Does the 2019 budget address the mining sector’s challenges? - Polity

7 March 2019 - Finance Minister Tito Mboweni’s emphasis on economic growth is viewed positively by South Africa’s mining industry, but it is doubtful the sector will thrive as long as it is burdened by conditions that fuel an unstable regulatory landscape, erode trust, and chase away competence.

Dioné Harley

Finance Minister Tito Mboweni’s emphasis on economic growth is viewed positively by South Africa’s mining industry, but it is doubtful the sector will thrive as long as it is burdened by conditions that fuel an unstable regulatory landscape, erode trust, and chase away competence.

While Mboweni’s 2019 Budget speech expressed various intentions for initiatives that could improve economic conditions –  only time will tell whether these intentions translate into action.

According to the Chamber of Mines, gross fixed investment in mining has been stagnant since 2009 and has declined by 5% during 2016-2018. Increased costs and production challenges have also resulted in the industry recording a loss in 2018. With a mining industry that is struggling to grow and draw investors, it would be prudent to consider the details of the Budget speech and evaluate whether the government’s choices will serve or hinder the industry’s development.

The mining sector faces a plethora of constraints, including an uncertain regulatory framework and tenuous property rights; electricity shortages and prices; infrastructure weaknesses; ports; and skills gaps

Let’s consider the extent to which the budget addresses each of these challenges and identify the work that must be done.

An uncertain regulatory framework and tenuous property rights

In the wake of the Mineral and Petroleum Resources Development Act (MPRDA) of 2004, mineral resource owners were forced to hand over their basic right of control to the state. Since the MPRDA lacked objective guidelines and proper timelines for the exercise of licencing powers, the Minister of Mineral Resources and the Department of Mineral Resources were free to wield their discretion as desired.

In the absence of a steady regulatory framework that could ensure accountability, the sector faced inconsistency that gave rise to uncertainty. This caused a drop in investment: based on the Policy Perception Index in the Fraser Institute’s Annual Survey of Mining Companies, in 2001 South Africa ranked 20th out of 54 jurisdictions globally and fell to 53rd out of  64 by 2005.

A Bill to amend the MPRDA was introduced in 2013 with the aim of dramatically expanding the Minister of Mineral Resources’ powers. However, the international and constitutional risks of the Bill eventually resulted in its being put on the backburner until it was recently withdrawn. These developments only served to aggravate the impression of a volatile regulatory landscape, scaring away potential investors.

The Finance Minister had little to say by way of specific initiatives aimed at ensuring a stable regulatory framework across all sectors. While he alluded to the land debate, he did not explicitly refer to land expropriation without compensation (EWC), nor did he express the government’s endorsement of it. He did express a commitment to land-reform projects and guarantee funds to assist emerging farmers. This can possibly be read as a positive sign that the government appreciates the importance of maintaining property rights if investment is to be encouraged. Alternatively, the government could simply be hedging its bets: don’t explicitly mention EWC to avoid being downgraded for the time being, but also don’t rule it out entirely, to retain votes. Without explicitly denouncing EWC and expressing a commitment to property rights, it is unlikely that foreign investors will be appeased.

Electricity shortages and prices

In the case of Eskom, the government has resolved to split the entity into three independent components. The supposed outcome of this reconfiguration is said to be more competition and transparency. However, the Finance Minister offered no explanation of how the restructuring will achieve these aims. We are still left in the dark – literally and figuratively.

The government drew a line in the sand by making it clear that it would not take on Eskom’s debt. However, the organisation will continue to receive support while it is being restructured, which means that Eskom will still drain the government’s finances and worsen the country’s debt.

The Finance Minister claimed that Eskom is taking steps towards expanding renewable energy, with a carbon tax coming into effect in 2019. In the absence of tangible progress regarding renewable energy –  which there is no evidence of – a carbon tax would surely be premature and cripple the economy further through increased prices. This is of particular concern to the Minerals Council of South Africa, which said in a statement that, while noting the passage of the Carbon Tax Bill ‘and the Minister’s recognition of the critical importance of the awaited trade exposure and benchmarking regulations’, the industry ‘will hope that these mitigate the generally negative impacts that the tax will have on the sustainability of many mining operations.’

Infrastructure weaknesses

The only project specifically mentioned was the improvement of non-toll roads. Functional roads are indeed a basic necessity for economic development if goods, equipment, and labour are to be transported. Yet further projects have been recommended to develop additional transport infrastructure (railways and ports in particular), power infrastructure, education and healthcare infrastructure, as well as telecommunications infrastructure. These factors are equally vital to economic growth, especially if South Africa is to keep apace with the 4th Industrial Revolution.

Ports

South Africa suffers from extensive inefficiencies in the logisticssystem: we have some of the lowest ship turnaround times and highest duties on a global scale. This can arguably be attributed to BEE policies that block experienced and skilled workers from being employed. The additional costs that result from these inefficiencies only motivate foreign buyers of South African exports to go elsewhere.

Strategies have been recommended to address these inefficiencies, including a moratorium on BEE policies to halt the brain drain and ensure competency at all levels. Portmanagement arrangements with at least four consortia must also be initiated to ensure more efficient ship turnaround times. The privatisation of ports should be a priority. Unfortunately, the Finance Minister expressed no such plans nor any other interventions that could combat these challenges.

Skills gaps

Quality education is a persistent problem in this country. While the government has, in recent years, admitted to the dire shortage of artisanal skills required in the mining sector, it has been no simple task to resuscitate the vocational trainingfacilities. The largest portion of the budget will be funneled into education. The government’s plan is to provide fully subsidised education and training for the poor at universities and TVET colleges. What the government fails to accept is that a focus on tertiary education is besides the point.

Without a solid primary and secondary school education, these learners will not be competent enough to enter the tertiary system and perform at the requisite level. There is every indication that South Africa’s primary and secondary school system is ineffective due to poor standards and inferior instruction. While South Africa spends more money than even First World countries on education, our results do not reflect this. In Maths and Science – the most important subjects for artisanal skills development – South Africa has one of the lowest rankings worldwide. The current distribution of funds will only serve to push more ill-equipped students through a broken system, providing them with mediocre degrees and few skills that South Africa currently needs.

Clearly, the recent Budget speech will provide little comfort to the mining sector. According to the latest Fraser Institute Annual Survey of Mining Companies (2017), South Africa’s investment attractiveness is sitting at just over 60%. In Africa, we are falling behind Ghana, Mali, and Botswana. If South Africa does not face reality and do away with all forms of preferential treatment which fuel an unstable regulatory landscape, erode trust, and chase away competence, we will not convince investors to take a chance on us anytime soon.

Dioné Harley is a writer commissioned by the Institute of Race Relations (IRR), a liberal think tank that promotes economic and political freedom. Go to https://irr.org.za/ 

http://www.polity.org.za/article/does-the-2019-budget-address-the-mining-sectors-challenges-2019-03-07

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