic Empowerment (BEE Codes). The BEE Codes determine the targets to be achieved, the priority of elements and the mechanism by which levels are awarded. Their clients, the mines, are subject to the Mining Charter, a different act with different categories and targets. Companies providing goods and services to the mining industry need to comply with elements of both Acts.

BEE Codes VS The Mining Charter

The differences between the BEE Codes and the Mining Charter are much greater than the differences between the Sectoral BEE Codes which apply to different, non-mining, sectors of the economy. The Mining Charter preceded the BEE Codes and where Sectoral Charters tend to conform to the categories and measures of the BEE Codes, the Mining Charter does not.

The BEE Codes are incremental, recognising eight levels of compliance. These levels act as an incentive for the selection of suppliers. Procuring from suppliers with better levels provides a company with more points to be used towards its own scorecard. The Mining Charter is binary: for the renewal of mining rights, certain targets must be achieved.

Many differences have a very little practical impact, for instance, the difference between Previously Disadvantaged Persons (PDP – BEE Codes) and Historically Disadvantaged Persons (HDP – Mining Charter). Some of the differences between the two acts are very significant to suppliers to the mining industry. One of these is the difference between Preferential Procurement (BEE Codes) and Procurement, Supplier and Enterprise Development (Mining Charter).

Preferential Procurement is based on Total Measured Procurement Spend (TMPS). TMPS is a subset of total procurement that can exclude imported goods if they are different in brand or specification to what is available locally. This is in contrast to the Mining Charter that prescribes the local content of goods purchased by mining companies.

Where The DTI & DMR Differ

The Department of Trade and Industry (DTI) and the Department of Minerals and Resources (DMR) do not agree on the definition of Local Content. “According to SATS 1286:2011, the local content of a product is the tender price less the value of imported content, expressed as a percentage.” (DTI). In other words, the DTI’s definition includes profit. The DMR’s definition states that “The calculation of Local Content excludes profit mark-up.”

In the BEE Codes, Preferential Procurement points are achieved by buying from suppliers that meet various criteria. Compliance with the BEE Codes is captured in Levels which in turn determine spend recognition level. For example, Level 8 has a spend recognition of 10% and Level 1, 135%. The more compliant a company is, the greater the advantage that that company will convey to its clients.

The Implementation Guide for the Mining Charter recognises BBBEE compliant companies as having achieved a rating of Level 4 or better and being at least 25% +1 HDP owned. In other words, a company that achieves Level 1 but has 24% black ownership would not qualify as a BBBEE compliant company under the Mining Charter.

Other significant differences are that the BEE Codes award points for procuring from suppliers that are at least 30% black woman-owned, the Mining Charter requires majority women ownership (although not specified, we suspect that they mean black women-owned).

The BEE Codes define the category of Designated Group which includes black people who are: Youth (aged 14 to 35); have a disability; are unemployed; live in underdeveloped rural areas or are military veterans. From that list, the Mining Charter only recognises the category of Youth (defined as 18 to 35) and then subject to the restrictions of national or provincial demographics.

The conclusion of this is that for empowerment to deliver the maximum competitive advantage, suppliers of goods or services to the mining industry should optimise their compliance not according to the BEE Codes under which they are measured but rather according to the requirements of their clients, who are measured under the Mining Charter.

What Strategy Should Be Used?

Shaping a strategy around the Mining Charter leads to some unexpected outcomes. If your company is 25% + 1 black-owned and has achieved Level 4, it is recognised as a BBBEE company. If your clients are subject to the Mining Charter, there is no incentive to achieve a higher BEE score. Where a higher level makes a company a more attractive supplier under the BEE Codes, the difference between Level 4 and Level 1 is invisible to the Mining Charter.

Phrased in the negative, if your company cannot achieve at least 51% black woman/youth ownership, it will not be recognised as having any black woman or youth ownership. If it does not achieve 25% + 1 black ownership, it will not be recognised as having any black ownership and if it has not achieved Level 4, it will not be recognised as BBBEE compliant.

The Strategic Choice of an Empowerment Partner

Risk Board With Orange Highlighted Pieces Representing Trust.

The Codes attempt to redress economic exclusion of the past. Discrimination was not just about race but also about patriarchy, generational conflict, the rural-urban divide and a recognition that the first step on the ladder of wealth is the hardest. South Africa was everything but a level playing field where teams played a sport where the rules were designed for only one winner. The compounding layers of marginalisation were never more pronounced and reflected than in the element of Ownership.

In Ownership, various subsets of the black populace are recognised. Eight points are allocated for ownership by black people; four points for black women; three points for Designated Groups, employees and members of co-operatives and two points for New Entrants.  A further eight points are available for the transfer of Net Value which may be simply (and incompletely) summarised as: equity free of debt in the hands of black people.

Watered Down Equity

As with the times and the mindsets that brought, few shareholders volunteered to dilute their equity. Rather, the old-style Ownership transactions focussed on the sale of shares to politically or commercially connected businessmen. Although these transactions nominally generated funding for the previously white companies, many were supported by loans underwritten by the companies themselves.  The paucity of black people wealthy enough or with access to sufficient debt to buy stakes in large companies meant that it was a buyers-market. Shares generally changed hands at a substantial “Empowerment discount.”

The irony of these highly dilutive transactions is that the large discounts were not matched by high numbers of empowerment points.  The strategic choice of empowerment partners turned out to be unstrategic from an empowerment point of view. This myopic view lead to the struggle that is currently very much at the forefront of the B-BBEE discussion.

The Possibility of 3%

Consider what would happen if a company issued 3% of its equity to a young black woman who had never been involved in empowerment before.  According to the scorecard, the company would achieve:

  • 3% / 25% of 8 points for black ownership plus
  • 3% / 10% of 4 points plus for black woman ownership plus
  • 3% / 3% of 3 points for Designated Group ownership (Youth) plus
  • 3% / 2% of a maximum of 2 points for New Entrant ownership plus
  • 3% / 25% of 8 points for Net Value Transfer (being the lower result of two formulae)

In other words, a 3% dilution would deliver 8.12 points.

In order to achieve the same number of points from a black man over 34 – who has already made more than R50m from empowerment –  it would be necessary to sell 12.6875% of your company.  Not only is this more dilutive but the empowerment discount is likely to be higher than the cost of an outright donation of 3% of equity.

This means that transferring 3% equity to a young black woman delivers 4.2 times more points than delivering the same equity to a wealthy black man would.

10% of equity optimally distributed would deliver 15.4 points where 10% transferred to wealthy black men would deliver 6.4 points.

A further implication is even in the context of a fully paid 25% transaction, it is possible to deliver up to an additional 6.2 points for 3% of equity.

The conclusion is that choosing an empowerment partner around the requirements of the Codes could save significant value and avoid unnecessary dilution. By calculating your organisations BEE scorecard can you truly understand who and how will benefit your business the most. The old-style sport is out and the new forward-thinking rules have been adopted, it’s up to you to choose the right team mates to play with now.