Bloomberg News

Mandela’s Wealth-Sharing Dream Fades in South Africa

July 23, 2013

African Rainbow Minerals Ltd. Founder Patrice Motsepe

African Rainbow Minerals Ltd. founder Patrice Motsepe acquired his first mine in January 1998, from Anglo American Plc, as Bobby Godsell, the head of its gold and uranium division, sought to promote black business people. Photographer: Simon Dawson/Bloomberg

Prudence Moime looks up from stirring a pot of corn meal in front of her two-room shanty in northeastern South Africa and gazes across the surrounding rocky hillside. Just beyond her view lie some of the world’s best platinum deposits.

She says she waits in vain for some of the money promised to her village by African Rainbow Minerals Ltd. (ARI), part-owned by Patrice Motsepe, the richest black South African and a beneficiary of the country’s policy to spread the wealth to blacks after the end of apartheid.

As former President Nelson Mandela enters his 96th year recovering in a Pretoria hospital, his dream of widely distributing the country’s riches has faded. Discontent is mounting 19 years after his election over how a tiny elite with ties to the ruling African National Congress benefitted from more than 600 billion rand ($61 billion) in so-called black economic empowerment deals.

Villagers say that in 2000, Motsepe’s people offered them an 8.5 percent stake in the Modikwa platinum mine on credit, promising to develop schools, hospitals, homes and roads in the hills of Limpopo province. While Motsepe today is a billionaire, the 80,000 community members still collectively owe about 158 million rand on their share.

“They promised to develop the village,” Moime said in front of her crumbling home, where a row of bricks serves as a kitchen surface. “Houses were never built. Roads weren’t built properly. We’re not happy at all.”

No Jobs

Moime, 30, says she and her husband remain without jobs and feed their family on a 560-rand monthly state child welfare grant. She and fellow inhabitants of the corrugated-iron shacks dotted across the barren landscape have no running water.

Modikwa officials say the company has spent 110 million rand on community development projects, including a 65-million-rand road, and recruits more than three-quarters of the mine’s workforce from the surrounding area.

“Sometimes the mining industry doesn’t get the recognition it deserves for a lot of the good, good work we do,” Motsepe said at a Johannesburg press conference on Sept. 3, 2012. “We can always do more. Our commitment to communities, to labor and to shareholders is without question.”

Companies made deals with African Rainbow for business reasons rather than to just include black business people, Andre Wilkens, African Rainbow’s executive director and former chief executive officer, said in an interview today.

One-Sixth

Almost 14 percent of South Africa’s 53 million people live on less than $1.25 a day, according to the World Bank. Black citizens on average earn a sixth of what their white counterparts do and 1.9 million households have no income, census data shows.

Motsepe is worth $2.2 billion, according to the Bloomberg Billionaires Index. His 40.7 percent stake in African Rainbow is worth $1.39 billion and a share in financial services group Sanlam Ltd. (SLM) is worth $597 million. He also has about $200 million in cash and is the board chairman of Harmony Gold Mining Co. Ltd. (HAR), in which African Rainbow has a 14.6 percent stake.

In addition to his stake in African Rainbow, Motsepe has had control of the Mamelodi Sundowns, one of the country’s biggest soccer teams, since 2003. He recruited players with experience in the English and Venezuelan leagues and the team won the national title in 2006. His wife, Precious Moloi-Motsepe, is a medical doctor who runs African Fashion International, which promotes South African fashion.

Foundation Gifts

On Jan. 30, Motsepe pledged to donate at least half his family’s future income to charity “to uplift poor and other disadvantaged and marginalized South Africans,” joining Berkshire Hathaway Inc. (A:US) Chairman Warren Buffett’s Giving Pledge initiative to boost philanthropy.

His family foundation, established in 1999, already funds educational, religious and community projects, according to its website.

Racially entrenched income disparities stem from colonial and apartheid rule, which denied black South Africans a proper education, decent jobs and property rights for centuries. By the end of the nineteenth century, British imperialist and De Beers co-founder Cecil John Rhodes was pushing business practices and laws that discouraged education for blacks both in South Africa and in neighboring Rhodesia, now known as Zimbabwe.

