Full Submission on Reviewed Mining Charter – 13 May 2016

Jun 03, 2016
IRR submission on Reviewed Mining Charter – 13 May 2016.

South African Institute of Race Relations NPC
Submission to the
Department of Mineral Resources
regarding the
Reviewed Broad-Based Black Economic Empowerment Charter
for the South African Mining and Minerals Industry, 2016
Johannesburg, 13th May 2016

Introduction, page 2
The importance of the mining sector to South Africa, page 2
The growing regulatory burden on the mining sector, page 4
Conflicting audits of mining charter compliance, page 7
Content of the draft charter, page 9
Preamble, page 9
Definitions, page 10
‘Black people’, page 10
Elements of the Mining Charter, page 11
Ownership, page 11
Procurement, supplier and enterprise development, page 13
Capital goods, page 13
Consumables, page 13
Services, page 13
Verification, page 13
Multinational suppliers of goods, page 14
Beneficiation, page 14
Employment equity, page 14
Core and critical skills, page 15
Human resource development, page 15
Mine community development, page 15
Housing and living conditions, page 16
Reporting and compliance, page 16
Applicability of targets, page 16
Transitional arrangements, page 17
Non-compliance, page 17
Two telling omissions, page 18
Inconsistency with the Constitution, page 18
Conclusion, page 19
A necessary shift to EED, page 20

The Department of Mineral Resources (DMR) has invited public comment on the Reviewed Broad-Based Black Economic Empowerment Charter for the South African Mining and Minerals Industry, 2016 (the draft charter), published in the Government Gazette on 15th April 2016. According to the Gazette, such comment is due not later than 30 days from this publication date and thus by 14th May 2016. This period is too short to meet the constitutional requirement for proper public consultation.

This submission is made by the South African Institute of Race Relations NPC (IRR), a non-profit organisation formed in 1929 to oppose racial discrimination and promote racial goodwill. Its current objects are to promote democracy, human rights, development, and reconciliation between the peoples of South Africa.

The draft charter has been gazetted by the minister of mineral resources, Mosebenzi Zwane, under the powers given to him by the Mineral and Petroleum Resources Development Act (MPRDA) of 2002, as amended by legislation adopted in 2008 and brought into effect in 2013.

The importance of the mining sector to South Africa
South Africa’s mineral resources are valued at $2.5 trillion, giving it arguably the richest non-oil reserves in the world. In 2015 the mining sector contributed 8% to gross domestic product (GDP). However, the sector’s large appetite for electricity, infrastructure, manufactured goods and a host of other products and services makes it far more important to the economy than the 8% figure might suggest. That the mining industry in 2015 alone spent some R405bn on goods and services gives some measure of its contribution to the wider economy. [Fast Facts March 2016; John Kane-Berman, Digging for Development, SAIRR, 2014; Mike Schussler, ‘Employment in downswing of super cycle – UASA’, Politicsweb, 26 April 2016]

Mining also generates some 35% of South Africa’s merchandise exports, and helps attract much-needed foreign direct and portfolio investment. This in turn helps finance the country’s budget and current account deficits and buttresses the value of the rand. Mining also contributes significantly to tax revenues. The sector has long been a major employer of mainly unskilled labour and currently sustains more than 1 million direct and indirect jobs. The mining sector thus remains a central pillar of South Africa’s struggling economy. [John Kane-Berman, Digging for Development; Financial Mail, 21 April 2016]

However, the mining sector now faces a perfect storm of adverse conditions. Since peaking in August 2011, the prices of South Africa’s major mineral exports have dropped sharply as demand from China, in particular, 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 significantly higher than the consumer price index. In addition, electricity supply remains inadequate, while transport logistics are inefficient and costly. Declining ore grades are a further constraint on profitability, as is the deep-level mining often required. Trade union rivalry, unrealistic wage demands, and the risk of prolonged and often violent strikes pose further major risks to mining operations and the profitability of the industry.  The net profits of mining companies have fallen sharply, as has the market capitalisation of mining companies listed on the JSE. The mining industry is now struggling to survive, while many major international mining companies are seeking to disinvest, rather than expand their operations here. [Business Day 15 Feb 2016; Business Day, 11 January 2016; Peter Leon, ‘The SA mining industry at a time of crisis’, address to the diplomatic members of the South African Institute of International Affairs, Pretoria, 3 December 2015; Business Report 13 May 2016]

Worryingly, South Africa does worse than many other mining countries on many of the indicators tracked by the Fraser Institute of Canada in its annual assessment of the attractiveness of different mining jurisdictions. To cite but some examples of the differences between South Africa and its Botswana neighbour, in the 2015 Fraser report South Africa came 105th out of 109 countries (that is, 4th last) on labour issues, whereas Botswana ranked 46th. On community development conditions, South Africa ranked 91st, while Botswana ranked 35th. Even on its legal system, insofar as it applies to mining, South Africa ranked far worse than Botswana, coming in at 70th position compared to Botswana’s 20th place. On its tax regime relevant to mining, 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. (South Africa also fared poorly on policy issues too, as further described below.) Overall, the Fraser Institute ranked South Africa 66th out of 109 countries, while Botswana ranked 39th. [Fraser Institute, Annual Survey of Mining Companies, 2015]

As these comparisons show, the travails of the South African mining sector cannot solely be blamed on the current global commodities downturn.  Even during the boom years of soaring Chinese demand for minerals from 2001 to 2008, moreover, South Africa’s mining industry shrank by 1% a year. By contrast, the top mining exporting countries experienced average growth of 5% a year in the same period. [John Kane-Berman, Digging for Development, p4]

If the South African mining sector could match this performance, it would help the economy to grow at the rapid rates (ideally 6% or 7% of GDP) needed to overcome the unemployment crisis. Increased mining revenues are also badly needed to help the government finance its twin deficits and reduce the growing burden of public debt, which has doubled since 2009. Interest payments on this debt are already expected to total roughly R150bn this year (almost as much as spending on healthcare), while interest is the fastest rising line item in the annual budget. [2016 South Africa Survey, p190]  Growing doubts about South Africa’s capacity to manage its debt burden could also prompt Standard & Poor’s and other international ratings agencies to downgrade the country’s credit rating to below investment grade. Any such decline to ‘junk’ status will add to the country’s financial woes and increase the already high interest burden.

