Agriculture minister Derek Hanekom made few friends in the wine establishment when he opposed KWV’s 1996 application to convert from a cooperative to a private company. Hanekom argued some of KWV’s assets had been built up using its powers to regulate prices and collect levies from producers. A unilateral conversion was tantamount to privatising state assets. KWV countered that government had contributed nothing to KWV’s wealth, so its assets should be distributed among its grape growers and employees. In the end a compromise was reached. agreed to pay R369 million in quarterly tranches over 10 years into a trust that would support a range of industry needs, including vine research and export promotion. Crucially, the trust was also meant to play a pivotal role in funding black participation in the industry.
The SA Wine Industry Trust (Sawit), which held its first board meeting in March 1999 under chairperson Michael Fridjhon, Hanekom’s advisor, soon came under fire for not doing enough for transformation. Fridjhon concedes Sawit could have spent its empowerment budget more efficiently, but points out it was hamstrung by its trust deeds, which had to be amended to allow it to fund BEE transactions directly. hree months later, when Thabo Mbeki took over as president, Hanekom was summarily axed. He was replaced by 28- year-old Thoko Didiza, a virtual unknown at the time. Political commentators pointed out Didiza, a close ally of Mbeki’s, was given what the president considered a relatively minor cabinet posting to groom her for greater heights, possibly even the presidency. By all accounts tensions were rife between Didiza’s officials and Hanekom’s remaining appointees, including Fridjhon.
Didiza immediately pushed for a far stronger transformation focus for Sawit. In 2002 she removed Fridjhon and five other trustees. Their replacements included Western Cape Black Management Forum president and CEO of African Renaissance Holdings, Gavin Pieterse, as chairperson; Cape Town mayor Nomaindia Mfeketo and wine writer John Platter. ANC stalwart Kader Asmal joined them two years later. The same year KWV and Distel formed the SA Wine and Brandy Corporation, with the intention of modernising and democratising the industry while bringing it in line with the government’s black empowerment plans for agriculture. Representatives were drawn from growers, processors, merchants and labour. A little-known group calling itself the Black Association for the Wine and Spirits Industry (Bawsi) emerged as a self-declared voice of labour and civil society. Didiza gave the keynote address at a wine empowerment conference held at the Cape Town International Convention Centre in October 2003, which set the scene for what was to follow. “Sawit’s developmental initiatives do not yet have the necessary impact with respect to BEE,” she told delegates. “Government will be looking at the trust deeds and the board of trustees to see how best to address [this].
Black diamonds he following year Sawit brought together BEE consortium Phetogo Investments which, together with a KWV workers trust, would buy a 25% chunk of for about R210 million. Phetogo, consisting of several individual investors and companies, the Western Cape branch of the National African Farmers Union (Nafu) and Bawsi, would hold 18% and the KWV workers trust the remaining 7%. he byzantine nature of the funding model, reconstructed by Farmer’s Weekly from several documents and interviews, contributed to Sawit’s later insolvency. The Industrial Development Corporation (IDC) made three loans to Phetogo totalling R121,5 million. Sawit secured these loans, partly by ceding the IDC almost half its quarterly payments from KWV, and partly through upfront cash payments and soft loans to cover the remaining amount. KWV funded the bulk of its worker trust’s shares with a soft loan, with the remainder paid for by a loan from Phetogo.
Sawit’s payments to the IDC were repayable by Phetogo from future KWV dividend streams at soft terms, once Sawit had settled the IDC debt. This meant Sawit was in effect heavily subsidising the IDC’s interest rate. As far as could be established, none of the shareholders, who included ex-Post Office CEO Khutso Mampeule and eTV chief executive Marcel Golding, put any of their own money on the table. The arrangement therefore offered the BEE shareholders a low-risk investment on very generous terms, including a 1% interest rate on over half the capital amount and 6% for the rest, with interest only accruing once Sawit had settled the IDC debt in full. Today the total value of their shares is estimated at R380 million, which means individual shareholders stand to make a tidy profit should they opt to sell. The deal also enabled KWV to pay for its own empowerment credentials with the money it had paid to Sawit. But it held no intrinsic value for Sawit. A key flaw was the IDC’s demand that it would own all Phetogo’s shares until all its loans were repaid in full. This meant neither Phetogo nor Sawit could use them as security or collateral, or benefit from dividend flows, even after the larger loans had been repaid, leading directly to a cash flow crisis that resulted in payments for vital industry functions being stopped, including vine-disease research and foetal alcohol syndrome awareness programmes.
Several sources claim Sawit acted on advice contrary to its interests. Calls were made last year for an investigation to be launched into the role of the IDC and Sawit’s legal and financial advisors in structuring the deal, but nothing has come of this. Speculation is rife Pieterse, a key architect of the deal, was assured by Didiza that Sawit could afford to blow most of its reserves on a single BEE deal because it would be recapitalised by €15 million (R170 million) the European Union pledged to pay SA as compensation for phasing out the use of the names port, sherry, grappa and ouzo. The deal has yet to be ratified, so no money has been forthcoming. Moreover, Phetogo’s claims to represent the sector have proved hollow. Although some individual investors are reportedly involved in the wine and spirits industry, the majority are not. And neither Bawsi nor Nafu Western Cape, which owns its shares through a private trust called Zamori, can substantiate claims of representing thousands of farmworkers and black farmers. Nor can they adequately explain how the millions they received from Sawit were spent on their supposed constituencies.