Under Robert Mugabe, who has ruled Zimbabwe since 1980, the country has sunk to become Africa’s second-poorest nation per capita, according to the CIA World Factbook. Its unemployment rate is an estimated 70 percent, compared with 25.2 percent in South Africa.

‘Excessive Concentration’

“It is quite obvious that the economic power relations represented by the excessive concentration of power in a few white hands have to change,” Mandela told business leaders in May 1990, four years before he became president.

While black empowerment programs have enriched a few black leaders, significant financial power remains in the hands of South Africa’s white population. They occupied 73 percent of top business management posts, the Employment Equity Commission said in an April 20 report.

Of the 54 South Africans who own listed shares worth more than 500 million rand, a dozen were black or of mixed race, a study published by Johannesburg’s Sunday Times newspaper last year shows. Four of them hold or have held senior posts in the government or ANC, including Cyril Ramaphosa, the party’s deputy president, and Tokyo Sexwale, who was human settlements minister until July 9.

Political Connections?

“No one in his or her right mind would disagree with the need for structural transformation of our economy,” Mamphela Ramphele, the former chairwoman of Gold Fields Ltd. (GFI), said in a May 8 interview in Cape Town. “Yet for the last 10 or 15 years we have seen the same people benefitting from a multiplicity of deals. They are the people who are politically connected.”

Earlier this year she quit business for politics. On June 22 she formed a new opposition party that will seek to fight corruption. That is “at the heart of the problems our country is facing,” she said that day.

In December 2012, Gold Fields ordered an independent investigation into its black empowerment transactions, whose beneficiaries included Baleka Mbete, the ANC’s chairwoman. The inquiry was announced in a stock-exchange filing. Ramphele said she had persuaded other board members to agree to the probe, declining to comment on the details.

Political In-Laws

The investigation is still ongoing and there is no update or expected time for release, said Gold Fields spokesman Sven Lunsche. Mbete didn’t respond to calls to her mobile phone, which didn’t go to voice mail, or to e-mailed questions. Her office said she wasn’t immediately available.

While Motsepe, 51, hasn’t engaged in active politics, he has enviable political connections: One sister, Bridgette, is married to ANC policy chief and Justice Minister Jeff Radebe. She is the founder of Mmakau Mining (Pty) Ltd., which has platinum and coal interests. Another sister is married to Ramaphosa, the second-richest black South African.

African Rainbow was a sponsor of the ANC’s national conference in December. Motsepe, a party member, sat at the same gala dinner table as President Jacob Zuma.

Motsepe’s entrepreneurial spirit was nurtured in his days helping out at his father’s grocery store in Hammanskraal, north of Pretoria. Though blacks were banned from studying at Johannesburg’s University of the Witwatersrand, he obtained a waiver allowing him to join a small group of black law students.

Mining Debut

While in his 20s, Motsepe joined Bowman Gilfillan Inc. in 1988, becoming the Johannesburg-based law firm’s first black partner in 1993. The next year, as Mandela became South Africa’s first black president, Motsepe quit law to go into mining, beginning by offering services to operators.

Even before the ANC replaced the apartheid government, it had identified economic desegregation as a priority. Faced with having to operate under a black government, companies such as insurer Sanlam voluntarily sold stakes and assets to black investors -- including Motsepe - starting in 1993.

Motsepe acquired his first mine in January 1998, from Anglo American Plc (AAL), as Bobby Godsell, the head of its gold and uranium division, sought to promote black business people. The company sold six gold mine shafts to African Rainbow for the equivalent of $7.7 million, allowing it to pay out of future profits. Motsepe turned loss-making shafts around by cutting costs and firing workers, and paid off the debt within three years.

New Legislation

African Rainbow listed on the stock exchange in 2002, just as it was becoming clear the government would legislate that mining companies needed to include black owners into their business models.

That was critical in helping Motsepe secure the deal in 2003 that turned African Rainbow into the company it is today. It took control of Anglovaal Mining Ltd., giving it stakes in iron ore, manganese and chrome mines that saw profits soar along with demand from China for building materials. One of the main reasons Anglovaal folded into African Rainbow was to achieve “a significant black shareholding,” Anglovaal said at the time.