In these circumstances, the government urgently needs to do all it can to help the mining industry overcome its current challenges and start growing strongly once again. To this end, it needs to reduce the regulatory burden on the sector, which is a key factor contributing to its current malaise. The government must certainly not increase the regulatory burden, which is unfortunately what the draft mining charter seeks to do.

The growing regulatory burden on the mining sector
Much of the regulatory burden comes from the MPRDA, which came into effect in 2004. Many of the Act’s requirements for the granting of mining rights are vaguely worded and inherently uncertain, making them difficult to understand and open to varying interpretation. Applicants must, among other things, draw up ‘social and labour plans’ satisfactory to DMR officials, fulfil broad socio-economic objectives (such as ‘advancing the social and economic welfare of all South Africans’), and comply with the empowerment provisions set out in the Broad-Based Socio-Economic Empowerment Charter for the South African Mining Industry (the original charter), which was drawn up in 2002 and entered into force (with the MPRDA itself) in May 2004.

The original charter effectively required mining companies to transfer 26% of their equity or assets to ‘historically disadvantaged South Africans’ (HDSAs) within ten years, or by the end of 2014. It also said that this 26% in equity or assets was to be transferred at ‘fair market value on a willing seller/willing buyer basis’ and that ‘the continuing consequences of all previous deals’ must be taken into account in measuring the extent of HDSA ownership. Under the original charter, mining companies also agreed to ‘aspire to a baseline’ of 40% black participation in management within five years, co-operate in the formulation of development plans for mining communities and major labour-sending areas, improve housing standards for mineworkers, and increase procurement from HDSA companies over three to five years, while encouraging their existing suppliers to partner with HDSA firms. [Anthea Jeffery, BEE:Helping or Hurting? Tafelberg, 2014, p226]

According to mining law expert Peter Leon, the vague provisions of the Act have made for ‘a very unpredictable regulatory environment’ ever since the MPRDA took effect. In 2007 the government seemed to recognise this problem and pledged to reform the MPRDA by reducing discretionary powers and making the relevant rules more certain. Instead, a number of regulatory changes since then have made the initial problem even worse. [BEE:Helping or Hurting? p229] 

In April 2009 the then mining minister, Buyelwa Sonjica, unexpectedly gazetted a code of good practice under the MPRDA, under which mining shares transferred to HDSA partners would have to be free of debt within two years. This suggested that mining companies would virtually have to give their assets away. Following strong objections, the code was put on hold for a number of years. However, under the MPRDA Amendment Bill of 2014 – which has been adopted by Parliament but is currently under review because of doubts as to its constitutionality – the code has been incorporated into the Act. Unless this is changed, the code of good practice will automatically come into effect when the 2014 Amendment Bill is enacted. In combination with the draft charter provision requiring mining companies to re-do ownership deals whenever their BEE investors sell out, this could cripple many mining companies. [BEE:Helping or Hurting? p230]

The regulatory burden was also increased in 2010, when a new mining minister, Susan Shabangu, insisted that mining companies were lagging in implementing the original charter and had to do more to advance transformation. She then gazetted a revised mining charter in which previously aspirational goals were turned into specific targets to be attained by the end of 2014. By that time, mining companies were expected, among other things, to achieve ‘a minimum target’ of 26% ownership by HDSAs, attain ‘a minimum’ of 40% black representation at board and management levels; increase annual procurement from BEE suppliers (those with 25% black ownership in most instances) to 40% for capital goods, 50% for consumer goods, and 70% for services; allocate an increasing proportion of their annual payrolls (3% in 2010, rising to 5% by 2014) to skills development; implement community development projects, and improve housing for mineworkers in various ways.  Mining companies undertook to report annually on their compliance with these revised requirements, while the DMR in turn promised to help ‘promote the sustainable development and growth of the mining industry’. [BEE:Helping or Hurting? p245-p246]

The revised charter also changed the empowerment goal posts in other fundamental ways. First, Ms Shabangu declared an end to the ‘once empowered, always empowered’ principle contained in the original charter, saying that if BEE shareholders sold out their stakes, mining companies would have to enter into new BEE ownership deals. However, as Mr Leon pointed out, this was contrary to the original charter and unfair to the industry for ‘it was not the company’s fault...if the BEE investor sold out’. Second, the revised charter expressly stated that ‘non-compliance’ with its provisions, or those of the MPRDA, ‘shall render the mining company in breach of the Act and subject to the provisions of Section 47, [providing for the suspension or cancellation of mining rights] read in conjunction with Sections 98 and 99 of the Act’ (laying down penalties for contraventions of the statute). [BEE: Helping or Hurting? pp245, 246]

The revised charter thus purported to give the minister the power to cancel the mining rights of companies that failed to comply either with the revised charter or the Act itself. Wrote journalist Tim Cohen in Business Day: ‘Suddenly, all the soft targets of the charter have been turned into black letter law. Suddenly, not achieving procurement targets means your competitors can insist your licence is revoked.’ Moreover, nothing had been done to cure the ambiguities in wording that made for great uncertainty about the Act’s requirements and opened the way to the unequal and often arbitrary enforcement of the relevant rules. [BEE: Helping or Hurting?,  pp246-247]

