President Thabo Mbeki’s stinging attack on South African domestic chemical and synthetic-fuel company Sasol suggests the long-standing gulf of misunderstanding persists between established, white business and the government.
Mbeki accused Sasol last week in a newsletter on ANC Today of, among other things, travelling to New York to ”bad-mouth our national effort to build a non-racial society”.
In the strongly worded column, he suggested that Sasol had damaged its own and the country’s image by presenting black economic empowerment (BEE) in a negative light to United States investors.
What sparked his anger was a description of BEE, in an obligatory report to the US Securities Exchange Commission, as a risk. Specifically galling to the president was the statement that Sasol might be forced to sell shares at below fair market prices, a form of expropriation.
Mbeki wrote: ”To substantiate its [Sasol’s] view, it said that it could not guarantee that black empowerment transactions would take place at fair market prices. In addition, it said that it could not promise that what it considered ‘forced participation’ in black economic empowerment in our country, would not have a material effect on the company as a whole.”
Sasol’s identification of BEE as a risk, and the elucidation of that risk, are contained in a 20F report to the Securities Exchange Commission in the US, part of the requirement for Sasol to have a secondary listing on the New York Stock Exchange. These were picked up by the media, and the president reacted in his letter.
The president linked the Sasol warning to potential US investors with a comment by Barloworld’s chief economist that BEE had a negative effect on the cost and profitability of South African companies.
”The message communicated by Sasol and the chief economist of Barloworld is simple and straightforward. It is that black economic empowerment is not good for business. Accordingly, the message these sought to communicate to all business people, both domestic and foreign, is that they should view our efforts to address the legacy of racism in our economy as something inimical to good business.”
Sasol has not yet reacted, but would probably dispute this interpretation of its submission. It would probably point to the fact that other South African-based companies have made similar assessments of BEE risk in their obligatory 20F submissions, including Telkom.
Perhaps Sasol could have defused the row by reacting more positively and strongly about its stance on BEE when the 20F document first surfaced. In any case, it is important to examine exactly what the company did say about the empowerment risk. For instance, it does not talk about ”forced participation” as the president charges in his letter.
Sasol outlines the equity demand of the Liquid Fuels Charter, which requires the company to ensure that historically disadvantaged South Africans hold at least 25% equity ownership of its liquid fuels business by the year 2010.
It goes on to say in its 20F filing, after promising to try to ensure equity participation takes place at fair market value, ”… we cannot assure you that these transactions will occur at fair market terms and that this will not have a material adverse effect on our future business, operating results, cash flows and financial condition.
”It is not currently known what financing arrangements will ultimately be put in place to support these transactions and we cannot assure you that we will not be required to participate in these arrangements or support them with our own credit or assets.”
AngloGold and Telkom both point to BEE as a risk in their own 20F submissions. However, AngloGold and Telkom do not present the potential risk in the same way.
Telkom presents the BEE risk as a competitive one: it has government shareholding, but no significant BEE shareholding and may lose business because of this.
AngloGold pulls no punches on the risk to the company of equity changes as a result of the Mining Charter. Yet despite the notion that the risk sector of the 20F report should not — for legal reasons — minimise the risks presented, it is openly supportive of the aims of the charter and fairly upbeat on its prospects of fulfilling the requirements.
”Any significant adjustment to AngloGold’s property ownership structure could have a material adverse effect on AngloGold’s financial condition or the value of AngloGold’s ordinary shares, and failure to comply with the requirements of the charter and the scorecard could subject AngloGold to negative consequences, the scope of which has not yet been fully determined.”
The company goes on to say: ”AngloGold fully supports the notion that the mining industry and the wider South African economy have to find ways of dealing with the legacy of the country’s history in a manner that promotes economic development and growth.
”AngloGold has made progress in adjusting the ownership structure of its South African mining assets and the composition of its management consistent with the charter’s spirit. AngloGold believes that it is well placed to meet the charter’s targets in accordance with the scorecard.”
Why is Sasol a target, when other firms have also presented BEE as a risk in their 20F submissions? Perhaps it is due to perceptions that Sasol has not promoted employment equity at top management levels. Its board is still largely white.
Perhaps, too, Sasol is not seen to have moved as fast as other fuel firms in ensuring that 25% of its equity is in black hands, in terms of the Liquid Fuels Charter. BP, Total and Shell have done so, and Engen has Worldwide as an empowerment investor.
However, Sasol Oil acted as a catalyst in the establishment of fuel retailer Exel, and a merger between the two was recently announced, which could see Exel’s black owners getting a stake in Sasol. One thing is certain: Sasol will now be under pressure to show results on BEE.
Mbeki questioned why ”any thinking person” would categorise the achievement of BEE goals ”as constituting a business risk”. He then contrasted Sasol’s comments with a positive view of empowerment in the liquid fuels sector put forward by the industry body, the South African Petroleum Industry Association.
Semantics may have played a role in the row. Business thinking is infused with the idea of ”risk” and risk management. The underlying belief is that no action is without risk and that the level of risk is related to the level of reward. This is summed up in the saying, ”High risk, high reward.” In ordinary parlance ”risk” implies negativity. If something is ”risky”, it should be avoided.
The BusinessMap Foundation believes BEE should be viewed as an opportunity to add value to the particular business, as well as a national economic necessity. In one sense BEE can be seen as an investment or a short-term cost for a medium to long-term reward.
However, the foundation has noted a similar problem of language in discussing the costs of BEE. To mention cost is perceived to be implying criticism. This is not the case. The idea of quantifying cost in business is to try to minimise it, rather than avoid action.
The attack underlines the political sensitivities around empowerment, and its importance to the presidency. It is small comfort for Sasol that the president’s brother, Moeletsi Mbeki, has been far more critical of BEE, albeit from the left-wing perspective of the need for more to be done about poverty alleviation.
For the president, negativity around BEE must be galling after the effort devoted to introducing more flexibility and certainty through the Broad-Based BEE Bill.
No responsible businessperson in South Africa today denies the need for racial transformation, and most would now support the government’s broad-based approach as the main method to achieve it. It would be a pity if an inflammatory development stifled debate on the shape empowerment should take.
Reg Rumney is executive director of economic transformation think-tank The BusinessMap Foundation