In that transaction, black empowerment “was a huge factor,” according to Gerard Kemp, who has worked in mining and mine finance for 40 years and advised Motsepe at the time. He now runs his own resources consulting business.

Big companies “probably wouldn’t have come to him” without the black-empowerment push, said Kemp. “He was bankable because he had a track record. You must give him credit for his first few transactions,” which he did on his own.

Financial Woes

Anglovaal agreed to join African Rainbow because it was in financial difficulties, African Rainbow’s Wilkens said in today’s interview. African Rainbow paid a 15 percent premium for the assets and invested to recapitalize the operations, he said.

The takeover valued Anglovaal at 50 rand a share, 13 percent more than its 44.20 rand price the day before the transaction, Anglovaal said at the time.

Other deals were also based purely on business decisions, Wilkens said.

“Shareholders don’t want to know you’ve done an empowerment deal, they want to know you’ve done a business deal which creates value,” he said. “Obviously there’s a climate where there’s more focus on empowerment transactions. As a black-controlled company we’re looking at those opportunities to see if we can find anything.”

Motsepe declined to be interviewed for this story.

Concentrated Ownership

The newly acquired mines contributed 3.5 billion rand to earnings before extraordinary income or expenses, called headline earnings, in the financial year ending in June 2012. That was more than African Rainbow’s overall earnings since some divisions incurred losses.

Motsepe’s African Rainbow was one of just six companies benefiting from almost three-quarters of the 28.4 billion rand’s worth of assets transferred into black hands in 2003, data released by the Trade and Industry Ministry show. The others included Ramaphosa’s investment company, Shanduka Group Ltd., and Sexwale’s then-company, Mvelaphanda Resources Ltd.

Sexwale’s office didn’t respond to requests for comment. Ramaphosa declined to comment.

In 2003, Parliament adopted the Broad-Based Black Economic Empowerment Act. It gave companies promoting black investment and ownership preferential status in securing state contracts, and encouraged them to hire and promote more black staff and buy more goods from black-owned companies. Mining companies also agreed at the time that they would sell 26 percent of their assets to black investors by 2014.

Board Positions

By 2007, a study published by economics professors Daron Acemoglu of the Massachusetts Institute of Technology, Stephen Gelb of the University of Johannesburg and James Robinson of Harvard University found 56 senior ANC officials had positions on listed companies’ boards.

A fall in commodity prices prompted by the global financial crisis in 2008 meant a lot of black empowerment operations struggled, African Rainbow’s Wilkens said.

“The downturn of the economy had the worst possible effect on what the government was trying to do in good faith,” he said.

Anglo American Platinum Ltd. (AMS) holds a 50 percent stake in the Modikwa mine, which produced 304,044 ounces of platinum last year. Headline earnings from African Rainbow’s platinum group metals production fell 46 percent to 190 million rand last year. That is 5.5 percent of the company’s total. Modikwa provides 41 percent of African Rainbow’s platinum production.

Community Borrowing

Like a number of platinum mines in South Africa, Modikwa last year stopped producing for about five weeks because of a wage-related strike.

When the mine was established, African Rainbow not only promised an ownership stake, it arranged an interest-free loan for the villagers to pay for it, the company, Modikwa and villagers say. Seven communities borrowed 306 million rand from African Rainbow. The communities elect their representatives to a committee set up to look after their interests and who are given regular updates on their finances.

While African Rainbow has paid off its own debt through income from Modikwa and other operations, only about half the villagers’ debt has been repaid, Mokgosi Nkoana, the mine’s general manager, said in an interview in Johannesburg. Built more than a decade ago at a total cost of 3.6 billion rand, the mine should operate for another 80 years, Nkoana said, adding that a downturn in platinum prices probably will delay repayments and dividend payments to the communities.

Mine Workers

In addition to the Modikwa-funded community development projects, including the road, 78 percent of Modikwa’s workforce comes from the surrounding area, according to Nkoana. They have earned 4.2 billion rand in wages to date, he said.

“You might not necessarily with the naked eye see the improvement in the community, but I’m certain that from where we were 10 years ago to where we are now there has been a lot of development,” he said. “To really satisfy all of them isn’t a 10-year process, it’s a lifetime process.”

At one village near Modikwa, young men operate a makeshift car wash as a way to make money. Chickens and goats scratch in the scrub nearby.

