Creating shared value through community trusts

Creating shared value through community trust

For decades, the mining sector has recognised the need to invest in the development of host communities, both from a regulatory perspective, and in recognition of the historical inequalities that continue to create socioeconomic challenges in communities across South Africa. In the mining industry, community trusts are one tool among many that are used to create shared value.

A community trust holds the community’s equity share in a local company, such as a mine or renewable energy plant. As a vehicle in trust, its role is to ensure that the benefits flowing from this shareholding reach a broad base of the community’s households.

According to De Jager, director for Corporate and Commercial Law at NSDV, South Africa’s mining sector has a long history of exploitation. Therefore, community trusts play a crucial role in the mining industry, by endeavouring to achieve economic inclusivity, development, and build generational wealth to alleviate poverty in mining-affected areas.

“Community trusts exist to, among other things, provide socioeconomic development and quality of life to their beneficiaries. The objectives of community trusts are to partner with companies operating within communities and draw resources from trusts for the purposes of using those resources for near-hill development projects, for example through training programmes; education development through building of schools and provision of bursaries; infrastructure development through many building programmes; and economic development through investment in local companies.”

“In the mining sector,” she says, “a community trust may be established to benefit communities affected by mining operations. Its aim is to ensure that these communities share in the wealth generated by mining activities, especially in historically disadvantaged areas.”

While community trusts in South Africa are a vehicle for empowerment, development, and inclusion in the mining economy, they are also important to meet the legal requirements of the Mineral and Petroleum Resources Development Act (MPRDA) and the Mining Charter, which require mining companies to contribute towards economic development,” says De Jager.

Compliance and Governance

“It’s absolutely vital for community trusts to adopt the correct governance and operating model to foster good governance and efficiency, and to curb mismanagement of funds, corruption, and erosion of trust with the communities. Accountability, transparency and strong governance are critical to the success and sustainability of community trusts,” she says.

Graeme Wilkinson, senior social investment specialist at Tshikululu Social Investments, notes that compliance requirements depend on how community trusts are registered.

“The term ‘community trust’ can actually refer to various structures. For example, not all ‘community trusts’ are broad-based ownership schemes, although many are. Some are registered as trusts, while others operate as non-profit companies,” he says.

“From a compliance and governance perspective, community trusts and similar entities must consider regulations like the Protection of Personal Information Act and the Financial Intelligence Centre Act. Compliance is a challenging area, and we always recommend seeking professional advice tailored to the specific situation.”

Wilkinson suggests that good governance is especially critical in the case of community trusts, which exist to benefit thousands of community members. The credibility of a community trust relies in part on its own ability to demonstrate good governance and be accountable to its stakeholders.

“Strong governance that builds accountability and trust is essential for these trusts to deliver on their mandate. This requires creating strong governance structures right from the beginning, and developing a trust deed that includes mechanisms of accountability.

“Choosing an operating model, meanwhile, is very much dependent on the trust’s specific circumstances. We recommend seeking professional guidance during these key early stages of the life of a community trust, to make sure that it has strong foundations that will support robust governance and operations.”

Impact And Exit Plans

There is no single right way for an entity of this nature to operate, he continues, and how it operates may change over time. Each of these models has benefits and drawbacks, and the choice of a model depends on factors such as the trust’s budget, the nature of the relationship with the founder company (the benefactor), and where the trust falls on the social investor spectrum. Structure follows strategy – the purpose of the trust must determine the ultimate choice of operating model.

“A robust process of stakeholder engagement is necessary to understand the beneficiaries’ needs, assets and priorities. Structured consultations and collaboration with local stakeholders and reputable partners build strong relationships. These then foster mutual trust, create shared ownership of local initiatives, and establish the trust as a reliable local partner in the community’s development.”

In terms of impact, he says, “our 2022 benchmarking study found that the most effective community trusts had a clear strategy that aligned with the trust’s core purpose for existence. These trusts maintained a focus on long-term impact and sustainability, and so their activities were not determined based on individual funding applications or donations, but were rather guided by a clear, impact-driven strategy.”

Siviwe ka Maqutywa, associate in Corporate and Commercial Law at NSDV, points out that to ensure the work of the community trusts is impact-focused, there should be consultations in the communities to understand their needs and a clear strategy must be developed on how priority areas will be addressed with the resources from the community trusts. There should also be metrics to measure resource distribution, to understand whether the resources are being used effectively and impactfully.

“It is critical to determine the exit plans for the community trust, to ensure continuity and sustainability of community projects. An exit plan would further ensure that there are strategies to develop independent and self-funding avenues. The exit plan provides a roadmap for the entire lifespan of the trust from beginning to conclusion. It aligns expectations, protects beneficiaries and ensures legal compliance, which ultimately ensures the long-term success of the trust,” he says.

“Community trusts are a powerful and necessary tool to ensure that the country’s laws relating to transformation and inclusivity are implemented. They further ensure that the benefits of mining are shared equitably and sustainably with communities affected by the mine’s activities.”

Wilkinson notes that there are those trusts that intend to exist in perpetuity to create benefit to communities beyond life of mine – these trusts need to start planning early to make sound investments, to build up an endowment that will provide them with ongoing income, even when mine dividends are no longer coming in.

“They may need to seek out other donor funding as well, and building those relationships and developing the trust needed should start as soon as possible. Tshikululu has found that a detailed trust deed and well-structured relationship between the trust and the founder company are central to good governance. A strong trust deed sets up a trust for success, by outlining what it can and cannot do and how any governance concerns will be handled,” he says.

IMPORTANCE OF SOCIAL INVESTORS

Social investors pursue different types of social investment to generate both a financial return and a positive social or environmental impact. However, as suggest NSDV, many of them accept lower financial returns or take on higher risk if the social impact is significant.

Social investors are often also focused on the long-term goals and are generally patient with capital supporting initiatives that take time to mature.