Next came the MPRDA Amendment Bill of 2014, which again sought to increase the regulatory burden in numerous ways. Under the Bill, the mining minister is empowered to ‘designate’ various minerals as necessary for local beneficiation and then stipulate ‘the prescribed quantities, qualities and timelines’ in which these minerals must be supplied. Prices must be either ‘mine-gate’ or ‘agreed’, while no designated mineral may be exported until the stipulated percentages have been locally supplied. Though the Bill lacks detail on this point, both price and export controls are also likely to be imposed on all minerals identified by the minister as ‘strategic’. These export controls are clearly in conflict with international agreements binding on South Africa, which bar the introduction of such measures. This is partly why President Zuma declined to sign the Bill into law, and why the measure is now under parliamentary review. [BEE:Helping or Hurting? pp255-257; Business Day, 11 January 2016, Legalbrief 5 May 2016]

Unless the 2014 Bill is greatly changed in the review process, its enactment into law will not only increase the regulatory burden on mining companies but also greatly expand the mining minister’s discretionary powers. This will add to policy uncertainty and increase the already wide scope for arbitrary interpretation and uneven enforcement by DMR officials.

The growing regulatory burden and vague provisions of our mining law have already triggered a sharp decline in South Africa’s ranking on key elements of the Fraser Institute’s mining index. Even without the adoption of the 2014 Mining Bill, South Africa in 2015 ranked 78th out of 109 countries on the ‘policy perceptions’ element, which measures the extent to which mining policy helps attract investors. Botswana, by contrast, with its clear and certain mining legislation – which has remained largely unchanged since 1999 – came 14th out of 109. On uncertainty in administering existing regulations, South Africa fared even worse, ranking in 84th place out of 109 countries. By contrast, Botswana, with its unambiguous rules, was rated the 2nd best in the world. [Fraser Institute, Annual Survey of Mining Companies, 2015]

Since 2014, the mounting regulatory burden on the mining sector has also been accompanied by various other policy shifts. These changes have further undermined property rights and deterred investment both in mining and the wider economy. Key interventions include:
• the re-opening of the land claims process for five years (from July 2014 to June 2019), which is likely to generate many claims on land now used for mining;
• the cancellation of bilateral investment treaties (BITs) entered into after 1994 with the United Kingdom and 12 other European countries, many of which have long been South Africa’s most important investment partners;
• the replacement of these BITs with the misleadingly named Protection of Investment Act of 2015, which provides almost no protection against nationalisation or expropriation for either foreign or domestic investors; and
• the pending enactment of the Expropriation Bill of 2015, which further undermines property rights and is likely to encourage, among other things, a number of indirect or regulatory expropriations for which no compensation will be paid.

Conflicting audits of mining charter compliance
Under the revised mining charter, mining companies were expected to raise HDSA ownership to 26% and meet various other targets by the end of 2014. The DMR thus commissioned an audit of their compliance, while the chamber of mines conducted its own review of how fully the various targets had been met. These assessments highlighted sharp differences between the department and the mining industry on the extent to which the revised charter had been implemented. Among other things, the DMR insisted that ‘the once-empowered, always empowered’ principle no longer applied, whereas the chamber strongly disagreed.  In March 2015 the then mining minister, Ngoako Ramatlhodi, announced that he and the chamber had agreed to apply jointly for a declaratory court order on the status of the ‘once empowered, always empowered’ principle. [Business Day, 28 April 2016]

However, instead of waiting for the court to give its ruling, the minister followed up in May 2015 by unexpectedly releasing the DMR’s audit report. According to the DMR report, only 20% of the industry had reached the 26% target for HDSA ownership in 2014. The chamber disagreed, saying all its members had at least 26% black ownership and that the average was 38%. The discrepancy was largely based on conflicting views of the changes introduced by the 2010 revised charter and whether these should have retrospective effect. [City Press 17 May 2015]

Using the original targets in the 2002 charter, the DMR agreed that 90% of the mines it had measured had not only met the target of 26% black ownership but had in fact exceeded it by bringing such ownership up to 32.5% on average. However, the 2010 charter had inserted a requirement that black ownership deals should include an employee share-ownership programme and a community group of some sort, in addition to one or more BEE entrepreneurs, and most ownership deals lacked the correct beneficiary mix. In addition, the DMR had not counted deals from which BEE partners had sold out, or which had otherwise come to an end. Whether the BEE ownership attained under these deals should still be counted was, of course, the very issue the minister and the chamber had jointly agreed to refer to the courts. . [Department of Mineral Resources, Assessment of the Broad-Based Socio-Economic Empowerment Charter for the South African Mining Industry (Mining Charter), May 2015, pp37-38; City Press 17 May 2015; Business Day 15 May 2015]

The chamber responded that it had been ‘blind-sided’ by the DMR’s report, especially as it had earlier been agreed that the ownership issue would be put to one side pending clarification by the courts. It stressed that the mining industry had transferred more than R159bn in value to black South Africans and that the ownership target had been met or exceeded in all spheres, including diamonds (26%), platinum (38%), manganese (42%) and coal (47%). [Moneyweb 18 May 2015]

On the procurement element, the DMR report agreed that most companies had met the relevant targets. Some 82% of companies had meet the 40% target for capital goods, while 65% had met the 50% target for consumer goods, and 83% had met the 70% target for services. (The chamber’s figures were generally lower, at 72%, 72%, and 63%, respectively.) However, the DMR report criticised multinational suppliers of capital and other goods for failing to contribute sufficiently to a social development fund. ‘This aspect had largely fallen through the cracks’, it said, and so a new mechanism would be needed to address it. By contrast, the chamber noted that these multinational suppliers, which were supposed to contribute 0.5% of the annual income they generated from local mining companies, had in fact contributed some 20% of such income, thus greatly exceeding the target.  [DMR, Assessment, pp39-40; Chamber of Mines, Transformation Fact Sheet, 2016, p2; DMR, Amendment of the Broad-Based Socio-Economic Empowerment Charter for the South African Mining and Minerals Industry, September 2010, p2]