The mine has taken over some grazing space for cattle herds, said Kabelo Madilo, who set up a committee to pressure the mine into managing the community stake more transparently, said. Blasting has cracked some of the brick houses and collapsed some boreholes used to access ground water, he said.

Waste Removal

Motsepe “became successful because of his influence on politics,” said Madilo as he sat with four other activists on plastic crates outside a tavern. “Black economic empowerment is working for politicians and their friends only.”

That view isn’t shared by all in the village. Edwin Cheloani, the chairman of a committee looking after the villagers’ interests in Modikwa, said the mine helped the communities set up five companies that supply labor, waste removal, maintenance and gardening services to the mine. While African Rainbow helps manage the companies, they’ve run at a loss and haven’t helped defray the debt.

“It’s difficult to keep some individuals happy because they want to benefit personally” and the mine can’t provide for all community members, Cheloani said in an interview outside a tavern.

Though representatives such as Cheloani are elected by the community, the representatives don’t share the information with the villagers, Madilo said.

Development around Modikwa has been uneven. While some live in large, sturdy homes -- Madilo says they are the ones who have links to local leaders or have personal contracts from companies including Modikwa -- the majority live in cobbled-together shelters dotted across a moonscape of eroded land.

‘Suffering Here’

“I’m happy the mine is here, but they don’t give us anything,” said Doris Madingwane, 35, who helps run a kindergarten for 35 preschoolers in the area and accuses the mine of reneging on a pledge to upgrade the two classrooms, which let in the rain. “We’re suffering here.”

On June 20, South Africa’s National Assembly approved changes to the empowerment laws to enable the government to fine companies at least 10 percent of sales for deliberately misrepresenting the measures they have undertaken to promote black participation.

The amendments also provide for the establishment of a new commission to oversee compliance with empowerment laws and investigate complaints about violations. No new ownership diversity requirements were proposed.

The government says the initial difficulties that saw deals benefitting a select few have been largely fixed.

More Broad-Based

“It’s become much, much more broad-based,” said Lionel October, director-general of the Department of Trade And Industry, which oversees the empowerment laws, in a July 22 interview in Cape Town. “Most of the deals now include staff, communities, women.”

One example of a company to conclude such a transaction was Kumba Iron Ore Ltd. (KIO), an Anglo American unit that owns Africa’s biggest mine producing the steelmaking raw material. In 2011, the first phase of a five-year share participation plan matured and 6,209 of the company’s permanent workers each received a pretax payment of 576,045 rand. The workers had already earned 55,000 rand of dividends over the course of the plan, which is now in its second phase.

While President Zuma says black empowerment needs to be refined and that “the majority of the black people still suffer as they did many years ago,” he denies the policy has failed or is politically tainted.

Why Punish?

“I don’t think it is true that black economic empowerment has benefitted ANC people only,” he told lawmakers in Cape Town on March 20. “It has benefitted a particular percentage of the black people in this country, who are not ANC. If there are people who may be ANC, who are black, who qualify for black economic empowerment, why should they be punished, why should they not participate?”

Black empowerment has on balance been a success, according to Renfrew Christie, dean of research at the University of the Western Cape in Cape Town.

“South Africa would have had another violent revolution if we had not fixed the lily-white nature of the top of the economy,” he said in an e-mail. “We now have a surprisingly large black middle class, given where we started.”

African Rainbow itself is 10 percent owned by church groups, women’s organizations and trade unions through the company’s Broad-Based Economic Empowerment Trust, which has distributed 74 million rand to rural projects, the company says.

That means little to villagers around Modikwa. Moime says the mine’s management didn’t fulfill its promise to improve education or train and hire the villagers of Maandagshoek. Among them: her husband, who as she spoke was at the nearby mine in search of work.

“The children can’t even go to school, because they have to pass through a big river on the way,” she said, waving at a cratered dirt track that bypasses the village that, Moime says, floods in places during heavy rains.

To contact the reporters on this story: Franz Wild in Johannesburg at fwild@bloomberg.net. Mike Cohen in Cape Town at mcohen21@bloomberg.net;

To contact the editor responsible for this story: Nasreen Seria at nseria@bloomberg.net


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