Flexibility needed to realise BEE dream

12 February 2017 - 02:00 By Mxolisi Mgojo

The debate on sustainable empowerment and radical economic participation is timely. With South Africa one of the most unequal societies, registering close to 0.7 on the Gini coefficient, we are acutely aware of the risks of economic exclusion and inequality, particularly in mining communities.

CEO of Exxaro Mxolisi Mgojo.
CEO of Exxaro Mxolisi Mgojo.
Image: Russell Roberts

There should be public benefit from mineral resources. Ownership and leadership of the mining industry must be transformed in line with demographics, particularly taking cognisance of how apartheid laws criminalised black entrepreneurship and professional development.

The level of black shareholding in mineral resources is too low and there is concern about regression in ownership patterns of mining companies. We need a more nuanced approach to analysing progress in facilitating black capital and asset formation. In short, we need to consider BEE equity from balance sheet and social redress perspectives.

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We need to caution against a fixation with gross value - often a representation of the debt of black shareholders - and pay attention to the creation of net equity or capital formation of mining companies. For example, should additional debt be required for a BEE shareholder to maintain equity, let's say 26%, share price movements and uncontrollable market forces will compromise potential growth, which ultimately hinders the shareholder from taking advantage of further opportunities.

We must determine how to provide transparency and predictability of costs and returns for investors, and eliminate disempowerment of black shareholders through overly simplistic equity structures.

We need to enable black shareholders to use the equity built into empowerment to strengthen and broaden their capital base.

The journey for black shareholders in empowerment transactions before the crash of 2008 has often been disheartening. Lock-up periods have frustrated them from reducing debt. Poor investment strategies, unintended legislative consequences and highly encumbered deal structures have disenfranchised them and destroyed value.

In the eight years to January 2016, the JSE Resources 20 index lost over 70% of its value, before starting to recover. The casualties from poor mining BEE structures in this period are numerous, with significant value lost due to the inability to trade.

The companies that have survived understood the need to quickly create equity rather than perpetuate debt structures by focusing on a favourable capital structure.

In the main, their net shareholding in the traditional white companies reduced - but they are still around and represent tangible net black wealth and institutional black capital formation. Among those survivors are African Rainbow Minerals, Kagiso Tiso Holdings andWiphold.

If we are to radically transform our economy, the trajectory of black ownership must be towards less encumbered black equity shareholding at a significant ownership level.

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Flexible structures, that limit the cost and offer dilution to minority shareholders, will ensure that the business is more sustainable. These less geared structures are being designed to better enable black shareholders to maximise returns and end up with a positive net equity position after equity facilitation and debt has been paid off.

By preserving net asset value, black investors will be better positioned to facilitate more empowerment as well as reinvest in their businesses. Their companies will have larger capital reserves to invest in new projects, meaning more long-term, sustainable transactions. This flexibility includes viewing black shareholding in proportion to company size; an initial 26% black shareholding in a R6-billion company should be reconsidered when the company grows to R100-billion.

Better co-operation is required between the government, business, financial services and investment sectors to build true empowerment.

We must reconsider policy interventions to ensure they are not too restrictive for entrepreneurs and enterprising entities, that they do not create a permanent underclass, nor encourage corruption and fronting.

We must agree on the purpose of economic transformation - is it to create real wealth and value, and for whom? The debate cannot just be about regulatory compliance.

Policy must be enabling, rather than prescriptive, by acknowledging the milestones in transformation. The past 24 years have shown that while we must remain ambitious in our efforts, we must be pragmatic.

The country needs bold leaders who will provide direction on wealth creation and policy implementation for the creation of black industrialists and encourage broad-based empowerment. It's not a case of one or the other. This requires a collective balancing act of short-term needs and long-term aspirations, shared risks and benefits, and hard work and sacrifice.

Ultimately, we must achieve sustainable black ownership to ensure economic growth, employment creation and social development for a better life for all.

Mgojo is chief executive officer of Exxaro

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