Sandile Zungu Zungu Investment Company ZICO

LINDO XULU: In this special podcast we're in conversation with Mr Sandile Zungu the executive chairman of Zungu Investment Company. Just briefly, lets just start off with your background - who is Mr Zungu?

SANDILE ZUNGU: Sandile Zungu comes from Umlazi Township, which is south of Durban and is one of the largest townships in Durban. I went to the schools in KwaZulu Natal including Vukuzahke and Hilton College where I did my post-matric. Then I went to UCT (University of Cape Town) where I did my mechanical engineering degree 1985 - 1988. Then I worked for six years as an engineer. I went back to UCT to do an MBA and then my moved my career from engineering to finance. I worked for African Merchant Bank which was part of NAIL at the time - for just over a year - got involved in a financial transaction which was about the takeover of Johnnic by an empowerment consortium called the National Empowerment Consortium where I was involved as part of the advisory team. The following year I started a trading and investment company called SARHWU Investment Holdings, which I led as CEO and then executive deputy chairman for 3.5 years. I went to NAIL for a short while, got involved with the unbundling of Metropolitan Life from the Group and the streamlining of the group to a focused media company. I was appointed chairman of Denel at that time which I chaired for just under five years. Then in 2002 I decided to start my own company - Zungu Investment Company that is commonly referred to as ZICO.

LINDO XULU: Most people might know you as being part of the MTN-Transnet shares debacle - can you tell us what the history was around that and where you are today.

SANDILE ZUNGU: I'm not so sure that most people would know me as part of the MTN debacle. Most people would know me as someone who led SARHWU Investment Holdings - those were in the heydays of trading and investment companies - we were in the forefront. I built that company from a zero asset base, and at some stage it had a net asset value of just under half a billion - without much support and capital from a strong balance sheet. Yes the MTN debacle, as you call it, was an important milestone in my life. In 2003 a request for proposals was issued and I formed a consortium to pitch for the 5%, which was being sold by Transnet, and we were successful after a gruelling six-month process. In 2004 we entered into negotiations which are now common cause that those negotiations culminated in a verbal agreement which was not signed but which was in draft form - and was subsequently reneged upon by my counterparts and then we entered into a long litigation process which was finally settled out of court, effectively on 15 and 16 September 2009 on which date we were supposed to go to trial. As Sandile Zungu leading that consortium which was called Umthunzi Consortium - I was absolutely delighted at the successful conclusion of this litigation process. Yes, it was a lost opportunity because one is not involved in business to be engaged in litigation and I would argue that if we had not been interrupted, Umthunzi Telecoms would be one of the giants in the telecoms space. But that dream was shattered and yes, the settlement was in financial terms satisfactory...

LINDO XULU: How much was the settlement?

SANDILE ZUNGU: I would not want to go into detail - it was confidential and we were sworn to confidentiality and I would not want to be the one to breach confidentiality.

LINDO XULU: But is it safe to say that it was above R500m?

SANDILE ZUNGU: I would not even want to guess...

LINDO XULU: OK - then lets move into the Sishen mining rights - again I would use the word ‘debacle' around that issue. On Tuesday, 18 August 2010 ArcelorMittal South Africa released a Sens announcement essentially with two components. Firstly on the one hand it had entered into an agreement to buy Imperial Crown Trading (ICT) - the legalities around whether they are still the rightful owners of the Sishen mining rights are subject to a court case, but essentially the de facto owners of the prospecting rights - the 21.4% stake in Sishen Mine - ArcelorMittal then decides to make an offer to take over the company for R800m. In a separate deal, your name crops up as one of the BEE partners. Can you tell us how long you've been engaged with ArcelorMittal around this BEE transaction?

SANDILE ZUNGU: I as an individual or as the consortium?

LINDO XULU: Well as the consortium - you lead the consortium - am I correct in saying that?

