Briefing by Black Economic Empowerment Oil Companies

Meeting report

PORTFOLIO COMMITTEE MINERALS AND ENERGY
19 August 2002
BRIEFING BY BLACK ECONOMIC EMPOWERMENT OIL COMPANIES

Chairperson: Mr M Goniwe

Documents handed out:
BEE in the Oil Industry (AMEF)
Report to the Portfolio Committee by ECACOC Investment Holdings-Energy (Pty) LTD.
Black Economic Empowerment Presentation (Mineworkers Investment Company)
(Documents awaited)

SUMMARY:
One of the common problems experienced by Black Empowerment Oil Companies is the inaccessibility of funding. There was a suggestion that Black Empowerment would not be possible without the co-operation of the financial services sector. Members were particularly interested in the role women would play in the empowerment process. The Companies outlined their roles in the area of community development and emphasised that the process would lead to broadbased benefits.

Presentation by NAFCOC
Mr K Headbush (Acting General Secretary of NAFCOC) outlined the impeding factors faced by the National African Federated Chamber of Commerce (NAFCOC). These were (1) finance, (2) transfer of skills and (3) the lack of knowledge about the sector. While the Eastern Cape was not rich in mineral and energy resources, its inhabitants can benefit from opportunities in the rest of the country. He appealed to the Committee to assist the organisation with obtaining finance in order to ensure that they are able to access the opportunities provided by the industry. BP had made a presentation the previous week during which they encouraged black business partners to form joint ventures. The black businesses would however have to raise their own funds. The argument was that if they used bank finance, part of the money generated would have to be used to repay bank loans. NAFCOC however differed from this viewpoint. Black persons are and have always been unable to access funding.

He urged the Committee to assist them by encouraging potential funders to assist the organisation. He pointed out that many of NAFCOC's members lacked the skills needed to access this funding. The Department could assist women who wish to be part of the project by providing consultants to draft business plans and proposals.

Questions and Discussion
Mr Dlali (ANC) wanted more detail with regard to the activities of the organisation. He asked how they have tried to make inroads into the industry and what their programme was.

The Chair pointed out that NAFCOC was a national organisation, which was not really engaged in deals with oil companies. The companies who were forming business partnerships were members of NAFCOC. The Committee had merely expected an overview from NAFCOC and not specific details.

Mr Dlali insisted that as an umbrella body NAFCOC should be able to provide details on the problems experienced by its individual members.

Mr Headbush responded that one of the main problems has been that most of the oil companies approached by members of NAFCOC had already identified partners for themselves. This has made negotiations very difficult.

A member asked if there was any company within NAFCOC representing women.

Mr Headbush stated that the SA Women Entrepreneurs' Network (SAWEN) is one such company.

Presentation by AMEF
Mr M Radebe (Chairman) referred to the presentation document. He stated the definition of Black Economic Empowerment (BEE) has four components. These are (1) ownership, (2) control- via the fifty plus one percent option, (3)management and operational involvement and (4) transfer of skills in terms of training and capacity building. Management and operational involvement would enable the Historically Disadvantaged Individuals (HDI's) to play a role in determining the strategic and operational direction of the organisation. The transfer of skills would ensure that involvement of HDI's would serve as more than just window dressing.

AMEF regards the Preferential Procurement Act as being inadequate. It requires a company seeking to purchase a service/ product to take into account the price of the service/product and its social responsibility (BEE) in choosing from whom to purchase such product/service. Of the factors considered 90% should relate to price and 10% to BEE. This however does not facilitate empowerment since the 'majors' are able to undercut black companies. AMEF recommends the approach used by the State Tender Board. Transnet issued a tender for the procurement of fuel and diesel. The tender was awarded on the following basis: 30% of the procurement on the basis of BEE, 30% on reciprocal business and 30% on service levels.

The Petroleum Products Act tilts the playfield toward BEE. It, however does not level the playfield, since parties are operating from different starting points.

