L Hendricks: Fifth Anniversary of Liquid Fuels Charter

17 February 2006

Programme director Honourable guests,
Industry representatives present tonight,
Members of African Minerals and Energy Forum (AMEF),
Ladies and gentlemen,

Introduction

It is a pleasure for me to be here tonight on the Fifth Anniversary of the
Liquid Fuels Charter, the first ever transformational charter in South Africa,
which was signed in 2000. I am pleased to be seeing industry players in a
different context and not related to fuel shortages. As part of this fifth
anniversary we have received a very interesting presentation by Empowerdex –
thank you.

On the basis of what we have heard tonight we are able to assess whether the
progress that we have made in transforming the Liquid Fuels industry has been
enough and if we continue on the current trajectory will we achieve our goals.
The presentation has given us some food for thought and I will speak more about
some of the issues shortly.

Inequality in South Africa

Programme director, the transformation agenda is at the core of the
development of the South African economy. In short we are seeking to increase
the number of participants in the economy, who are able to contribute towards
economic growth and thereby create a better life for our people. It has over
the years required us taking some difficult and tough decisions. We are
starting to see the fruits of our efforts as shown by the budget that Minister
Manuel presented on Wednesday.

However, we still have a long way to go in addressing the poverty and
inequality in our country. Most of us are aware that in the early 1990s, South
Africa was ranked as one of the countries with the highest income inequalities
in the world. Our Gini co-efficient, which is a measure of income inequality,
was second only to Brazil. Since 1994, South Africa has been characterised by
10 years of consistent economic growth and macroeconomic stability has been
achieved. Unfortunately, the extent to which this growth has been shared
equitably amongst all South Africans is not yet adequate for the requirements
of a stable, integrated and prosperous society. There is a great deal of
empirical evidence which shows us that in the long run inequality retards
prospects of economic growth.

Broad Based Black Economic Empowerment (BBBEE)

A contradiction of political power and economic power not co-operating in
the development of the country could result in negative consequences. BBBEE is
therefore an essential part of confronting the contradictions in our society.
It is therefore a priority for all of us – government, business, labour, and
other players in our society to take the issues of addressing inequality
extremely seriously. We must as a collective bridge the social and economic
inequality to ensure that our people are able to take advantage of the benefits
that our democracy has brought. Through our BBBEE programme we have promoted
Black Economic Empowerment (BEE) by encouraging compliance largely through
negotiation and compromise. We have agreed to targets that are uncomfortable
for some but are achievable. The challenge for is whether companies take a long
term view of the country. Your presence here tonight clearly shows that you
do.

Accelerated and Shared Growth Initiative of South Africa (ASGISA)

Ladies and gentlemen, our ASGISA is also part of our efforts to establish
sustainable and shared growth. ASGISA to quote the President “consists of a
limited set of interventions that are intended to serve as catalysts to
accelerated and shared growth and development”. Over the past few weeks we have
reported what government is doing to further stimulate the economy to achieve
six per cent growth and the catalysts we are using that will induce this
growth.

There are clearly synergies between government and private sector that can
make this growth sustainable. Here I refer to efforts by government to localise
its increasing procurement spending and if large private sector players were to
embark on similar initiatives it would be increasingly worthwhile for
multinational companies to establish local operations. ASGISA is a critical
programme for this sector because of the close association between energy and
economic growth, with a growing economy, the energy needs of our country will
continue growing.

Liquid Fuels Charter

Programme director, in looking at the presentation we have received tonight
into the progress of transformation in the Liquid Fuels Industry, I have a
number of specific comments to make.
1. Having a culture of measuring and evaluating progress is important as it
allows the industry to reflect on the strategies that they have deployed to
achieve the objectives of transformation and make the necessary modifications
so that we our goals. The measuring process will indicate if a company is
achieving and able to meet the self-imposed indicators of progress. If the
strategy deployed has not enabled the company to achieve the short-term
indicators that will be an indication that the strategy used may not be the
best and a need for a review of such a strategy may be necessary.