SANDILE ZUNGU: You're absolutely right. Let me clarify - ArcelorMittal as long ago as 2008 went public and were looking at an empowerment transaction and I guess at the time they thought that could be externally funded with minimal impact on their own balance sheet - typical of empowerment transactions at the time. It proved to be difficult for a whole host of reasons - I'm made to believe the debt crisis played a part, the recession also played a part, and they abandoned those discussions and waited for some appropriate moment - maybe when the recovery in the economic situation would prevail - to then resuscitate such discussions. In the last couple of months something really magical in the environment happened - they were told by Kumba that it was no longer going to be business as usual. The offtake terms would be changed dramatically in a manner that threatened ArcelorMittal's business. At the same time comes ICT who claimed that they had the prospecting licence -and upon inspection they indeed have the prospecting licence over that piece of property where ArcelorMittal had an old order mining right...

LINDO XULU: A prospecting licence over an existing mine...

SANDILE ZUNGU: You're going into too much detail - they had a prospecting licence duly issued by the Department of Mineral Resources (DMR) over a property where ArcelorMittal had an old order mining right...

LINDO XULU: ...and they failed to convert it...

SANDILE ZUNGU: ...and they failed to convert. Then ArcelorMittal says ‘look we have to do an empowerment deal, we are committed to do an empowerment deal, the board is pressurising us to do so, our clients downstream are pressurising us to be empowered so that they earn the appropriate credits, and we are threatened by Kumba'. It's a magical combination - lets do an empowerment deal as we have to, but lets also talk to ICT and make sure that we can strike a deal that will safeguard our interests - meaning ArcelorMittal's interests - and then obviously entered into discussions which then culminated in my being involved as a leader of the Ayigobi Consortium. Those discussions literally started post March 2010.

LINDO XULU: Who approached who - did ArcelorMittal approach you or did you approach them as a potential BEE partner?

SANDILE ZUNGU: I was not involved at the time when the discussions started to be honest - I was invited subsequently...


SANDILE ZUNGU: ... when the discussions were already under way, I was invited by the components of the Ayigobi Consortium...

LINDO XULU: ...who are?

SANDILE ZUNGU: I was specifically invited by the Gupta's and Jagdish Parekh, who as you know is a 50% shareholder in ICT.

LINDO XULU: What I'm confused by here is - you're described as the leader of the Ayigobi Consortium and yet you were invited to be part of it. Just tell me the mechanics around that - I'm just a bit confused.

SANDILE ZUNGU: There's nothing abnormal about that. Do you remember in 1996 - maybe you weren't born then - Cyril Ramaphosa was invited to lead the National Empowerment Consortium. He left the Constitutional Assembly to join NAIL to lead the consortium - which was already well under way in discussions with Anglo American. There is a precedent here - in no way am I comparing myself to a giant of Cyril's bilk but I'm saying that I was personally invited to lead a consortium which was negotiating with ArcelorMittal towards conclusion of a transaction that looks very good indeed.

LINDO XULU: So you were invited by the Gupta's ...

How Zungu met the Guptas...

... Continues from Who is Sandile Zungu? (part I).

LINDO XULU: In terms of the Gupta family - some circles have described them as being controversial and I know you don't agree with that perspective, but what I need to understand is the Gupta family - are they Indian nationals, or naturalised South African citizens, and how do they form part of a BEE deal given their status, either as being Indian nationals or naturalised South African citizens...

SANDILE ZUNGU: I've never looked at their papers and I don't know what their status is vis a vis South Africa, so I can't talk for them there. Secondly I wouldn't be able to tell you about their genesis of talking to ArcelorMittal - but what I can testify is that in my dealings with them, they've come across as very honourable people. They're very smart and trust me they're very sharp. My history of involvement with them goes back to the time when I sold a portion of my right over the uranium mine in Klerksdorp which we had a joint venture with Uranium One. They did a transaction and concluded it within the time that was set. They paid the monies that were expected and we were very happy and they continue together with IDC to develop that mine. So with their commercial history into the far relationships, this is a natural progression of that. So whether or not they're entitled to be economic players in South Africa, I really could not comment on that.

LINDO XULU: They're entitled to be economic players - everyone is entitled to participate in the economy, it's just a concern if they are benefiting from the empowerment legislation, which in my view and you can correct me if I am wrong - was meant for black South African citizens in the broader context.

SANDILE ZUNGU: What is the extent of their involvement in Ayigobi - do you know?

LINDO XULU: There is media speculation and I was going to get to that, but that is why I need you to clarify - you said that they invited you...