Two models of empowerment have emerged. The first refers to companies which are owned, controlled and managed by black players and service providers in the industry, e.g. engineering companies. The second refers to equity purchase by BEE companies into existing companies. AMEF believes that one cannot choose one above the other, since they both have their respective strengths and weaknesses.
The merits of the first model are: (1) operational involvement and transfer of skills resulting from the fact that the person is running his/her own business. (2)qualifies in terms of most procurement policies and (3) contribute to social development. The demerits are that they are focused on the marketing side and are therefore not sustainable.

The problems with the second model are that the HDI's are not involved in the day to day running of the company and that there is no transfer of skills.

Questions and Discussion
Ms L Xingwana (ANC) pointed out that most of the BEE companies were based in KZN and Gauteng. She asked if any steps were being taken to move to the poorest and most disadvantaged areas.

AMEF responded that individual companies already have established a presence in the rural areas. Excel is already in the Eastern and Western Cape. It is very difficult to build service stations in areas like the Northern Province, but this is happening slowly. In addition, the organisation would need money to expand beyond Gauteng. It will take some time for them to reach these areas.

Ms Xingwana asked what was being done to mobilise women.

AMEF said that the representation of women is increasing. An organisation called the Women in Energy in SA has been formed and launched in Durban. AMEF and the Department have been involved in its launch. The BP deal gave rise to a growing number of women entering the industry.

Mr Dlali said that Mr Radebe had referred to barriers to sustainability and the development programmes which are in place to deal with this problem. He asked for more detail on this.

Mr Radebe said that the main barrier would be accessing capital. BEE companies have no track record and represent a credit risk. The problem will persist until there is a Financial Services BEE Charter.

Mr Dlali referred to the fact that many black-owned service stations were closing down in the townships. He asked why this was so prevalent.

Mr Radebe answered that service stations are dealer-owned instead of being owned by the Boards. The problem is that dealers are unable to maintain and upgrade the buildings, which results in structures becoming dilapidated. The result is that they are losing business in the townships.

The Chair believed that the ownership arrangement was not the only reason for the closure of stations. Much of the problem could be attributed to the high rental imposed by oil companies.

Mr Radebe agreed that the relationship between black dealers and oil companies was strained. Oil companies used high rental to put pressure on the dealers.

Mr Dlali asked if the amendment of the Petroleum Act would address this problem.

Mr Radebe responded that licensing would give power to the operator. The power currently lies with the oil companies. The problem, however is that the relationship is governed by contract. There is little one can do to assist the dealer once s/he has signed this contract.

The Chair asked if there are too many service stations.

Mr Radebe replied that the number of service stations have not increased from 5000 for a very long time. According to RATPLAN rules a service station owner has to close his/her existing service station before being able to open another one in another area. The result is that dealers ended up closing service stations in rural areas, since they were less profitable and would then open new stations in the urban areas. Also, since quotas were only given to BEE companies, old big companies now rather close their small sites to open bigger ones in more prosperous areas.

Mr Dlali asked which part of the chain the 14% ownership referred to in the presentation document.

Mr Radebe replied that it referred to the cumulative value of the value chain as a whole.

Mr B Bell (DP) asked if the RATPLAN is still working.

AMEF responded that the RATPLAN is still in place. Its day to day operations have been overshadowed by the Petroleum Act. The Plan aims to enable black people to access licenses. The approach is that licenses should have a BEE bias, hereby forcing the 'majors' to do something about empowerment.

Ms E Ngaleka (ANC) asked for more detail on the barriers to entry.

The Chair asked if AMEF had experienced funding problems and how they dealt with it, given the fact that many of the HDI's had at some point been blacklisted.

AMEF replied that the funding problem permeated through all the sectors, including the Petroleum sector. There is a need for a collective effort and broad participation of all stakeholders, including banks and aspiring entrepreneurs. The banking sector therefore needs to change. He added that funding was the reason that smaller companies had to team up with the larger ones.

The Chair asked what could be done to promote the upstream participation of BEE companies in the value chain.