On employment equity, the DMR report agreed that the mining industry had generally exceeded the target of 40% black representation in ‘all functional categories’.  However, it complained that ‘white males still dominate...senior and middle management’, and that ‘African females were still under-represented at all levels’. Again, the chamber disagreed, putting black representation at 50% at the top management level, at 42% among senior managers, at 51% among middle management, and at 54% at the junior management level. [Business Day 18 May 2015; DMR, Assessment, p39, Chamber of Mines, Transformation Fact Sheet, 2016, p2]

On skills development, the DMR report found that ‘most companies had met the target of spending 5% of their annual payroll’, as required. The chamber said such spending had in fact exceeded the agreed target, having risen to 5.5% of annual payroll in 2014. This meant that charter targets had again been exceeded. [DMR, Assessment, p39, Chamber of Mines, Transformation Fact Sheet, 2016, p2]

On the housing element, the DMR report said that only 55% of mining companies with hostels had met the target for upgrading these buildings. It acknowledged that many companies had sought to improve living conditions in other ways – through living out allowances and the provision of housing – but claimed that the charter dealt only with the conversion and upgrading of hostels. This is not true, however, for the 2010 revised charter speaks also of measures to ‘facilitate home ownership options for all mine employees’. [2010 Revised Charter, p4]

Without making any attempt to evaluate the other efforts made, the report concluded that ‘the objective of improving the living conditions of mine workers had not been fully realised’. [DMR, Assessment, p38] On community development, the DMR report found that only 36% of mining companies had met the mine community development target for 2014. [p39] But the chamber again disagreed, putting average compliance with hostel upgrading requirements at some 68% and compliance with community development obligations at 71%. [DMR, Assessment, p38; Chamber of Mines, Transformation Fact Sheet, 2016, p2]

Despite the high levels of compliance reflected even in the DMR report, Mr Ramatlhodi concluded that ‘only about 70% of mining rights holders had done everything the charter required for meaningful economic participation’. He failed to acknowledge that many of the targets had been met, even on the DMR’s assessment, and omitted to explain why the DMR report should be accepted as correct when the data assembled by the chamber was so different. Instead, the minister warned that the department was talking to companies that had not met the charter requirements and ‘would have to take steps to cancel mining licences under Section 47 of the MPRDA’. [Business Day 15,18 May 2015]

This was a major threat to the security of mining titles. In response, the president of the chamber, Mike Teke, said that the DMR was not ‘fairly reflecting’ all the work the mines had done. He also stressed the current difficulties facing the industry, which was characterised by ‘depressed commodity prices, rapidly escalating costs, electricity supply challenges, and continued uncertainty regarding some parts of South Africa’s mining and transformation laws’. The CEO of Harmony Gold, Graham Briggs, added that the threat to revoke mining rights was a threat to the very existence of many companies and put ‘a dark cloud’ over the industry. [Daily Maverick, 21 May 2015; City Press 17 May 2015; Business Day 18 May 2015]

It was against this background, as Mr Leon notes, that the chamber felt obliged to apply on its own for a court ruling on the crucial ‘once-empowered, always-empowered principle’ the DMR’s audit had discounted. That action remains pending. [Business Day, 28 April 2016]

This disagreement over compliance echoed a similar dispute in 2010, when the DMR’s audit of mining sector compliance with the original charter in its first five years was also disputed by the chamber. The DMR’s criticisms were then used to justify the sweeping changes to the mining charter made that year. The same story seems to be playing out in 2016, with the DMR’s criticism again being used to justify yet more changes to already onerous empowerment requirements. This became evident in April 2016, when Mr Zwane unexpectedly gazetted the draft charter. This proposes a number of major changes to empowerment obligations. If adopted in its current form, it will add significantly to the regulatory burden on mining companies and could greatly damage a crucial but struggling sector.

Content of the draft charter

According to the preamble to the draft charter, the DMR’s 2015 report on compliance found ‘an extremely varied performance that seemed to suggest a compliance-driven mode of operation, designed only to protect the “social license (sic) to operate”’. In addition, many mining communities were still living ‘in abject poverty’, while progress on BEE ownership remained ‘limited’. So too did ‘cash-flow directly to BEE partners’. A review was also needed to bring the mining charter into line with the Broad-Based Economic Empowerment Act of 2003, as amended in 2014, and with its generic codes of good practice.

The preamble ignores the extent to which mining companies have in fact met their charter obligations, as described above. It blames mining companies for the poverty and unemployment which the government’s own policies have often made worse. It criticises mining companies for making only limited dividend payments to BEE investors, but overlooks the sharp declines in commodity prices since 2011 which have placed all mining companies under enormous financial pressure.

Moreover, in agreeing that the mining charter should be brought into line with the BEE generic codes of good practice, the DMR is reneging on commitments long made to the mining industry. It is also fundamentally changing the empowerment goal-posts and generating further uncertainty as to what additional changes might lie ahead. In addition, it is greatly exacerbating a regulatory burden which is already too heavy.

‘Black people’

The draft charter states that ‘black people’ is a generic term which means Black Africans, Coloureds, and Indians’ (who are also South African citizens by birth or naturalisation). This definition replaces the reference to ‘historically disadvantaged persons’ in the original (2002) and revised (2010) charters.