2. The measurement of compliance has not been without its limitations and
challenges. Our Liquid Fuels Charter makes broad statements of intent with no
specific indicators which could be used as a reference and standard of
measurement to compliance. This limitation imposes a challenge on the
short-term assessment of compliance. We need to look to the BEE scorecard and
Codes of Good Practice recently released by the Department of Trade and
Industry (the dti), as these codes help to clarify a number of issues that were
uncertain or not dealt with in our own Charter. Industry players might want to
consider developing their own scorecard on the basis of the dti model. The
industry transformation compliance report provided us with a good opportunity
to listen to the alarm bells and drawing our attention to areas where immediate
intervention is needed for this process to be successful in the long-run.

3. On the issue of ownership, I am pleased to note that most companies have
signed an ownership deal of some kind. These deals are expected to confer legal
and effective black shareholding through voting rights, rights to economic
interests and sustainable business. The ownership deals are equally expected to
confer operational control of the companies via proportional control of such
influential positions as those occupied by directors of the individual
companies. The evaluation provides evidence that there are weaknesses in how
some of the deals have been structured, and where Empowerdex have identified
problem areas, I look forward to changes being made. Specifically companies
need to look at issues of voting rights, conversion mechanisms, sustainability
of the deals and the BEE partners and what the position of the BEE companies
will be at the time of deal maturity. The assessment that compliance on equity
participation is less than 50% of companies is very worrying. 4

4. For some companies, BEE deals do not include the whole value chain and
this undermines the spirit of the Charter, again I look forward to companies
developing strategies to rectify this anomaly.

5. From the individual company reports, I hope that companies will use this
information to review their strategic interventions to correct the perceived
threats to the respective BEE ownership deals.

6. The results of our evaluation have importantly shown progress in some
areas. The liquid fuels industry now employs 8, 817 people. Of these, 68% are
black and this is an increase of 3% since 2003. The element of employment
equity has shown considerable improvement. Black people are now in general well
represented at the top management scale with a percentage of all directors
currently at 56%. My concern here is gender representation at all levels of
employment. Of the total employees, only 26% are women and these women are
concentrated in the lower levels of the employment ladder. The top management
level falls short of expectations as women hit the glass ceiling. Of the 56%
top black management, only 12% are women. Further analysis shows that in the
executive-directorship level, women comprise a mere 1%. Women again, are thinly
populated in the senior management levels. While the Charter has not stipulated
a percentage representation based on gender, it is equally important to empower
women and I hope our subsequent reports will show an improvement. I will be
monitoring this indicator closely.

7. Procurement is an important element and measurable target of the charter
compliance. Total estimated procurement spend by the industry is R103 billion.
Of this amount, about 3.8% was spent on BEE companies. Procurement, unlike
ownership equity deals, has immediate returns to investments and is accessible
to small and medium enterprises (SMEs) owned and controlled by historically
disadvantaged South Africans. International experiences, for example in Norway,
have shown us that it is possible to successfully groom local specialised
small, medium and micro-enterprises (SMMEs) in the oil industry who in a short
space of time can become internationally competitive. We are fortunate to have
the South Africa Supplier Development Agency (SASDA) supported by both
government and industry which is able to support the industry by grooming small
companies to procurement opportunities in the sector. The industry needs to use
this resource more in order to grow their domestic and BEE procurement spend.
At the estimated level of 3.8% procurement, industry is far from reaching the
expected target of 25%.

Conclusion

To conclude, ladies and gentlemen, the report presented has both positive
and negative points. It clearly requires that remedial action be taken so that
in time there is compliance with the Charter requirements. The report creates
the space for companies to re-evaluate their strategies to meet the
transformational imperatives and draw up plans to reorient their BEE
programmes. From our side we will also be interrogating the report to see if
there are areas we must address, in particular we must look at some of the
interpretation and measurement issues. Finally, I would like to thank the
industry for your continued commitment to the liquid fuels charter and
encourage you to work harder to achieve the targets set by the Charter. I thank
all the friends of both government and industry for your presence here on this
occasion, as well as all the people involved in arranging tonight’s event. I
thank you.

Issued by: Ministry of Minerals and Energy
17 February 2006