Dear Reader: Money has no colour

Acting Chief Executive of Eskom, Matshela Koko, recently attacked Exxaro in an angry tweet accusing the coal digger of having dealt a heavy blow to “radical economic transformation”. While Exxaro is hardly the world’s saintliest company (see noses186&202), what substance is there to Koko’s highly charged statement?

His tweet was prompted by Exxaro’s announcement that it plans to reduce its 50%-plus BEE equity ownership to 30% with a massive capital-raising exercise. As a result, while Exxaro could in the past be trumpeted as a black-owned company, it will effectively no longer enjoy that status. This, said Koko, was an “insult” to Eskom.

But there are differences of opinion as to just what aspect of the BEE deal is most insulting  and to whom.

Eskom is building new coal-fired power stations (up to a decade behind schedule) and needs lots of coal. It is estimated that to meet the demand, coal mining capacity in South Africa will require more than R100 billion in fresh investment.

Koko, widely supported by empowerment “experts”, is one of many who never explains how BEE assists in raising large chunks of capital. Were that even vaguely possible, BEE shareholders could cough up, and follow their rights in any fresh share issue, thus maintaining unchanged equity stakes. It does not happen.

BEE shareholders in general have long become accustomed to risk-free equity stakes, which require zero capital investment by them. All they offer the company is their names and their apartheid-era race classification, with now and again a handy connection to a senior personage in the Zuma government.

All it does, with rare exceptions, is line the pockets of the idle rich in the ranks of the ANC. They themselves don’t borrow the money to buy their shares; the company stands in for the debt, effectively financing the purchase of its own shares. 

In many cases, the debt is paid off by the company withholding dividends – assuming there are dividends. Just as often, the debt is simply written off over time. In some cases, such as seen with Gold Fields in 2010, billions of rands worth of equity are given away free to BEE “partners”. Which, from a purely commercial point of view, looks horribly like licensed bribery on a grand scale.

This climate is hardly conducive to conventional financing. Large lenders are reluctant to lend huge sums to companies burdened in advance with significant amounts of this type of unproductive debt.

In the meantime, power for the nation remains a priority. Providers of capital (shareholders, mainly institutions) and debt finance (banks and stock markets) have clearly given Exxaro feedback on a preferred funding plan, including target shareholder stakes after a capital raising.

To counter this argument, BEE “consultants” such as Duma Gqubule of KIO Advisory Services and Ajay Lalu of Black Lite Consulting (both quoted in Business Day) suggest the Industrial Development Corporation, the Public Investment Corporation and the African Development Bank would be happy to fund such a deal. Taxpayers and the Treasury (who fund all three) are no doubt thrilled to hear that.

There are further troubling factors. It is not uncommon for mining companies to be forced into one BEE deal after another (see “Northam Platinum: for pensioners or the Party”, nose186), on the spurious notion that anyone but BEE shareholders will simply cough up ad infinitum for a BEE stake to be maintained.

Tellingly, there has never been a “sunset” clause for BEE ownership. On the contrary, it has been argued that companies must maintain an “always empowered” profile, even when BEE shareholders have sold up and walked off with their loot.

There are a number of court cases under way seeking legal and constitutional clarity on the Mining Charter and other odious chunks of BEE laws, rules and regulations. No-one in their right mind is against genuine BEE, but rules for equity and debt – not least when massive new investments are called for – must be fair, honest, and without colour.

More news you’re not supposed to know: In Noseweek’s interview with Solly Msimanga (See Draining Tshwane's swamp in this issue), the Tshwane mayor was reluctant to reveal names of ANC personages who in the past 24 months had been happy to – in the ANC’s words – “commit treason” by visiting Taiwan.Noseweek fortunately has other sources who aren’t so shy. Among the ANC elite who have visited Taiwan are President Jacob Zuma’s favourite son and nephew, Edward and Khulubuse, as well as a former mayor of eThekwini and – top of the pile – Minister of Trade and Industry Rob Davies, accompanied by his Director-General Lionel October. We thought you ought to be told.

The Editor

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