SANDILE ZUNGU: Let me clarify - they have an effective 6.25% interest in Ayigobi - in other words 93.75% of Ayigobi is owned by people who in your own language, are not controversial. Now how many empowerment transactions have had white men as players, indirectly - many - this South Africa is littered with such examples. I don't want to mention names but I have a long list, and where white women or white males are part of consortia, are part of holding companies where they are basically piggybacking and leveraging on the black compatriots - and we never take issue about that. What I don't understand is this new xenophobia that is finding space in corporate South Africa. It's unfair - we need to be consistent here. They own 6.25% of Ayigobi Consortium, which in my language is not material.

LINDO XULU: And what about Mr Jagdish Parekh ... he owns 25% of Ayigobi - is that correct?

SANDILE ZUNGU: What is wrong with that - is he not entitled as a South African?

LINDO XULU: I just wanted to confirm that my numbers were correct on that.

SANDILE ZUNGU: Yes he owns effectively 25% because he owns 50% of ICT and the ICT shareholders became direct shareholders in Ayigobi Consortium to a combined attributable value of 50%.

LINDO XULU: Earlier last week the CEO of ArcelorMittal, Nonkululeko Nyembezi-Heita basically admitted to Moneyweb, speaking to our editor-in-chief Alec Hogg that the reason the Gupta's got involved in the BEE component, or at least in the consortium itself, is because they brought the two parties together. I understand that you would probably say that it's fair business practice, but can you be compensated to the tune equity, to the tune of 6.25% for just bringing two parties together - is that deriving value from a shareholder perspective if you are sitting as a shareholder of ArcelorMittal?

Early Days for Sandile Zungu

SANDILE ZUNGU: As I said, I was not involved at the start of the discussions. I don't know who brought who, who called who, who invited who, who justified his or her participation in this transaction. What I now know is that the Gupta's through Oakbay - they have a direct interest of 6.25% in Ayigobi - I'm entirely comfortable with that. By the way I also have 6.25% interest in the Ayigobi Consortium. The next question is will it be fair to have 6.25% for leading - there is subjectivity here and suffice it to say these are very smart people with a sense of judgment - they are good partners to have.

LINDO XULU: The thing that I need clarity on is as far as my understanding of empowerment, specifically around broad-based black economic empowerment - it's there to empower broadly the community, employees in a specific company and in the surrounding areas that company operates. If you look at this deal, would you describe it as broad-based given the percentage that is going to be allocated to broad-based partners?

SANDILE ZUNGU: Lets unpack this. Broad-based black economic empowerment claims its broad-based attributes to the seven pillars that underpin empowerment. Narrow-based empowerment was just focused on ownership. Broad-based empowerment looks at a balanced scorecard with seven pillars. That is in the true sense of the word, what is meant by broad-based. However, people rightfully literally in the interpretation of broad base - they look at how many thousands are beneficiaries. Even if we subject this Ayigobi Consortium transaction to that crucible or to that framework of analysis - there are 8,500 employees of ArcelorMittal who will be beneficiaries to the extent of 5% of ArcelorMittal. And further, within the Ayigobi Consortium, 25% is allocated to women and youth - granted that still has to be finalised but there is the same commitment that that will go to the broad-base of entities. Also even within that 75%, which has already been cast in stone, those parties are not necessarily narrow-based - some of them have trusts for the benefit of communities - granted their effective interests is possibly minimum but I am saying that we are brad-based in terms of the transaction, secondly we are broad-based in terms of the number of beneficiaries that will benefit from this transaction.

LINDO XULU: Would it be fair then for us to question that the broad-based nature of this deal, given that those groups haven't even been identified. You're asking us to agree with you that it is broad-based, but you haven't identified that those women and those trust organisations... is it fair to question that the broad-based nature of this specific transaction...

SANDILE ZUNGU: No it is already broad-based - 8,500 employees with ArcelorMittal will benefit. You can ask them to give you the list of that 8,500 to satisfy yourself that they do exist - that is guaranteed.

LINDO XULU: But 75% is still going to largely three people...

SANDILE ZUNGU: Like I said, take us on our commitment that a significant portion will go to that broad base which is still to be identified. We are not going to be unambiguous in our commitment in that regard. Yes, I agree there is nothing finalised but it will be.