Mr Radebe responded that the BEE companies' focuses were primarily still on marketing. One has to put maximum pressure on the major oil companies to come up with creative funding ideas to encourage an upstream move. The Committee could perhaps assist by ensuring that they make concrete plans in this regard and then holding them accountable.

Presentation by ECACOC
Mr R Jacobs criticised the Committee for its inaccessibility to the ordinary people. He stated that it had cost the Eastern Cape African Chamber of Commerce (ECACOC) R11 000 to enable its delegation of nine persons to attend the Portfolio Committee meeting that day. For a small organisation like ECACOC this amounts to a huge dent on their finances. BEE can be largely facilitated by the decentralisation of hearings. He suggested that the Committee should visit the Eastern Cape in order to obtain a broader appreciation of what is happening on the ground. This would not only benefit ECACOC but also other organisations, which are unable to afford the visit to Parliament and are therefore not represented at its public hearings.

Mr Jacobs referred to the document titled 'Report to the Portfolio Committee on Minerals and Energy by ECACOC Investment Holdings-Energy (Pty) LTD. (EIH-Energy)'.

There is an urgent need to investigate the way in which banks respond to the needs of the black disadvantaged communities. People owe huge amounts to the municipalities for unpaid electricity. This bad credit record gave rise to liquidity problems. There is therefore a need to collaborate with financial institutions in this regard

ECACOC has identified SASOL as their potential partner. They are interested in acquiring 25% of the equity in SASOL. Their focus is on three of SASOL's twelve groups. These are SASOL Oil (Pty)Ltd, SASOL Fuel Oil and SASOL Gas.

Mr Jacobs stated that a specific person has been listed as being responsible for investments within SASOL. This person is however very inaccessible. There is clearly a need for individuals with a more straightforward approach. Mr Jacobs had the impression that corporate culture is not yet receptive to black empowerment. (He however stressed that this was merely an impression and was he not implying that this was a fact). It is important to note that ECACOC was not asking for any hand-outs or gifts. They are in fact investing their own capital. They wish to invest one billion rands by public share issue. Their approach would be broad based since one million people would invest R1000.

The fact that many of the investors are youth, women and SMME's could encourage long term commitment. This commitment could further be ensured by a five year binding partnership and the imposition of exit penalties.

The partnership between ECACOC and the oil company will be commercially viable to both parties. Mr Jacob stressed that ECACOC is not expecting any favours. All money borrowed will be paid back with interest. He assured members that the organisation has the business skills and experience to benefit the partnership.

Mr D Qeqe briefly explained the difficulties faced by black service station owners in the Eastern Cape from the 1950's.

Ms Kwacha explained that unemployment among women was identified as being one of the main problems for women in the Eastern Cape. In addition these women have limited skills. Many of them are single mothers.

These women would benefit from the partnership between ECACOC and SASOL, which would contribute to poverty alleviation, skills development, crime alleviation, alleviation of malnutrition and opportunistic diseases, as well as the spread of wealth.

Questions and Discussion
Mr Jacobs referred to earlier statements about the corporate culture being reluctant to accept black empowerment. He emphasised that these comments had not been targeted at SASOL, but had been a general comment.

Prof Mohamed asked what prevented ECACOC from purchasing the shares on the open market.

Mr Jacobs explained that ECACOC wanted to be represented on the decision-making board of SASOL. They had targeted SASOL because this company was still available to be used for BEE since it had not yet formed a partnership with a BEE company. They do not just want ownership but actually want to be part of the decision-making processes. With regard to the 25% of SASOL, in which ECACOC is interested, Mr Jacobs stated that this refers to 25% of the three groups mentioned earlier and not of the entire SASOL.

Ms N Cindi (ANC) asked how ECACOC assists SAWEN.

Mr Headbush said that ECACOC provides the organisation with support and technical assistance.

