Govt killing the goose that lays the golden eggs. Unshackle mining – BizNews, 23 June 2016

Mining is vital to South Africa’s economy – and has been for decades. Historically, the mining sector helped equip the country with by far the best electricity, transport, and water infrastructure on the African continent.

By Anthea Jeffery

Mining is vital to South Africa’s economy – and has been for decades. Historically, the mining sector helped equip the country with by far the best electricity, transport, and water infrastructure on the African continent. It also helped modernise the economy by expanding the secondary and tertiary sectors, and played a key role in boosting employment and prosperity.

Today, mining’s economic contribution remains important in many spheres. Among other things, the mining sector helps to bring in vital foreign direct investment (FDI). South Africa’s own savings rate is so low (at 15% of Gross Domestic Product or GDP) that the country has to attract the savings of foreigners if it is to raise spending on infrastructure to 30% of GDP (as recommended by the National Development Plan) and create a strong foundation on which ever more businesses can build.

Mining also helps to generate export earnings. With the manufacturing sector in decline and increasingly unable to compete against a tidal wave of Chinese goods, mineral exports help the country to pay for the imports it requires. Were it not for export earnings from mining, the current account deficit – which has already widened to 5% of GDP – would increase even further, putting yet more pressure on the value of the rand.

In addition, mining companies help the economy by boosting domestic demand for a host of goods and services. The mining industry creates a ready market for thousands of suppliers, helping them to employ staff, generate profits, and contribute to the fiscus.

At the same time, the mining sector now faces a perfect storm of adverse conditions. Since peaking in August 2011, the prices of many minerals have dropped sharply as demand from China has diminished. At the same time, input prices have continued to rise, often sharply.

Wage increases in the mining industry have averaged 12% annually for the past five years (which is double the inflation rate), but have not been matched by rising productivity. The cost of electricity went up by some 240% between 2007 and 2012 and has continued to rise at rates well above inflation. Yet electricity supply remains inadequate, while transport logistics are inefficient and costly. Declining ore grades, and the deep-level mining often required, further erode profitability. Trade union rivalry, unrealistic wage demands, and the possibility of prolonged and violent strikes pose further major risks to mining operations.

The government commonly blames the mining sector’s travails solely on the current global commodities downturn. But even in the period from 2001 to 2008, when Chinese demand had created an unprecedented commodities boom, the mining industry in South Africa contracted by 1% a year. By contrast, the mining sectors in the world’s most successful mining jurisdictions notched up average growth rates of 5% a year over that same period.

South Africa has probably the most valuable non-oil mineral reserves in the world. So why did its mining industry fail to grow, even at this time of unprecedented demand? Some of the reasons are evident from South Africa’s poor performance on many of the issues canvassed by the Fraser Institute of Canada in its annual assessment of the relative attractiveness of more than a hundred mining countries.

If South Africa is compared with neighbouring Botswana, the differences are notable. In the Fraser Institute’s report for 2015, South Africa ranked 66th overall out of the 109 countries surveyed, while Botswana came in at 39th position. However, on many specific issues, South Africa’s comparative ranking was much worse.

On labour issues, for example, South Africa came 105th out of 109 countries (that is, 4th last), whereas Botswana ranked 46th. On community development conditions, South Africa ranked 91st, while Botswana ranked 35th. Even on its legal system, as relevant to mining, South Africa ranked far worse than Botswana, coming in at 70th position compared to Botswana’s 20th place. On its tax regime, South Africa ranked 69th, whereas Botswana ranked 2nd. On uncertainty about disputed land claims, South Africa – having recently re-opened its land claims process – ranked 62nd, whereas Botswana came 4th out of 109 countries.

The vague provisions of South Africa’s Mineral and Petroleum Resources Development Act (MPRDA) of 2002 have also helped reduce South Africa’s ranking on policy issues. On the ‘policy perceptions’ element – which measures the extent to which mining policy helps attract investors – South Africa ranked poorly: at 78th out of 109 countries. By contrast, Botswana – which has kept its simple and certain mining rules largely unchanged since 1999 – came 14th out of 109.

Since then, South Africa’s Department of Mineral Resources (DMR) has added to adverse policy perceptions by springing a revised draft mining charter on the industry in April 2016. The draft charter requires that BEE ownership be maintained at 26%, even if BEE investors sell out. It also demands this in relation to every mining right a company might hold – and throughout the life of a mining operation, which could be 30 years or more.

Having to do ever more BEE ownership deals will place a crippling burden on many mining companies. It will also continually dilute the value of all other shareholdings. This will greatly deter any fresh FDI into mining in South Africa – and suggests that the country’s ranking on this element of the Fraser index will drop still further in 2016.

In the interim, on ‘uncertainty in administering existing regulations’, South Africa already fares particularly badly compared to Botswana. In 2015, South Africa ranked 84th out of 109 countries here, whereas Botswana, with its clear and unambiguous mining legislation, was rated the 2nd best in the world.

If South Africa’s mining sector were freed from the policy and other obstacles which currently hold it back, this would help enormously in increasing the growth rate and overcoming the unemployment crisis. Higher revenues from mining would also help reduce the growing burden of public debt, and stave off the damaging international credit downgrades that still loom.

The government also has a duty to expand opportunities for the 8.9 million South Africans who are now unemployed (on a broad definition that includes discouraged would-be workers). However, this can be achieved only in the context of a rapidly growing economy which attracts investment, encourages entrepreneurship, and generates many more jobs.

Particular care must be taken in crafting policies for the mining industry, where the fixed investment required is enormous, lead times are long, and prices are particularly volatile. Mining legislation must thus provide certainty, stability, and predictability to investors.

The government must stop killing the goose that lays the golden eggs. Instead, it should recognise mining’s unique economic contribution, acknowledge the damage already done by bad policies – and call a halt to the draft mining charter and other dirigiste interventions sure to hurt it still more.

Anthea Jeffery, Head of Policy Research, IRR

Read the column on BizNews here.

 

 

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