Investing in Mining: Transformation developments in the Construction sector

Over recent years, the South African mining industry has been plagued by political, legislative and regulatory uncertainty, stifling growth by increasing investment risk in South Africa. The most recent blow to the industry was led by the Minister of Mineral Resources when he unilaterally announced a new Mining Charter, ushering in "radical economic transformation" by significantly shifting the requirements for black ownership and employment equity at mining companies. However, there does seem to be a light at the end of the tunnel in the form of the newly elected ANC president, Cyril Ramaphosa. This became evident at this year's Mining Indaba. The manner in which Ramaphosa has been tackling the Eskom issues and his messages to the market, has investors hopeful that he would be able to mend the fence between the industry and the ministry. Ramaphosa's history with the National Union of Mineworkers may also serve to reassure investors and the mining industry that he understands the problems faced by the mining industry and how to solve them. The slow-down in mining has also had its effect on associated sectors which support the mining industry and it is hoped that any uptick in mining will similarly have a knock-on effect on these sectors, as mining companies will gear up to invest in new projects and infrastructure. In this regard, it is important to note that the construction sector has also recently revised its transformation targets, as in December 2017, the Minister of Trade and Industry published the Amended Construction Sector Code. While the Code does not directly apply to the mining companies, businesses associated with the mining industry (such as businesses specialising in structural and electrical engineering works, building excavations, shaft sinking, lateral earth support and structural steelwork and scaffolding to name but a few) are all affected. The Code is effective from the date of publishing with no provision being made for a grace period. The Code applies to both contractors and "built environment professionals" which includes consulting engineers, architects, quantity surveyors and town planners. Companies which are currently compliant under the previous Construction Sector Code published on 5 June 2009, should note the following important differences between the Code and the previous Code: * The target for exercisable voting rights for black people in the large enterprises scorecard in the Codes is 32.5% (increasing to 35% in the fourth year after the implementation of the Code), while the previous Code requires 30% exercisable voting rights in the hands of black people. The Code also seeks to increase the target for exercisable voting rights of black board members and black employees in management positions. * The skills development element in the large enterprises scorecard of the Code increases incrementally from 1.5% to 2% for skills development expenditure on black people, as a percentage of the leviable amount. * The targets in the large enterprise scorecard for the preferential procurement element for both built environment professionals and contractors for B-BBEE procurement spend has been increased to 80% and the points allocated thereto have been reduced to 6 compared to 12 in the previous Code. The Code also no longer contains an enterprise development element. * The annual value of all qualifying socio-economic contributions by the measured entity as a percentage of the target should be 1.25% of net profit after tax. The Code provides that 30% of this contribution should be spent on disadvantaged communities. Similar to the generic BEE Codes, the Code also contains the discounting provisions relating to priority elements being ownership, skills development and preferential procurement, which means that if the minimum targets (being 40%) for these elements are not met, a company will automatically drop one level in its BEE scorecard. Particular attention must thus be given to these priority elements. Another important element in the Code is the requirement that, for public sector work, major subcontractors must have the same or a better rating than the main contractor. The Code provides that if the value of the work that a contractor wishes to subcontract to any subcontractor exceeds 25% of any single contract awarded to a contractor, then such subcontractors will either need to be an EME (an entity which has R10 million or less in annual revenue) or if not an EME, then will need to be contracted to a company which as at least the same, or a better BEE level, than the contractor. This is to avoid any "fronting" practises. With South Africa on the verge of turning over a new leaf, investors may be convinced that South Africa is once again an attractive investment proposition, given the country's vast mineral resources However, notwithstanding the eventual form of the Mining Charter, most industries which support mining infrastructure and wish to take advantage of the "green shoots" on the horizon would be well advised to reconsider their business structures now, so as to ascertain whether they are required to comply with the Code and maximise their BEE scorecard accordingly.