The new definition implicitly requires some system of racial classification. However, there is no law providing how this should be done, for the Population Registration Act of 1950 was repealed by the National Party government in 1991 (after decades of public outrage at its provisions) and has not been replaced. In addition, identifying people by race and treating them differently on the basis of their race is contrary to the principle of non-racialism on which the Constitution is founded. [Section 1(b), Constitution of the Republic of South Africa, 1996]

It is also contrary to Section 9 of the Bill of Rights, which bars any form of racial discrimination by either the state or private persons. As an exception to these general rules, the equality clause authorises the taking of ‘legislative and other measures designed to protect or advance persons....disadvantaged by unfair discrimination’.  However, this sub-section makes no mention of racial targets and provides no constitutional authority for their use. In addition, any affirmative action measure must be ‘designed to protect or advance’ the disadvantaged and must be rationally and reasonably connected to this objective.  Measures which are instead likely to hurt the great majority of black South Africans do not satisfy this test. [Sections 9(1) to (5), Constitution]

Elements of the Mining Charter

The charter requires ‘a minimum target of 26% ownership per mining right’ for black people. It also requires that this 26% stake should be structured in a particular way, with at least 5% going to employee share ownership schemes (ESOPs), 5% to a community having rights in the land being mined, and 5% to black entrepreneurs. Trusts must be established to hold these community and employee shareholdings, and must also be structured to include traditional authorities and unions respectively. A Special Purpose Vehicle (SPV) must be created to manage each of the 26% BEE stakes required for each mining right. [Clause 2.1, Draft charter]

In addition, mining rights holders must, ‘with the concurrence of the BEE partners, consolidate the empowerment transactions with the prior written consent of the minister’ (whatever this may mean). In addition, ‘all existing mining rights holders must align BEE transaction(s) concluded prior to the coming into operation of the amended mining charter 2010 with the reviewed mining charter 2016.’ Moreover, where a BEE partner has ‘exited’ in some way, ‘the mining right holder must within three years...review its empowerment credentials consistent with the amended 2016 mining Charter’. [Clause 2.1, pages 2-3, Draft charter]

The obligations thus placed on mining companies – though poorly worded and thus difficult to understand – are likely to be highly damaging. A mining company with more than one mining right will now have to do a separate BEE deal for each such right. In addition, if existing deals do not include sufficient representation for employees and communities – and the National Union of Mineworkers (NUM) estimates that only 9% of mining companies have deals that meet these criteria – then most of the costly ownership transactions already concluded will have to be redone. [City Press 5 April 2016] 

Worse still, if BEE investors ‘exit’ an ownership deal, a mining company must do whatever additional deals might be needed to keep BEE ownership at 26% overall (and at 5% for each of the three categories of BEE beneficiaries identified in the draft charter).  These obligations will require mining companies to keep diverting scarce capital into ever more ownership deals, which in turn will inhibit the sustainability and development of many mines.

Each new BEE deal will also dilute the shareholdings of other investors. Many of these investors are institutions such as pension funds and unit trusts, in which small savers and pensioners, both black and white, have substantial interests. This means that every new BEE deal done at a discount by a mining company needing to keep its BEE stake at 26% will reduce the value of these institutional shareholdings. This in turn will curtail the funds available to these investors to pay out in the form of pensions or dividends. Hence, much of the cost of enriching a relatively small group of BEE mining beneficiaries will be borne by ordinary savers and pensioners, many of them black.

In addition, it may not in any way be the ‘fault’ of a mining rights holder if a BEE investor decides to exit.  Deals may end up under water because global commodity prices have fallen, or BEE investors may want to sell out at a profit and invest elsewhere. The new rules will put pressure on mining companies to lock in their BEE partners for the duration of an ownership deal (often ten years), but this would negate much of the benefit of their ownership stakes. On the other hand, mining companies cannot be expected simply to cough up for new BEE deals, perhaps indefinitely. [Business Day 9 April 2016]

Requirements to set up and establish trusts for employee and community stakes in particular ways will add to compliance costs, both direct and indirect. Having to establish an SPV for each BEE transaction will also be complex and costly, and will have major tax implications which seem not to have been considered.  Already, the financing of a BEE deal costs some 30% of the total amount, and the additional complexity required under the draft charter is likely to add significantly to these costs. [Business Day 9, 28 April 2016]

In addition, the mining industry has already transferred more than R159bn of value to black South Africans. However, it might well be expected to transfer the same amount again (if not more) under the new rules. A report by Stanley Morgan, an accounting firm, has calculated that the net present value of companies in the whole industry would be reduced by a quarter under these requirements. [FinWeek 12 May 2016]

Particularly damaging is the demand that all mining rights holders should re-do all the BEE ownership deals they have already concluded so as to bring them into line with the new requirements. Retrospective rule-making of this kind is contrary to the rule of law. Yet the Constitution stresses the ‘supremacy’ of the rule of law and makes it clear that it cannot simply be ignored. [Section 1(c), Constitution]

Many of the draft charter’s provisions in this sphere are also vague and difficult to interpret. This further contradicts the rule of law, which requires that laws and regulations be certain and precise. What does the draft charter mean, for instance, when it says that mining rights holders must ‘consolidate the empowerment transactions’ (see Clause 2.1.(i))? And what does it mean when it states that ‘the mining rights holder must...review its empowerment credentials’, in the final paragraph of Clause 2.1? The wording of the draft charter provides no clear answer.

Overall, these ownership requirements will deter new mining ventures, hamper the expansion of existing mines, encourage disinvestment from South Africa, and make it far harder to maintain or expand mining jobs. Their retrospective operation is unreasonable, irrational, and inconsistent with the Constitution. So too is the vague and uncertain content of the new rules.

