Understanding the key elements of BEE: Charters, Scorecards and Codes of Good Practice for the Mining Industry Address by Peter Leon Partner, Webber Wentzel Bowens Senior Vice-Chair, Mining Law Committee, International Bar Association to Great Eastern Hotel, London 20 November 2007

BEE in the South African economy The constitutional mandate for Black Economic Empowerment (“BEE”) contained in section 9(2) of the Constitution of the Republic of South Africa, 1996 led to the promulgation of the Broad-based Black Economic Empowerment Act, 2003 (“BEE Act”) in 2004, which provides the legislative framework for the promotion of BEE Government’s underlying BEE strategy is to use the state’s full purchasing power and regulatory muscle to increase the participation of black people in the economy by giving recognition and preference to entities which contribute to BEE The BEE Act: does not, itself, set any industry targets, but rather provides a framework for the implementation of BEE initiatives; and empowers the Minister of Trade and Industry to publish a set of Codes of Good Practice (“the Codes”)

A basic overview of the Codes The Codes were published on 9 February 2007 The following entities are measurable under the Codes: all public entities listed in schedule 2 or 3 of the Public Finance Management Act; any public entity listed in schedule 3, which are trading entities that undertake any business with any organ of state, or public entity; and any enterprise that undertakes any business with any organ of state or public entity Entities in the private sector are not obliged to comply with the Codes The market does, however, regulate the competitiveness of any entity which does not meet the Codes’ requirements, particularly when a private entity seeks to provide goods or services to a public entity The Codes are set out in a number of series (000 to 800), each of which contain statements that clarify issues relating to each BEE element Code Series 000 contains the general objects and principles of BEE. It: provides a generic scorecard emphasises substance over form provides that misrepresentation or “fronting” may lead to disqualification Codes Series 100 to 800 set out and explain the seven elements of “Broad-based” BEE ownership management employment equity skills development preferential procurement enterprise development socio-economic development Examples of public entities listed in the Public Finance Management Act must comply with the Codes: ESKOM Telkom SA Limited DENEL Transnet Limited SA Broadcasting Corporation Limited

Development of Transformation Charters Section 12 of the BEE Act provides for the publication of “Transformation Charters” by the Minister of Trade and Industry (“the Minister”) Transformation Charters comprise a commitment by entities in a particular sector to enforce BEE imperatives. They are devised and negotiated by industry bodies in consultation with government The BEE Act: confers regulatory status on Transformation Charters provides that a Transformation Charter must be taken into account and, as far as is reasonably possible, applied by public entities and organs of state in “determining the qualification criteria for the issuing of licences, concessions or other authorisations in terms of any law” The Mining Charter was, however, gazetted under the Mineral and Petroleum Resources Development Act, 2002 (“the MPRDA”) and cannot be classified as a Transformation Charter

The development and publication of the Mining Charter The Mining Charter was, after some debate, signed by the SA Chamber of Mines, the National Union of Mineworkers, small scale miners and the South African government on 11 October 2002: The vision behind the Mining Charter is to achieve a globally competitive mining industry for the benefit of all South Africans and to "create an industry that will proudly reflect the promise of a non-racial South Africa“ One of the Mining Charter’s key objectives is to achieve 26% ownership of mining companies by previously disadvantaged people by 2014 A key component of the Mining Charter is the Mining Charter Scorecard, which provides a framework for measuring the BEE in the mining sector. The scorecard has three core elements: direct empowerment through ownership and control of enterprises and assets; human resource development and employment equity; and indirect empowerment through preferential procurement and enterprise development

The Codes and the Mining Charter: different targets and measurements The BEE Act and the Codes aim to provide a uniform vision for BEE throughout the economy ie the Codes are intended to apply across all sectors The Codes and the Mining Charter do not, however, provide the same targets and measurements for BEE in the mining industry The Department of Minerals and Energy (“the DME”) applies the Mining Charter, and not the Codes, when granting mining rights, as the MPRDA empowers the DME to grant mining rights and to convert “old order mining rights” by reference to the Mining Charter only An applicant for a mining right accordingly does not have to demonstrate to the DME its compliance with the Codes when applying for a mining right, but must demonstrate its compliance with the Mining Charter A mining company should, however, be aware that the Codes may apply in instances when it deals with business outside the mining industry. Eg a mining company with downstream operations or which sells the commodity it mines to a public entity or to a private entity (which wishes to ‘score’ on procurement)

Differences between the Mining Charter and the Codes Unfortunately, the provisions and requirements imposed under the Codes differ significantly from those contained in the Mining Charter For example: the definition of a “historically disadvantaged South Africans” (“HDSA”) in the Mining Charter is a far wider than the concept of a “black person” in the Codes the scoring process is different. The Codes are based on an overall score, while the Mining Charter requires compliance with every element the Mining Charter Scorecard The difference in the definition of HDSA and Black person: “HDSA” refers to any person, category of persons or community, disadvantaged by unfair discrimination before the Constitution of the Republic of South Africa, 1993 came into operation "black people" is a generic term which means Africans, Coloureds and Indians. There is, however, “enhanced recognition for certain categories of black people” including, black women, black people with disabilities, black youth, black people living in rural areas and black unemployed people