The Chair stated that the Eastern Cape had been invited, since they are one of the poorest provinces in SA. He commended ECACOC for not philosophising about BEE, but for dealing with it openly. However it is not the role of the Portfolio Committee to dish out stakes. There are other channels one has to pursue in this regard.

With regard to the R11 000 ECACOC had to spend to reach Parliament, the Chair stated that they should not see it as a waste of resources, since contacts were made (especially with persons within SASOL).

Presentation by TOSACO
The presenter read the document titled 'Presentation by Total SA Consortium (TOSACO) to the Energy Portfolio Committee.

The TOSACO deal with Total SA complies with the Liquid Fuels Industry Charter in the following ways:
-a broad based empowerment group was selected
-target investment equals a minimum of 25%
-direct operational involvement of empowerment partner
-skills transfer and development plus social responsibility
-long term commercial sustainability
-committed knowledgeable and adequately incentivised core leadership
-agreed principle of financial commitment by the empowerment partner
-long-haul commitment by empowerment partner

Ms P Mashabela said that the process has been difficult. The deal will be signed in mid-December and the process continues to be uphill. She thanked Total for ensuring that the deal was broad based and inclusive as possible.
For further details, refer to the presentation document.

Questions and Discussion
Mr S Louw (ANC) asked if TOSACO is happy with a 25% ceiling.

Mr Bell said that the 25% was not a ceiling and that he was sure that companies would in fact go further.

Mr Shuenyane agreed with Mr Bell saying that the 25% in fact refers to the minimum. While this is a capital hungry industry TOSACO is trying not to bite off more than what they can chew. They have emphasised that 25% represents an entry point. Much other business can be done within Total. Once the deal is signed TOSACO becomes part of the value chain and will not merely be dormant investors. The deal will be signed in December 2002 and negotiations started in August 2001. One has to recognise that the whole process did not happen overnight. The parties had to "get into each others' way of thinking".

The Chair asked whether the Committee could receive a progress report.

Mr Shuenyane answered in the affirmative.

Presentation by Thebe Investment Corporation
Mr S Shonhiwa read the document titled 'Black Economic Empowerment in the Oil Industry' and stated that Thebe had acquired 25% shareholding in Shell SA Marketing. According to Shell the 25% would be an absolute limit. They have no management participation, except as part of the Board. They have 25% Board representation. There will be no transfer of skills to HDSA's. It will be 8.5 years before there is any economic benefit to HDSA's.

Questions and Discussion
Prof Mohamed asked how Shell made it difficult to let control pass out of their hands.

Mr Shonhiwe responded that no good thing is handed over on a platter. Thebe is however not suggesting that MNC's should sell control of their companies. They should however have gone beyond 25%. The difficulty was not really because Shell was reluctant to put together a deal. Instead the problem was the complexity of the deal, which led to there very little benefits to HDSA's upstream.

Mr Bell referred to a statement that there had been lack of support from SASOL. He asked what Thebe had expected from SASOL.

Mr Shonhiwe explained that the Charter specifies that established oil companies had to assist small companies with positive credit terms and infrastructure. This is a capital intensive industry and it is therefore very difficult for small companies to raise money.

Mr Bell referred to the statement that Thebe was a small company with a weak balance sheet. He asked what the fact that it was a small company had to do with it having a weak balance sheet. Some big companies have weak balance sheets.

Mr Shonhiwe explained that Thebe had not been in business for that long and therefore did not have much assets. Huge amounts are needed to move to the retail end of the value chain and the problem is that banks are not willing to provide this finance.

Mr Bell asked how Thebe could be said to have no management participation if they had 25% representation on the Board.

Mr Shonhiwa responded that there are four persons on the Board, one of whom is a Thebe representative. This is not meaningful enough to make an impact. If the representative had been allowed to participate in management he/she would have had a daily presence at the company. The fact that s/he is a non-executive member of the Board however means that attendance is limited to once per quarter.

Mr Dlali asked for more details on the reference to state procurement policies.