LINDO XULU: How soon will that happen?

SANDILE ZUNGU: In the fullness of time...

LINDO XULU: Which means what?

SANDILE ZUNGU: It means that conditions precedent have got to be fulfilled and I suspect that is one of the conditions precedent that ArcelorMittal will have to tick off on that aspect. So when this transaction becomes unconditional, trust me, the broad-based aspects will have been finalised.

LINDO XULU: You've been quoted by some media publications describing this as money for jam - do you regret that comment?

SANDILE ZUNGU: That's why the Media Tribunal becomes very relevant - because I never said this transaction is money for jam. I was asked by a lady at Business Report - her opening remark was "Sandile I have studied this transaction - it looks like money for jam" and I said who would say no to this transaction. In actual fact I expected to add a lot of value in this transaction. She never said I said it was money for jam - she said I also agreed - in other words she put words into my mouth and I sat into the trap of not saying it was not money for jam. I said who would say no to this transaction. Let me just clarify here - I don't take issue with her and have not even called her to protest, but I just know it's not in my nature to brag about easy money. It's not in my nature to brag about money that I've made, but I never said it was money for jam.

LINDO XULU: So instead of money for jam, it is easy money...

SANDILE ZUNGU: It's a very favourable transaction - for two reasons. One, this is a transaction where empowerment is guaranteed - a minimum return of at least $100million and it has an upside if ArcelorMittal behaves in a particular way, up to a capped number. How many transactions that you know have had empowerment guaranteed a return up front.

LINDO XULU: That is quite extraordinary and I suppose it's kudos to your consortium, however there is unfortunately the pending saga and the court case that is still under way that is questioning the legitimacy of the rightful owners of the Sishen 21.4% stake and the way that ICT has alleged to have made that application to the DMR. Now obviously there are several reviews around that issue. In terms of your conscience in your dealings with the Gupta family and ICT specifically - you feel that they've been above board in the way that they've dealt with this issue?

SANDILE ZUNGU: Maybe before I even respond to that, I want to elaborate on this good, attractive attributes of this transaction. I said we have guaranteed a flow and how many big transactions that you've analysed have had money guaranteed empowerment ranging from big mining houses to liquid petroleum companies to industrial groups. If you review those transactions, you will find that there are a lot of tears covering the cheeks of the empowerment groups who are supposed to have benefited. But banks will have smiled all the way to their own tills, as well as law firms. In this transaction of Ayigobi - we have a negotiated upfront guarantee with an upside kicker under certain conditions. We need to celebrate this because that is in my opinion a genuine empowerment. Now you're asking me whether I should celebrate the manner in which ICT will have got their prospecting license. The ICT transaction where they acquired for R800million for ArcelorMittal has nothing to do with me - I am not a beneficiary in ICT. Of course I wish them luck because if they successfully prove their entitlement to this prospecting license, and they successfully have the conversion to a mining right which obviously will have been obtained by ArcelorMittal, that's good for me as a future shareholder in ArcelorMittal. So you can say I have a vested interest. But whether they succeed or not, it doesn't impede the Ayigobi broad-based empowerment transaction. The morality of ICT and the prospecting license - I am not empowered and don't have capacity to comment on those things...

How Duduzane Zuma fits in...

... Continues from Who is Sandile Zungu? (part I) and Who is Sandile Zungu (part II)

LINDO XULU: Let's just go back to the constituents of Ayigobi. Of course the President's son Duduzane Zuma is also a beneficiary of the BEE deal. Would you mind explaining how he came to be introduced to you, or how he got introduced to this deal?

SANDILE ZUNGU: I think he was independently introduced to the deal by the champions of the deal, which is essentially the ICT component. The Gupta family as Nonkululeko Nyembezi-Heita, CEO of ArcelorMittal correctly says - they played the facilitator role in introducing the parties but really the trigger to this transaction was the ICT people and I guess they're the ones who said they wanted the construct of the consortium to go like this and want the leadership of the consortium to go like this. I'm not sure if you've met this young man called Duduzane - I have met him a couple of times. He is a very smart fellow, a very conscientious young man, hard working, articulate, reasoning and most importantly, he wants to be in business and does not want to be in politics - he is therefore proving his worth in the corporate sphere. Lets give him a chance - lets not crucify him for being the son of the President as if he must then be condemned to being poor.