Procurement, supplier and enterprise development
Capital goods

The target for the procurement of capital goods is raised from 40% to 60%, while local suppliers must now be manufacturing companies which are ‘BEE compliant’ under the constantly shifting BEE rules laid down by the Department of Trade and Industry (DTI). In addition, ‘30% of the 60% must preferably be given to small business development which are BEE compliant’ (sic), while ‘a minimum of 10% of the 30% must be reserved for BEE compliant enterprise development’. [Clause 2.2, Capital goods, paras (a) and (b), Draft charter]

The increase from 40% to 60% is a major shift, which may not be realistic and could add significantly to input costs, as many local manufacturers are less competitive than global ones. The expectation that 30% of this 60% should come from small businesses is particularly unreasonable. So too is the demand that 10% of the 30% be set aside for the development of new enterprises capable of supplying the necessary capital goods. Mining companies, which face major problems in sustaining their own profitability, cannot be expected to incubate new enterprises in this way. It will also be difficult for these new enterprises to succeed when the mining sector is itself in such difficulty and the economy as a whole stands on the cusp of recession.

Under the draft charter, the targets here will also rise steeply, from 50% to 70%. Again, the draft charter expects 30% of this 70% to ‘be given to small business development which are BEE compliant’ (sic) and adds that 10% of this 30% must go to enterprise development. [Clause 2.2, Consumables, paras (a) and (b), Draft charter]

Again, these increased targets are unrealistic and are likely to add significantly to procurement costs. Mining companies are not sustained by tax revenues and have to maintain their international competitiveness if they are to survive. They cannot reasonably be expected to base their procurement decisions on any criteria other than price, efficiency, and reliability of supply.

The target here goes up from 70% to 80%, while 40% of the 80% must go to small businesses and 10% of the 40% must be reserved for the development of new enterprises. [Clause 2.2, Services, paras (a) and (b), Draft charter] Again, these increased targets are unrealistic and are likely to add significantly to procurement costs.

Mining rights holders will also have to ‘verify local content for capital and consumer goods...with the South African Bureau of Standards (SABS)’ before sending in their annual reports on compliance with the charter. This will add to compliance costs and is likely to generate a major bureaucratic burden for both mining companies and the SABS. [Draft charter, p5]

Multinational suppliers of goods
Multinational suppliers of goods must contribute each year ‘a minimum of 1% of annual turnover generated from local mining companies’ to a ‘social development trust fund’ to be established by the mining minister. This fund is intended to promote the socio-economic development of local communities and help build capacity for BEE suppliers of goods and services. [Draft charter, page 5]

The draft charter doubles the relevant target from 0.5% to 1%. However, the DMR should be wary of imposing additional financial burdens on multinational companies with a wide range of faster-growing countries in which to operate. The international trade law implications of this provision are also significant and seem to have been overlooked. [Business Day 28 April 2016]

The draft charter, like its predecessors, allows mining companies to offset the BEE ownership obligations through the local beneficiation of mineral products. However, beneficiation is difficult to achieve when the necessary skills cannot easily be found and South Africa’s electricity supply remains inadequate and increasingly costly.

Employment equity
Employment equity targets are increased particularly sharply under the draft charter. The previous target of 40% black representation at all management levels is now to be raised to 50% at board level, 50% at executive level, 60% at senior management level, 75% at middle management level, and 88% at junior management level. In all but one sphere, black women are expected to make up half the relevant targets. (The exception is at board level, where black female representation is expected to rise to 15%.) [Clause 2.4, pp6-7, Draft charter]

These targets, like the Employment Equity Act of 1998 (the EE Act) on which they are based, assume that, because black South Africans make up 77% of the economically active population (EAP), they should make up 77% of executive, senior, and middle managers too. But the EAP includes all those between the ages of 15 and 64 who either work or wish to be employed. Given the youthfulness of the black population – more than half of black people are under the age of 25 – the EAP includes many black teenagers who have never obtained a matric or worked at any job at all.

By contrast, executive, senior, and middle managers must have appropriate experience and skills. In 2015, only 40% of blacks fell within the 35-64 age cohort that might be considered eligible for such management posts. In addition, though degrees or diplomas are often necessary or advisable for such jobs, only 5% of the black population then held any kind of tertiary qualification. This means that the pool of black people from which such managers can realistically be drawn is far smaller than the draft charter assumes. [2016 South Africa Survey, p258]

It is also unreasonable and irrational to raise targets for black female representation in management posts from 10% to the high targets (25%, 30%, 38%, and 44%) laid down in the draft charter. The pool of black women with the requisite skills and years of experience in the mining industry is simply not big enough.

Core and critical skills
The draft charter adds that mining rights holders ‘must ensure that a minimum of 40% black people are represented in the mining company’s core and critical skills by diversifying their existing pools. To this end, it says, the rights holder must ‘identify and fast track their existing pools’, while ‘the abovementioned fast tracking of pools must be a proportional representation of the workforce’. These requirements, particularly the last one, are so badly phrased as to be virtually unintelligible. [Draft charter, p7]

Human resource development
The draft charter requires the mining industry to ‘invest 5% of annual payroll’ in essential skills development activities, ‘such as artisanal, bursaries, literacy and numeracy’ (sic). It indicates that this allocation must be ‘reflective of the proportional representation’ (sic). [Clause 2.5, para (a), Draft charter]

Again, this provision is poorly drafted and difficult to understand. The target is the same as that in the 2010 charter, but it fails to take account of the particular financial difficulties now confronting the mining industry. For most companies in what is still a labour-intensive industry, 5% of annual payroll is a significant sum (on top of which mining companies must also pay the statutory skills levy, set at 1% of annual payroll). Such payments pose a substantial burden, especially during periods of limited profitability, and could fuel many job losses over and above the 10 000 already recorded this year. [Business Day 13 May 2016] 

Some 15% of the 5% levy will have to go to a ‘ministerial skills development trust fund’ to be established by the minister. There is no certainty that this fund will be well administered or that its contribution to training will be well conceived or executed.  Mining companies should have the choice of spending the full amount of the levy on in-house training, or support for academic institutions, both of which are likely to be more effective in meeting their training needs.

