Zama's loss of R335m deal is a blow to shareholders and process of empowerment

Mlungisi Kwini is a troubled man. The acting CEO has the unhappy task of telling thousands of small shareholders that their company, Zama Resources, has managed to lose the R335m Komatiland state forestry deal it was celebrating only months before.

The shareholders, some of whom invested their life savings in Zama, will have many questions. They will want to know how the fortunes of Zama have changed so dramatically in six short months, from being hailed as a leading light of black economic empowerment, to being scorned as the organisation which brought government's privatisation programme into disrepute.

Consider a government statement issued in March this year when Zama was announced as preferred bidder for the forestry deal: "Given the historic nature of this transaction, (the awarding of the deal to Zama) will ensure the meaningful participation of empowerment participants in all levels of the forestry industry and make an indelible mark in the indigenisation of this important industry."

These lofty ideals were shattered last week when the cabinet, after a tough two-day debate, decided to cancel the deal and put it out to tender again. The reason given was that the bidding rules for the transaction had been broken.

They came to this conclusion after studying a report by the Public Service Commission which probed corruption allegations that Zama CEO Mcebisi Mlonzi had paid R55 000 to Andile Nkuhlu, former public enterprises department director and head of the bid evaluation committee, shortly before Zama was awarded the tender.

The commission found no evidence of corruption, but there were several instances where public service rules and confidentiality agreements were transgressed.

Perhaps more importantly, shareholders will want to know what the future holds for Zama and for the Komatiland forestry deal. Will they get their investment back? Will Zama be allowed to retender for the deal when the forests are placed back on the market?

Only the depleted Zama board and its management team know the answer to the first question. And comments by departing board members Gordon Sibiya and Jeffrey Kleinsmith indicate they have grave concerns about the financial status of Zama. They talk of a company with serious problems of management and corporate governance, of a board which seldom met to discuss the affairs of the company, of decisions being unilaterally executed and funds freely spent.

Both Sibiya and Kleinsmith moved swiftly last week to distance themselves from Zama's liabilities. But someone is going to have to carry the can if it is found that shareholder funds have been depleted.

Whether Zama retenders will depend on if it can afford to do so financially, and if it will be allowed to do so by government.

Public Enterprises Minister Jeff Radebe's statement on the new bidding process is carefully worded. The minister welcomed bids from both Zama and reserve bidder, Indian firm Paharpur. However, "should they be found to have committed any unlawful act in the initial process", they would be disqualified from the second round of bids.

The first round of investigations by the commission and PricewaterhouseCoopers, which probed the deal at the request of the Zama board, found no evidence of such unlawful acts being committed.

However, the findings of both reports were thrown into doubt amid claims that Zama secretary Michelle McMasters had lied to commissioners when saying the R55 000 payment was an administrative error. Government is now re-examining this claim and if any evidence of corruption or unlawful acts by either of the two bidders emerges, they will not be allowed to bid during the second round.

It is a sad outcome of a deal which could have, and should have, led the way for empowerment in government's privatisation and restructuring programme. The deal promised to set the standard for a new type of empowerment in forestry, one which ensured that beneficiaries were not merely absentee owners but active participants in a dynamic sector.

Government is, however, unlikely to give up on empowerment in the forestry sector. Indeed, broadbased empowerment is playing an increasingly large role in SA's privatisation programme at a time when the initiative is finding rocky ground in the private sector.

Thus, a total of 10% of Eskom's power stations will be sold to empowerment players next year, and a chunk of Telkom's stock will be offered to empowerment entities when the phone company is listed early next year.

Government is sure to insist on a strong empowerment element in the second round of bidding. Unfortunately, international experience suggests that privatisation exercises which are cancelled even for the right reasons and put out to tender again tend to attract less interest and lower prices.

The first time around, three parties were short-listed to bid for the Komatiland package US-based GMO Renewables Resources, Pahapur and Zama (then called the African Forest Consortium of SA).

Paharpur, angry at not being awarded the bid despite its status as reserve bidder, has already indicated it is unlikely to bid a second time, and the chances of Zama doing so appear slim. There may be interest from domestic timber groups, such as Yorkcor, which will see an opportunity in perceived lower prices and reduced investor interest.

It is vital that government move as swiftly as possible with the second bidding round to stem morale problems within the sector and ensure the condition and value of its forestry assets are not further affected due to uncertainty.

The road ahead for the Komatiland forestry deal will not be a smooth ride. Nevertheless, Radebe and his cabinet colleagues have taken a courageous decision which will send all the right messages to the domestic and international investor community. The challenge now is to carry that message through with the remainder of the state's asset sales.

With acknowledgements to Robyn Chalmers and Business Day.