LINDO XULU: There is nothing wrong with him being the son of the President but if you're looking at this specific transaction - again it goes to you are the leader of the consortium and yet he has a stake twice the size of yours. What value is he bringing to this transaction - in your view?

SANDILE ZUNGU: I don't begrudge him for having more value than I do - honestly I don't and good luck to him. If you're going to be begrudging people you're involved with in business, you will not cherish the pleasures and blessings that you're endowed with. For all intents and purposes what I know is that he owns less than 50% of Oakbay - so it's not 100% his company. He has other shareholders and therefore his net effective interest could possibly be slightly less than what has been quoted elsewhere.

LINDO XULU: And his role in adding value - what value add is he bringing to this deal?

SANDILE ZUNGU: To the ICT consortium I don't know because for all I know he is not a shareholder in ICT.

LINDO XULU: No the Ayigobi Consortium...

SANDILE ZUNGU: You need to look at Ayigobi beyond the closure of the transaction - what you are making noise about is the ICT component of the transaction. Ayigobi will be expected to be in the trenches with ArcelorMittal in ensuring it becomes a balanced corporate player able to develop enterprises able to contribute to communities, able to upskill its people to the balanced scorecard in empowerment. So there is a lot of work that has to be done beyond the closure of the transaction for the next 14 to 20 years and I expect people like Duduzane and all the shareholders of Ayigobi to join me and those who would be in the forefront, to make sure that ArcelorMittal becomes a better company than it is now. ArcelorMittal becomes the most admired industrial player in the country and beyond. So a lot of work is cut out for us.

LINDO XULU: But based on what you've just said now, you're still not answering the question of what value add he is bringing to the consortium - is he an experienced businessman, has he been in mining before because based on that answer, it seems to be that the only strategic value that he's bringing is his surname... I could be wrong but that's why I need clarity on it.

SANDILE ZUNGU: Well you are too simplistic - if the mining industry were not to accept new entrants, the mining industry will never too full... if the people who earn the right to be participants are only those people with old money, then there is no space for black people in mining sector - that's why you have to continuously make conscientious efforts to introduce new players who aspire to be long term players in the industry. From what I understand, Duduzane wants to be seasoned businessperson and he wants to ply his trade, creating wealth for the country, for himself in the mining sector and beyond. This may well be just the start - lets look at him in 20 years time and lets see whether this transaction called Ayigobi will have been the fillip that catapulted him to better growth trajectory - I would like to hope so.

LINDO XULU: Are you satisfied that there is transparency in the level of who exactly will be benefiting as far as the various trusts - we've got the lead players, but obviously you basically gave away the idea that Duduzane Zuma is not the only player in his structure and there could be other people - are you satisfied that you are fully aware of all the individuals who will be benefiting from this, in their various facets - either directly or indirectly. Have you seen their share registry - are you satisfied on that side?

SANDILE ZUNGU: I'm satisfied and you can understand why. When I was fighting Transnet and government on the MTN shares a lot of innuendos were thrown that the transaction had people who were not supposed to be beneficiaries hiding behind trusts. I said look, that's a serious casting of aspersions on my integrity and for that reason I said I wanted to take the matter to court. None of the accusers who were hiding behind no names came to the fore and presented evidence to that effect. And I still maintain that - the transaction - what you saw was what you got. There were no ... beneficiaries hiding behind the transaction. We earned it rightfully because we presented the best case, priced correctly etcetera...

LINDO XULU: ...that's in that case - in this case?

SANDILE ZUNGU: When I agreed to lead the transaction I said ‘transparency' - I don't want people to dig and find that Duduzane is a participant here - lets put it on the table - that Duduzane Zuma is a participant through a company called Mabengela. The Gupta's are participants through a company called Oakbay. ICT shareholders are XYZ and T and that's it. What you're seeing is what you get and if you've got evidence to the contrary - please put it on the table, but it's not helpful to cast aspersions on people who believe that they're making money honestly and through being industrious and through observing the tenets of what makes this country a great country.