Mine community development
Under the draft charter, mining companies must contribute 1% of annual turnover towards local community development and labour sending areas. [Clause 2.6, draft charter]

Though this is likely to be the easiest target for mining companies to fulfil, the target should be based on net profit after tax, rather than on annual turnover. In addition, such contributions can do little to overcome key obstacles to upward mobility such as low growth, rising unemployment, and poor public schooling.

Housing and living conditions
Mining companies are expected to improve ‘the standards of housing and living conditions for mine workers in line with the Housing and Living Conditions Standards’ compiled by the DMR. They are expected to ‘maintain the occupancy rate of one person one unit and maintain family units’, in hostels presumably. They are also expected to ‘contribute to home ownership options for interested mine employees in consultation with organised labour’. This they may do, for example, by ‘offering different building packages to interested employees, subsidising such workers to buy houses’, or ‘partnering with finance institutions to issue guarantees for home ownership on behalf of the mine employees’. [Clause 2.7, draft Charter]

The draft charter fails to recognise the difficulties that mining companies may have, in practice, in helping to provide employee housing where the necessary land or infrastructure has not been made available by municipalities or other organs of state.  In the Rustenburg area, for example, the local dam is not big enough to meet the water needs of the large mining community that has grown up there, and new housing developments cannot easily be authorised for this reason. The draft charter needs to take account of practical obstacles of this kind. It also needs to recognise the financial difficulties now confronting the industry. Hence it should not impose such costly housing obligations on struggling companies, nor threaten them with the loss of their mining rights if they are unable to maintain a 100% score irrespective of the challenges they face.

Reporting and compliance
Every mining company must report each year on ‘its level of compliance with the Mining Charter’. [Clause 2.9, draft Charter] This reporting obligation, although not new, will again impose significant compliance costs on mining companies, especially smaller ones.

Applicability of targets
According to the draft charter, ‘all targets stipulated...shall be applicable throughout the life of the mine’, unless otherwise indicated. In addition, ‘ownership, housing and living conditions, and human resource elements are ring fenced and require 100% compliance at all times’. [Clause 2.10, draft Charter]

These provisions are likely to be particularly onerous and damaging to the mining industry. The original charter was supposed to apply for ten years, but the draft charter will apply for the full duration of a mining operation, which could be 30 years or more. Throughout this time, BEE ownership will have to be maintained at 26%, irrespective of how often BEE beneficiaries sell out or deals come to an end for other reasons. Sub-targets for community and employee stakes will also have to be maintained over all these years, even if the relevant communities or employees would prefer to sell out.

If the overall BEE ownership target or any of the sub-targets is not met at any time, the relevant mining right could be cancelled for this failure to maintain a 100% score on the ownership element. Few mining companies will be able to borrow working capital or commit their own resources to mining operations when they have so little security of tenure.

Even if BEE ownership in the stipulated proportions can be maintained at all times, mining companies will still be vulnerable to the loss of their mining rights if they fall behind on their housing obligations for reasons beyond their control. In addition, it is unreasonable to expect companies to maintain 100% compliance with costly housing and skills development obligations during periods of limited or no profitability.

Transitional arrangements
Effectively, mining rights holders will be given three years to comply with the new requirements in the draft charter. However, the wording is again vague and difficult to understand. For example, the draft charter says that ‘in all elements, mining rights holders must align existing targets cumulatively from the mining charter 2014 targets within three years period to meet the revised targets’. [Clause 2.11, draft Charter]

What does this mean? Take the employment equity targets, which rise from 40% black representation at senior management level to 60%. How exactly must this 20 percentage-point gap be bridged over three years?  The same question applies to the 20 percentage-point gap between the current capital procurement target (40%) and the new one (60%). Moreover, given the magnitude of the increases in many of the targets, a three-year transitional period is far too short.

Under the draft charter, ‘mining rights holders who have not complied with the ownership, housing and living conditions, and human resource development elements...will be regarded as non-compliant with the provisions of the Charter and the MPRDA shall render the mining right holder in breach of the MPRDA and subject to sanctions provided for in the Act’. The same penalty will apply to any mining rights holder that ‘falls between level 6 and 8 of the Mining Charter scored-card’ (sic). [Clause 2.12, Draft charter]

Though the draft charter does not spell this out in so many words, what this provision signals is that mining companies, as earlier noted, will have their mining rights suspended or cancelled if they fail to maintain a 100% score on their ownership, housing, and training obligations. Few mining companies will be able to sustain their operations under such a threat.

Companies which do manage to score 100% on these elements, but then fall down on others – particularly the unrealistic employment equity and procurement obligations – could also have their mining rights suspended or cancelled.  This too is a major threat to all mining companies.

The scorecard provided in the draft charter is also intrinsically vague. Though each target is supposedly now to be weighted, and each mining right holder will earn a score between 0 and 100, the scorecard does not set out the points attainable on each element. Thus, though it identifies 26% as the ‘minimum target for HDSA (sic) ownership’, it does not say how many points mining companies will score for meeting this target. Likewise, it sets out the targets for procurement on capital goods, consumables and services, but it does not say how many points will be available for full (or partial?) compliance with this element. This makes it impossible to determine how points will be allocated, which in turn makes it impossible for scores to be computed. 

Two telling omissions
One of the key goals included in the 2010 mining charter was to ‘promote the sustainable development and growth of the mining industry’. [Clause 1(f), 2010 charter] This objective has been removed in the draft charter. In addition, the 2010 charter said that the target of having BEE partners receive cash and take full ownership of their shares within the initially agreed time frame was ‘subject to market conditions’. The new version removes this important practical safeguard. [Definitions, 2010 charter; City Press 15 April 2016]

Inconsistency with the Constitution
The draft Charter is inconsistent with the Constitution in various ways. As noted above, it implicitly requires racial classification and mandates racial preferences, which is inconsistent with the Constitution’s commitment to non-racialism, its prohibition of racial discrimination, and the limited authorisation for affirmative action which it provides. [See Sections 1(b) and 9, including Section 9(2), Constitution]

The draft Charter’s attempt to give its new rules retrospective operation is also inconsistent with the Constitution’s founding provisions and their emphasis on ‘the supremacy of the Constitution and the rule of law’. [Section 1(c), Constitution] Similarly flawed are the vague and uncertain provisions of the draft Charter, which contradict the constitutional requirement for clear and unambiguous laws and regulations.