The Codes and the Mining Charter: different targets and measurements for BEE Differences in scoring: overall score as opposed to “checking the boxes” The Codes’ balanced scorecard divides enterprises quantitatively into categories, based on the enterprise’s total score on all elements. Accordingly, an entity can achieve from “Level 1” to “Level 8” contributor status to broad-based BEE The Mining Charter, although broad-based, requires compliance with every element of its scorecard. Its scorecard is “scoreless” – ie one can only “check the boxes” in respect of compliance in different areas The Codes accordingly allow for degrees of compliance, but the application of the Mining Charter and the Mining Charter Scorecard renders an entity either “compliant” or “non-compliant” The Codes thus adopt a more nuanced approach to BEE The Contributor Status level, indicates the overall performance in terms of the BEE Scorecard attached to the Codes, which captures the overall compliance in respect of the seven specific BEE elements (this is measured out of 100 points). A “Level 1 Contributor” = 100 points and a “Level 8 Contributor” = between 30 and 39 points. The importance of these levels is to do with the “spend” BEE. A “Level 1 Contributor” is deemed to spend R1.35 on BEE for every Rand it spends, while a “Level 8 Contributor” is deemed to spend R0.10 on BEE for every Rand it spends

The Codes and the Mining Charter: different concept and measurement of ownership Equity ownership: different treatment Under the Codes: 20% equity weighting is made up of multiple indicators, including: voting rights; economic interest; and realisation points the “flow through principle” focuses on ownership by black natural persons: the chain of ownership by juristic persons is followed until that chain ends in a black individual’s hands Under the Mining Charter Scorecard: a mining company is required to achieve “HDSA participation in terms of ownership for equity or attributable units of production of 15% in HDSA hands within 5 years [2009]and 26% within 10 years [2014]” HDSA participation is the only indicator. In practice, the DME does, inter alia, examine voting rights, but is not, in law, explicitly authorised to do so There is no indicator for net equity interest: ie there is no provision for a “flow through principle” Realisation points: Black people holding an economic interest in a measured business have often encumbered those rights pursuant to a finance arrangement, which facilitated the acquisition of the rights. Once the encumbrance has been removed, the realisation / ownership fulfilment point is awarded.

BEE and mining rights: the Mining Charter The Codes and the Mining Charter: BEE and the grant and conversion of mining rights BEE and mining rights: the Mining Charter The Mining Charter is crucial to the conversion process and to the award of “new order” mining rights, even though it does not comply with the provisions of the Codes (the Mining Charter was published five years before the Codes) mining rights must be awarded if, inter alia, the award of the right will accord with the Mining Charter referred to in section 100(2)(a) of the MPRDA; holders of mining rights must submit an annual report indicating compliance with the Mining Charter referred to in section 100(2)(a) of the MPRDA; and conversion from “old order rights” requires an “undertaking” to give effect to the MPRDA’s social upliftment and transformation objectives contained in sections 2(d) and 2(f) of the MPRDA Section 2(d) and 2(f), respectively read: “substantially and meaningfully expand opportunities for historically disadvantaged persons…to enter the mineral and petroleum industries and to benefit from the exploitation of the nation’s mineral and petroleum resources” and “promote employment and advance the social and economic welfare of all South Africans”

The effect of the inconsistencies between the the Codes and the Mining Charter The Codes are intended to apply “to all broad-based BEE initiatives conceived and implemented by organs of state and public entities…” The Mining Charter differs from the Codes in significant respects. This may create regulatory uncertainty The Codes could affect the Mining Charter’s implementation: the Codes could lead to substantial changes to the Mining Charter, which is, in any event, due to be reviewed in May 2009; the Mining Charter Scorecard may (and probably should) be reviewed to make it a “balanced” scorecard with sub-minimum totals for equity and management; Mining companies are, however, protected from changes to the Mining Charter until the MPRDA conversion process is completed in May 2009

A possible remedy? The BEE Act and the Codes provide for the adoption of Sector Codes, which “enjoy equal status with that of any other Code [promulgated under the BEE Act]”. There are no Sector Codes as yet A Sector Code can be adopted in circumstances where there is a “common commercial and other characteristics within the entities operating in the sector” – the mining industry is one such sector The Mining Charter could used as a foundation to develop a Sector Code, which could thus remove regulatory uncertainty in the mining sector Code Series 000 sets out the principles applicable to developing a Sector Code, including: “the proposed Sector Code must fully address all the Elements in the Generic Scorecard; the proposed Sector Code must use the same definitions in respect of all beneficiaries as those used in the Codes; and the proposed Sector Code must use the same calculation methodologies to measure compliance as those used in the Codes”

Conclusion: how to minimise the regulatory uncertainty created by the Codes’ uncertain relationship with the Mining Charter As indicated, the DME applies the Mining Charter exclusively when issuing mining rights (as well as in respect of all other requirements of the MPRDA) A mining company should, however, be aware that the Codes may apply in instances when it deals with business outside the mining industry – this would be typical of a mining company with downstream operations For example, a coal mining entity will need to comply with the Mining Charter to obtain a right to mine coal and with the Codes to sell coal to a public entity (eg ESKOM) Most mining companies have to date (correctly) applied the Mining Charter, which was carefully negotiated by the industry and represents the yardstick through which transformation commitments are measured A co-operative approach between the Department of Trade and Industry and the DME is essential to avoid regulatory uncertainty in the application of the Mining Charter and the Codes