LINDO XULU: But you said earlier on that yes what you see is what you get, but the media as you interlude that Duduzane Zuma's ownership is not as high as the media quotes. What I'm essentially asking is ‘have you seen the share registry of every single person who is involved in this deal and their subsidiaries'?

SANDILE ZUNGU: I don't have to do that because it's transparent - Mabengela has shareholders and directors and if you want to know what the shareholders of say Mabengela - if you want to know who the directors are - ‘my brother' you know where to go. There is something called Cipro, there is something called Asset Information. You don't have to get it from me - I'm not revealing anything fuzzy and secret here. I'm telling you that Duduzane owns less than 50% in Mabengela and take that as fact.

LINDO XULU: In an earlier report people have described this consortium as part of the President Zuma's allies - you of course serve as a member of President Zuma's BEE council, you've got President Zuma's son, of course as you've just said, you've got the Gupta family who are basically close associates with the President. Is it fair to describe this as the post-Polokwane BEE transaction that is aligned to the Zuma presidency? Is it fair to describe it as that?

SANDILE ZUNGU: I think it's possibly taking things too far and possibly making some of us more relevant than we think we are and dragging this thing into the mud where it should not really be. This is a transaction that was done post-2008 by the new administration, under the administration - a position that should be celebrated. It's a transaction where empowerment is guaranteed value upfront and that's got a share in the upside beyond that. And the participants include old names - some will argue I'm an old name - but has also got a significant presence of new entrants and it's a wonderful transaction. Anything done post-Polokwane could be deemed to be an outcome of the Polokwane issues - that's your choice. But I certainly don't see it that way.

LINDO XULU: During this negotiation process, did you meet with the President personally around this deal?

SANDILE ZUNGU: You're so naughty - why would I meet the President around this deal - really why
would I...

JOHANNESBURG—As a young engineer in South Africa's apartheid era, Sandile Zungu was once asked by a white subordinate to use a separate toilet. As a businessman in the post-apartheid era of black empowerment, company doors of all kinds have opened to him.
Sandile Zungu, in his Johannesburg office, is at the center of debate over Black Economic Empowerment.Dominic Nahr for the Wall Street Journal
In little over a decade, the 44-year old has amassed a fortune by building a broad portfolio of business investments, from financial services to pest control. African art adorns his office walls in Johannesburg's swank Sandton business district, and he drives a black Mercedes sedan to meetings, even if it means traveling a dusty road to a gold mine.
But mounting criticism of the Broad-Based Black Economic Empowerment policy that has made that possible is pulling Mr. Zungu and other black moguls into a national debate over how to right history's wrongs without upending business in Africa's largest economy.
BEE, as the policy is widely known, reaches across industries, compelling domestic and multinational companies operating here to meet such benchmarks as black ownership, skills training and development in poor communities. Ford Motor Co. +0.27% last month said it plans to build a center to support black-owned, automobile-parts suppliers.Microsoft Corp. MSFT +0.79% last year announced a $65 million program to cultivate young, black software developers. And Belgium's Rezidor Hotel Group REZT.SK +0.22%AB, which operates such brands as Radisson Blu Hotels and Resorts, expanded a partnership with black-owned South African enterprise Mvelaphanda Holdings (Pty) Ltd.
Critics, however, say BEE too often rewards people who are already successful. The Economic Development Ministry in November deemed BEE largely a failure, saying it focuses too much on deal making and not enough on supporting new entrepreneurs and creating jobs in a country where it estimates unemployment is 40% for people between 16 and 30 years old.