The draft Charter is also inconsistent with the doctrine of the separation of powers, which is a fundamental principle underpinning both the Constitution and the country’s democratic order. Under the Constitution, the authority to legislate is reserved for Parliament alone, while the authority to enforce the statutes enacted by the legislature is entrusted to the executive. Ministers may adopt regulations to clarify and give effect to existing statutory rules, but they cannot simply rewrite those rules as they see fit. Hence, the MPRDA does not – and constitutionally cannot – empower the mining minister to usurp Parliament’s function and legislate. In purporting to do so in this draft charter, Mr Zwane has also breached his own constitutional obligation to ‘act in accordance with the Constitution’ at all times. [Sections 43, 44, 92(3)(a), Constitution]

The vague provisions of the draft charter also give the minister a large discretion to interpret its requirements in different ways at different times. This in itself flies in the fact of a Constitutional Court warning against excessive ministerial discretion. Said the court in 2002, in the case of Janse van Rensburg and another v Minister of Trade and Industry and another, ‘it is inappropriate that the minister should be able to exercise an unfettered and unguided discretion in situations so fraught with potentially irreversible and prejudicial consequences for business people and others who may be affected’. [Janse van Rensburg and another v Minister of Trade and Industry and another, (CCT13/99) [2000] ZACC 18]

The government has a responsibility to expand opportunities, both in mining and elsewhere, for the 8.9 million South Africans who are now unemployed and the millions more who continue to live in poverty. However, this can be achieved only in the context of a rapidly growing economy which attracts investment, encourages entrepreneurship, and generates millions of new jobs. Hence, a key part of the government’s role is to develop and implement policies which promote these outcomes.

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 mining investors. To do so, it must meet various internationally recognised principles. It must comply with the principle of equality before the law, so as to limit the scope for bias and corruption. It must state all relevant rules clearly and unambiguously, so that mining companies know what is expected of them and officials have little scope to demand something different.  Above all, however, it must protect property rights and ensure security of tenure for mining licences. It must also provide mining companies with policy certainty. They must be confident that the rules that apply when they invest will not be changed in the future so as to undermine their security of tenure and put their investments at risk. [BEE: Hurting or Helping? pp219-221]

The draft charter breaches all of these requirements. Far from helping to expand opportunities in mining, it will encourage retrenchments, deter fresh investment, undermine the sustainability of existing operations, and promote disinvestment.

Already, mining production has plummeted by 18% to its lowest level in almost 40 years. [Business Day 13 May 2016] Mining production could easily fall further if experienced mining majors are pushed out, and the state mining company tries to step into the breach. However, without mining’s current contribution to merchandise exports, the budget and current account deficits will be harder to finance and the value of the rand will decline. Inflation will then rise sharply, causing great hardship to all South Africans, and especially the poor.  Many jobs in the mining sector will be lost, along with many of the indirect jobs which the sector helps to sustain. Again, the impact will fall the hardest on the poor. In addition, those who manage to retain their jobs will have ever more relatives and other dependants to support.

To avoid these economic consequences and ensure compliance with the Constitution, the draft charter must be scrapped. Instead, the DMR should focus on bringing all mining law into line with the internationally accepted principles outlined above. Botswana’s mining law provides a good example for it to follow. At the same time, many more opportunities can be created for the poor by shifting away from the damaging BEE rules reflected in the draft Charter and instead embracing an alternative policy of ‘economic empowerment for the disadvantaged’ or EED.

A necessary shift to EED
EED differs from BEE interventions of the kind included in the draft charter in two key ways. First, EED does not use race as a proxy for disadvantage, but instead cuts to the heart of the matter by focusing directly on socio-economic status. This allows racial classification and racial preferencing to fall away, thus helping South Africa to uphold the principle of ‘non-racialism’ embedded in the Constitution.

Second, EED focuses not on outputs in the form of numerical quotas, but rather on providing the inputs necessary to empower poor people. Far from overlooking the key barriers to upward mobility, it seeks to overcome these by focusing on all the right ‘Es’. In essence, it aims at rapid economic growth, excellent education, very much more employment, and the promotion of vibrant and successful entrepreneurship.

EED policies aimed at achieving these crucial objectives should be accompanied by a new EED mining scorecard, to replace the current one. Under this revised scorecard, mining companies would earn (voluntary) EED points for:
• all direct investment within the country;
• maintaining and, in particular, expanding jobs;
• contributing to tax revenues;
• helping to generate export earnings;
• appointing staff on a ‘wide’ definition of merit which takes account of how people have had to cope with poor schooling, bad living conditions, and the like;
• providing intensified training and mentoring for personnel appointed on this basis;
• entering into employee share equity programmes with all staff, with further points available for schemes that bring additional benefits to the disadvantaged;
• topping up the state-funded vouchers which the government should provide to help poor households meet their education, health care, and housing needs.

After decades of damaging mining policies, it is time to call a halt. South Africa cannot hope to expand opportunities for the disadvantaged, either in mining or elsewhere, unless it raises the annual growth rate to 6% of GDP or more. The introduction of Botswana-type mining legislation, coupled with a shift to EED in the mining sector, would help achieve this. By contrast, the introduction of the draft charter will further hobble the mining sector and could help push the economy into persistent and destructive recession. Though this would greatly harm all South Africans, the negative impact would fall most heavily upon the poor.

South African Institute of Race Relations NPC                 13th May 2016

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