Fridjhon has always been a vociferous opponent. “It was never our intention to fund black diamonds to buy shares in KWV,” he explains. “Gavin Pieterse was not acting with the interests of the industry at heart. This [deal] made a lot of people rich, with no benefit to anybody except KWV.” Pieterse retorts he’s an economic activist and would do the deal again if given the chance. “It’s always about the bigger good,” he told Business Report. “Prior to 1994, [this good] was in the political arena. [This situation] is exactly the same thing because we have not delivered on economic transformation.” KWV chairperson Danie de Wet, who together with Pieterse spearheaded the deal, still believes it was the most efficient way to spend Sawit’s empowerment budget. “I met minister Thoko Didiza and told her: in five years the money will have gone, with nothing to show for it,” he says. By funding a 25% empowerment stake in KWV, Sawit would make a major contribution to transforming the sector and get its money back within 10 years, he told her.
Lavish lifestyle
In any event, Sawit continued making lavish outlays – including millions spent on salaries and directors’ fees but very little on farm or community projects – and began to run out of money (see box: Spending priorities). It approached KWV to guarantee a R5 million loan in late 2005 and a R10 million loan early the following year. De Wet grew worried when grape producers’ organisation Vinpro informed him it had received similar requests. In March 2006 KWV agreed to pay out Sawit’s remaining tranches in a R110 million lump sum, incurring a R18 million penalty. Three months later Pieterse left to focus on his private business, and was replaced by Motheo Housing Group chairperson Thandi Ndlovu.
A fatal flaw in the IDC arrangement now became apparent. The IDC regarded the move as a breach of agreement, and demanded immediate payment of the debt outstanding on its main loan of R80 million, guaranteed by KWV’s quarterly payments. Sawit settled with a R52 million payment, apparently under the mistaken impression that Phetogo’s shares and dividends would now become available as security and to pay off the shareholder loans. In reality this could only happen once the IDC’s subsidiary loans, worth about R25 million, had been settled too. As a result, Sawit ran out of money and was forced to find an investor to refinance its loans (see box: Cracks in the consortium).
Nothing to show for it
De Wet believes Sawit’s trustees and management, including CEO Charles Erasmus, should be held accountable for irresponsible spending. “Where has the money gone? On consultants and projects. What do we have to show for it? Nothing.” Erasmus and Ndlovu declined to be interviewed on the subject, but a wide range of industry players, including several black winemakers desperate for support, agree with De Wet. They say Sawit squandered its vast resources by funding the lavish lifestyles of its members, paying excessive fees to consultants, and making questionable loans, grants and bursaries. “Sawit has paid a lot of consultants to tell us how to transform the industry but we see no results on the ground,” says Abelia Lawrence, CEO of empowerment label Blouvlei.
In the winelands tales abound of Sawit beneficiaries, consultants or members – often the same people – living the high life. “Guys with a letterhead and fax machine who drive around in fancy cars claim to represent farmworkers,” says a senior ANC MP. “Then they want to be populist and blame landowners for problems on farms.” The SA Black Vintners Alliance (Sabva), a loose grouping of black-owned wine labels, is regularly held up by Sawit as proof of its achievements. But the alliance is on the brink of dissolving amid complaints that it gets little support from Sawit and is being asked to help front companies with no industry ties access government grants, while a white-dominated fraternity protecting its own interests continues to monopolise a small, oversupplied market with shrinking returns.Today Sawit is pinning its hopes on a new refinancing model announced late last year.
The future
The new model will see the formation of a special purpose vehicle (SPV) to manage a fund focusing on land reform, empowerment and the social upliftment of farmworkers based on sound business principles. Half the funds will come from commercial lender Cebi Capital, the other half from Bawsi, Nafu and Sawit’s loans and shares. A due diligence, expected to be concluded in February, will value the Sawit loan book and establish Bawsi’s legal and financial status. Cebi will also pay off the remaining IDC loan, estimated at R15 million, which means the SPV can use Phetogo’s shares as security and receive its KWV dividends until the loan is settled. Future plans include accessing grant funding through the presidential priority project that aims to redistribute 5 million hectares of farmland to farmworkers within three years, buying a stake in five prominent wine farms, identifying another 100 farms for empowerment partnerships or acquisition, and buying into agricultural cooperatives as a bridge to other commodities.
Funding will be sourced from government departments, programmes and agencies as well as private investors on a case-by-case basis. “There must be very clear accountability, return on investments, business plans and skills transfer, administered by a fund manager and investment committee that will screen all business proposals for loans,” says a source close to the negotiations. The SPV will be expected to drive a strong transformation agenda, but in an orderly, sustainable way that doesn’t alienate the influential Afrikaner establishment.
“The message we want to convey is that this is orderly land reform, not land grabs, based on sound business principles,” says the source. “The Afrikaners are here to stay and have an important role to play. We need their money and skills.” It remains to be seen whether these plans will reach fruition, or sink in the morass of competing commercial interests and government red tape. Meanwhile, as the new elite watch their shares grow in value, social and labour tensions continue to rise among farmworkers and smallholders increasingly impatient at waiting for their ship to come in.