Mr Shonhiwa replied that the Charter states that preference should be given to BEE companies when government puts out tenders for its business. Thebe was then subsequently denied the tender for government business because they were unable to offer a huge discount. It appears to be a case of the one hand not knowing what the other is doing.

Mr Dlali asked if Mr Shonhiwa had implied that big companies were applying neither the Equity Act or the principle of skills development.

Mr Shonhiwa replied that Shell had their own development policies and that they were well on track in their implementation. They aim to see skills development at all levels from the bigger company to the BEE company as whole (and not merely to individuals).

Mr Dlali asked if Thebe was having a problem with the accessibility of funding.

Mr Shonhiwa answered that Thebe had applied for funding from IDC, which is a government institution. After eighteen months funding was denied. If government itself placed the same stringent criteria as private institutions, companies like Thebe would never get funding.

Prof Mohamed said that the Board normally determines the transformation of the company. He asked if this was the case here.

Mr Shonhiwa responded that there is in fact a Transformation Committee, which has Board representation. The Transformation Committee exists because of a clause in the agreement between the two companies. The committee is working very well.

Prof Mohamed asked what the respective working share capitals of Thebe and Shell are.

Mr Shonhiwa replied that he only had details on the equity of the companies and not on their share capitals.

Presentation by Mineworkers Investment Companies
Mr K Pillay and Mr P Nkuna read through their presentation document. Their black empowerment strategy involved a joint venture between BPSA, Mineworkers Investment Company (MIC)and the Women's Development Bank(WDB). Their empowerment deal is characterised by the following:
-there is no incentive to exit
-participation is encouraged
-no third party financeP: no external funding used therefore no value is leaked to financiers
-they aim to develop their partners' expertise
-commercial interests in common: the partnership is driven by mutual advantage
-empowerment partners with a broad base of beneficiaries: there are more than 300 000 beneficiaries from this relationship.

They then screened a video illustrating MIC's involvement in rural communities, especially with regard to the development of retrenched mineworkers.

Questions and Discussion
Mr Dlali asked how the bursaries to the children of mineworkers are marketed so that children in the deep rural areas also benefit.

Mr Nkuna responded that the bursaries are aimed at the children of their beneficiary base. The application is made to the Regional Structure, who then forwards the application to the Trust. The university or technikon would merely manage the bursary.

Mr Dlali referred to the exit penalties and asked why exit from the deal is discouraged.

Mr Pillay responded that people exit from the deal to realise value. This would take the company back a step.

Mr Dlali referred to the statement that the beneficiaries of the deal were broad based. He asked who exactly these beneficiaries were and if they referred to currently employed as well as ex-mineworkers.

Mr Nkuna pointed out that there are Mining Development Agencies, which are open to all ex-members. There are more than eighteen centres, especially in the rural areas. Retrenched workers go to the centres, which are situated near the mines. The trust deed of MIC also ensures that existing employees of the mining, energy and construction sectors are also benefitted.

Mr Louw noted that the video is silent on health issues in the mining industry.

Mr Nkuna explained they possess limited resources. There are many projects, which are still being developed, but the existing programmes are running well. However more money is needed to get involved in new projects.

Mr Dlali asked if there was data on the achievements of the beneficiaries of bursaries in the various provinces.

Mr Pillay responded that there are brochures, which provide a breakdown of the beneficiaries in terms of their specialised fields. There is however no breakdown according to provinces.

Ms Xingwana said that the majority of victims are African women and children in rural areas. She believed that 60% equity should be set aside for black rural women.

Mr Nkuna replied that when MIC identified its priority as the retrenched mineworkers, they included the families as well. They assist women in the villages too. MIC also works extensively with the Women's Development Bank.

Ms Xingwana believed that empowerment should be holistic and health should not be treated as a secondary issue. Empowerment cannot be sustainable if the health of the people is neglected.

Mr Nkuna agreed, but stated that MIC had identified the redevelopment of retrenched mineworkers as their priority. The aim is to teach them new skills. MIC will however not abdicating their responsibility to assist with health issues in the mining sector.