The winds of change are blowing across South Africa — 11 years after the apartheid regime was dismantled — and nowhere more so than at De Beers, the world’s largest diamond producer.
Nicky Oppenheimer, Harrow-educated chairperson of the group, has agreed with the government to sell 26% of his company to a black empowerment group. He must do so under new legislation, passed by the ruling African National Congress, designed to give Africans more power in a country where much of the wealth is still held by whites.
Oppenheimer, who studied philosophy at Oxford, is a realist and says: ”De Beers is here to make a profit, but we must benefit the people and communities where we operate.”
But with a raft of new legislation either on the statute books or being looked at by the ANC, there are worries that De Beers — part of the mining empire set up by Cecil Rhodes at the turn of the 19th century — might lose its grip on an industry it has dominated for 100 years.
De Beers is not alone in having to comply with black economic empowerment (BEE) legislation, which forms part of a broad push by the ANC to rebalance the country’s racially skewed economy. If only it was that simple.
‘Black economic enrichment’
Critics have dubbed BEE ”black economic enrichment”, complaining that the programme has mostly benefited a tiny black elite that has political ties to the ANC.
That picture is not altogether accurate. For the first time, there is a thriving black middle class and property prices have rocketed. Yet, few would deny that some individuals have done particularly well under BEE. In the early days, former ANC luminaries such as Cyril Ramaphosa, Tokyo Sexwale and Saki Macozoma became multimillionaires.
Elsewhere in South Africa, poverty and mass unemployment are still alarmingly high, although Alec Hogg, editor-in-chief of South African media group Moneyweb Holdings, believes that South Africans should be given the benefit of the doubt: ”You have to remember where we were a decade ago. The country has made great strides.”
But immediately after Oppenheimer’s announcement, opposition politicians attacked the De Beers deal for not doing enough for the black majority. Pierre Rabie, shadow trade and industry spokesperson for the Democratic Alliance, said: ”We support broad-based empowerment which benefits the majority of South Africans — but not empowerment aimed at enriching a small ANC circle.”
Those comments will irritate Oppenheimer because the deal was structured in a way designed to avoid such criticism. Under the terms of the package, 50% of the R3,8-billion stake being sold to the BEE group, called Ponahalo Investment Holdings, will go to De Beers employees and pensioners.
Beneficiaries
But Rabie and others point out that about half-a-dozen beneficiaries are individuals with close links to the ANC, including Manne Dipico, chairperson of Ponahalo and a former premier of the Northern Cape province; Moss Mashishi, a leading figure behind South Africa’s Olympic committee; and Cheryl Carolus, the former South African high commissioner to Britain. Three of Ponahalo’s directors will be co-opted on to the De Beers board.
Rabie highlights the flaws of the arrangement: ”It is commendable that 18 700 ordinary De Beers employees will benefit to the tune of R1,4-billion, but Manne Dipico takes a R342-million slice, which sees him benefit 4 700 times as much as an ordinary member of staff.”
But if black-empowerment legislation in South Africa is assailed by politicians, how is it viewed by the business and investment community? According to Oppenheimer: ”What we have now is better than what went before.” But he adds: ”One day we will get past the need for quotas and targets because the playing field will simply level out.”
It is this transitional period that is, perhaps, the most difficult. De Beers’ grip on the South African diamond industry is now threatened from another quarter. A Bill before Parliament would compel diamond producers to offer an undefined percentage of their production to a new state diamond trader. It would also impose a 15% export duty and require producers to offer rough stones destined for export to a central diamond exchange.
Black dealers, gem cutters and polishers support the Bill, but De Beers says it could make mining in South Africa less appealing. Once the mainstay of the company, only 29% of De Beers’ global diamond production now comes from South Africa — and the company is looking to diversify further.
Political tightrope
Free-market economists wonder whether South Africa will become less business-friendly in the future. But the ANC must walk a political tightrope by making certain the country is sufficiently capitalistic to attract foreign investment, while meeting the expectations of a largely disenfranchised constituency at home.
De Beers, like others, has taken account of the changing reality on the ground by ring-fencing its South African operations inside a company called De Beers Consolidated Mines and moving capital elsewhere.
One mining analyst in London said: ”There is some political and regulatory risk for companies investing in South Africa — look at the relatively poor share price performance of Anglo-American [which owns 45% of De Beers] in relation to its peers.”
Big companies formerly listed on the JSE, such as Anglo-American and financial-services company Old Mutual, have moved their headquarters and primary listings to London. One analyst said: ”When was the last time you heard about a mining company coming to the market in South Africa? Exchange controls mean that you risk having your capital trapped in South Africa; who wants that?”
For many mining companies, diversification has been given added impetus by the strong rand, which has all but wiped out profits at many gold producers. Michael Rawlinson, an analyst at JP Morgan Cazenove, said: ”If the rand is too high, it doesn’t matter about your gold reserves. Gold is valuable, but not at any price. At some point, it becomes a worthless piece of muck in the ground.”
No one believes South Africa will go the way of Zimbabwe, but there are questions regarding land rights, export taxes and government royalties. There are signs that the country is trying to strike a sensible balance between social re-engineering and free-market economics. Only last week, officials at the South African Reserve Bank said exchange controls may be abolished. Even with controls, British companies such as Barclays and Germany’s Deutsche Bank have made multibillion-pound investments in the country.
As long as the South African economy continues to hold its own, creating jobs and prosperity, the ANC government could achieve that balance. But for previously white-dominated companies which thrived under apartheid, it is hardly surprising that life has become less comfortable. — Guardian Unlimited Â