David Le Page
The government this week abruptly backed down from ruling on the R1,5-billion oil trading deal made by the Strategic Fuel Fund (SFF) with the Bahamas-based High Beam/Trafigura joint venture.
Despite having already conducted its own internal investigation, the Department of Mineral and Energy Affairs is now to appoint senior counsel to investigate standards of corporate governance, while other international experts will evaluate the deal’s commercial virtues. The deal, first revealed last week by the Mail & Guardian, guarantees High Beam Trading International a fee of at least R100-million for managing a routine oil hedging transaction involving the buying and selling of stocks worth at least R1,5- billion.
Intended to effectively transfer crude from a mine in Ogies, Free State, to more accessible storage facilities in Saldanha Bay, the deal will leave South Africa without an internationally accepted level of reserves for a year.
Through the involvement of High Beam’s local affiliate and directors Moses Moloele and Dominic Sewela, the deal imparts a gloss of black empowerment to the SFF’s operations. It provides for some training of SFF personnel by High Beam – at SFF expense.
Central Energy Fund (CEF) chair Keith Kunene and SFF chair Seth Phalatse did not inform the minister that they planned to outsource the SFF’s oil trading operations. They also gave the contract to High Beam without an open tender. Both have offered to step down during the investigation. Minister of Mineral and Energy Affairs Phumzile Mlambo-Ngcuka now wishes to ensure that any judgement is fair, and avoid “irreversibly damaging people’s reputations and standing in society”.
Earlier in the week, the department said the minister was likely to announce the restructuring of the SFF board and a forensic audit, or a ruling on the internal investigation that began in August. Last Thursday she said she would probably be calling for resignations and that the case might be going to the police. But on Thursday Mlambo-Ngcuka cancelled a press conference on the deal at the eleventh hour, following confidential briefings from the CEF, the SFF, High Beam Trading International and international oil brokers Trafigura. All had had “strong” responses to the conclusions of the department’s internal report, her department said. Neither High Beam nor its partner, Trafigura, has chosen to make any public statements regarding their roles in the deal.
At the heart of the issue is the fact that SFF will be paying High Beam a commission of about 10% for routine brokerage services.
Legal experts consulted by the M&G this week said the agreement is legally sound. But they warned that, from a commercial point of view, the SFF/High Beam contract contains some extremely onerous provisions.
Their view echoes that of the department’s internal investigators, who concluded that while the contract was legally sound “it is not clear if the contract was evaluated from a commercial perspective”. The international experts to whom the department is now turning will be asked to determine whether the deal makes commercial sense.
Their expertise, however, might be unnecessary if the department had been able to compare offers made by competing companies in a transparent bidding process before Trafigura was actually appointed. The contract stipulates that High Beam will not be responsible for any losses it might make. Astonishingly, the SFF also undertakes to repay High Beam for any losses the latter might suffer. Together, these provisions insulate High Beam from any risk whatsoever. Industry insiders said this week that the fundamental structure of the deal would have made sense – if High Beam had shouldered its fair share of the risk attached to doing the deal. One opined that if High Beam had taken a share of the risk, it might have been reasonable for them to take 40% of any profit; 15% had they not. Currently they stand to get at least 40% of the expected profit without taking any risk plus 60% of any additional unexpected profit. The profit expected from the deal is at least $170-million. It is understood that CEF has already authorised payment of at least R21-million to High Beam – the first of several instalments.
Both Kunene and Renosi Mokate, recently appointed as CEF CEO, were members of the fund board in 1998 when an internal inquiry appointed by then minister Penuell Maduna recommended that the entire board be sacked. The inquiry concluded that board members did not properly understand their fiduciary duties and needed training in the principles of the King commission on corporate governance. The inquiry was appointed after the controversial appointment of a consultant – once again without going through a tender. Additional reporting by Anthea Abrahams, Mungo Soggot and Evidence wa ka Ngobeni