Float Like a BEE

Some of South Africa's biggest recent Broad-Based Black Economic Empowerment deals; values converted from rand at current rate
2005: Anglo American and Kumba Resources in a roughly $2 billion deal establish the country's largest company wholly owned, controlled and managed by blacks.
2006: The Royal Bafokeng Nation, which holds some of the country's largest ore and platinum reserves, converts its royalty stream to a 13.4% stake in Impala Platinum Holdings for an estimated $1.8 billion.
2007: Energy and chemicals company Sasol agrees to sell a 10% stake valued at $2.6 billion to black investors, junior staff, communities and its educational foundation.
2008: Telecom MTN Group restructures $3.2 billion in shares as part of BEE vehicle.
2009: Brewer SAB Miller sells a 8.5% stake in its South Africa subsidiary to its employees in $1.1 billion deal.
Sources: the companies, Ernst & Young
A recent audit of mining companies by the Department of Mineral Resources found that many black shareholders knew little about their businesses. "The BEE partners, in most cases, don't show up for site visits," Minister Susan Shabangu says. When they do show, they are "clueless about operations."
Despite BEE, blacks own only 18% of the available share capital in the top 100 listed companies in a country where whites make up less than 10% of the population, according to study last year commissioned by the Johannesburg Stock Exchange. Whites occupy nine of ten chief-executive positions, according to a survey by lobbying group Business Unity South Africa of the nearly 300 companies listed on the exchange.
Change is in the works. The Department of Trade and Industry last month wrapped up a three-week process of accepting bids from legal experts who wish to participate amending BEE legislation. A goal is to prevent companies from feigning black ownership through token shareholders and to deter BEE monitoring agencies from falsely certifying compliance, according to Nomonde Mesatywa, chief director of BEE for the department.
"We have had some issues of opportunistic misbehavior," she says. She plans to have a review group in place this month and hopes that by June to have proposals for improving the legislation. Any substantive changes would be subject to parliamentary approval, but amendments can be handled in phases to speed up the process.
The cloud over BEE is one of several concerns to investors, particularly in South Africa's mammoth mining industry. The government recently halted awards of some mineral rights. And the ruling African National Congress has said it will consider nationalizing mines, although officials and executives play down those prospects.
The result is that one of the world's richest countries in mineral and metal reserves has been struggling to attract investment. While a downturn in global commodities prices was partly to blame, foreign direct investment in other developing economies fared better, rising 9.7% on average, the U.N. said. South Africa's attractiveness among mining companies as an investment destination fell to 67 from 61, out of 79 locations, according to a recent survey by the Fraser Institute, a Canadian think tank.
Ms. Shabangu, the mines minister, is leading a delegation to Boston, New York and Toronto this month in an effort to drum up interest from investors.
Mr. Zungu has been at the center of the BEE debate, thanks to a deal he announced last August with a unit of Luxembourg-based mining giant Arcelor MittalMT -0.54% Under the agreement, valued at the time at about nine billion rand, or more than $1 billion, Arcelor's South African unit will lend Mr. Zungu and other BEE partners money to invest in a project with a guaranteed return over the course 14 years.
The project has been delayed by a challenge by a unit of multinational miner Anglo American AAL.LN +0.98% PLC over mining rights obtained by one of Arcelor's BEE partners. Arcelor says it will wait for the resolution of the rights dispute to determine if it will proceed with the arrangement.
The deal sparked wider controversy, though, because one of Mr. Zungu's partners is Duduzane Zuma, the son of South African President Jacob Zuma. After an outcry that the deal would benefit people who don't need assistance, the younger Mr. Zuma pledged to give the bulk of what he earns from the project to charity.
An affiliate of the Congress of South African Trade Unions, the country's largest labor federation, has registered its "total disgust" for the deal, saying it showed how BEE has been abused "to empower a tiny minority of people."
The Arcelor deal "is the ugliest face of [BEE], but not the only instance," says Trevor Manuel, the head of South Africa's National Planning Commission and a former finance minister.
Sakumzi Macozoma, a former political prisoner and one of the participants in early BEE efforts, though not in the Arcelor deal, says some resistance stems from those who don't want to see "free and enterprising black South Africans prosper."
But Mr. Macozoma, who remains active in empowerment deals, says BEE risks being "contaminated by the offensive odor" of those who exploit the policy to enrich themselves.
Mr. Zungu and other proponents of BEE say it has done more than any other policy to bring blacks into corporate boardrooms, nearly 17 years after Nelson Mandela became South Africa's first black president.
Mr. Zungu says critics are judging his deal before it is complete. Waving to a stack of papers in his office, he says he has been poring over applications from "historically disadvantaged" groups who would benefit from the Arcelor transaction."That's the type of deal that people like me, who have been in the trenches, can make happen," he says. "The bygone days of waiting for things to come to us are past. We might as well crystallize our value now."
—Jackie Bischof in Johannesburg contributed to this article.

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