Frans Cronje on how South Africa could start catching up with Botswana
What does great mining policy look like?
Notes of Frans Cronje’s address to the Johannesburg Mining Indaba on 5 October 2017.
‘Predictable, competitive, and stable’
What does great mining policy look like? South Africa’s National Development Plan (NDP), as adopted by the ANC in 2012, provides the answer: it must provide ‘a predictable, competitive, and stable regulatory framework’.
But South Africa’s mining policy meets none of these criteria. This is the key reason why, even during global commodities boom and despite South Africa’s unparalleled mining wealth, the country’s mining industry shrank even as the mining sectors in other important jurisdictions expanded by 5% a year on average.
The problem is not simply that mining policy is ‘uncertain’, as commentators often state. That the mooted amendments to mining legislation and the mining charter have remained unsettled for five and three years respectively has not helped investor confidence, but it is only a small part of the overall challenge. The key issue is that existing mining policy is fundamentally flawed.
The Mineral and Petroleum Resources Development Act (MPRDA) of 2002 and its accompanying mining charter are intrinsically vague and uncertain, making for the discretionary and uneven enforcement of the relevant rules. Vague provisions have also helped open the door to corruption and other abuses of power. In addition, policy changes have been frequent and increasingly hostile to private enterprise. The further shifts now contained in the 2017 mining charter are so deeply damaging that they could well make the mining industry ‘uninvestable’, as the Chamber of Mines has warned.
This is a tragedy for the country, given the economic importance of the mining industry. Mining companies have made enormous contributions to growth, employment, fixed investment, tax revenues, and dividend distributions. To name but some examples:
- Mining provides half a million direct jobs and a million indirect ones, so helping to support about 15 million people or a quarter of the population;
- Mine wages were once among the lowest in the country, but are now roughly 30%-60% higher than in industries that stretch from retail to manufacturing and construction – while outstripping wages in sectors such as security and agriculture by an even more considerable margin;
- Our mining jobs pay well (especially for an emerging economy), while mining is one of the few sectors able to create decent work for relatively unskilled people;
- Mining accounts for some 11% of gross fixed capital investment and accounts for almost a quarter of all foreign direct investment (FDI) into South Africa;
- Mining exports make up 60% of merchandise exports (when beneficiated products are taken into account) and are crucial in balancing the current account deficit, maintaining the value of the rand, and preventing inflation from spiking even higher;
- In profitable years, mining generates billions of rands in tax and royalty revenues for the government, while the dividends it pays go mainly, not to a wealthy elite, but rather to the pension funds and other large financial institutions that safeguard the futures and savings of millions of ordinary hard-working South Africans, both black and white;
- Mining is crucial to the economic well-being of four provinces, 16 towns, and two major ports, while annual procurement by the industry drives upstream and downstream businesses to an extent that rivals some aspects of government procurement;
- Since most of South Africa’s power stations are dependent on coal, most businesses and some 90% of households are dependent on the health of the mining industry to keep the lights on. And, without the oil from coal produced by Sasol, the country’s fuel import bill would be even higher.
President Jacob Zuma is right, then, in saying that the mining industry is the backbone of the economy. Its economic contribution could also be very much greater, if it were not being hobbled by adverse policy. Think how much better off the country and all South Africans would be if the mining sector here had also been able to grow at 5% per annum during the boom years from 2002 to 2008.
How, then, should mining policy change?
Recasting the MPRDA
First, we need to recast the MPRDA itself to make it ‘predictable, competitive, and stable’. Botswana’s mining statute shows what could be done.
Despite South Africa’s enormous mineral wealth, well-developed capital markets, unmatched infrastructure, and high degree of mining expertise, the country does badly in comparison with its Botswana neighbour. Botswana stands almost 30 places ahead of it in the Fraser Institute’s annual mining index, which measures the attractiveness to investors of different mining countries.
The key reason why we lag so far behind lies in our mining policy. Both countries embarked on major changes to their mining laws in the late 1990s, but Botswana opted to reform its 1977 mining legislation so as to bring it into line with international best practice. The new mining law Botswana adopted in 1999 is reasonably predictable and clear. Mining rights depend, in the main, on applicants having ‘adequate financial resources, technical competence, and experience to carry on effective mining operations’. The mining minister and his officials have relatively little administrative discretion, making the licensing process transparent and predictable. Time frames for decision-making are also brief: 60 days for prospecting licences and 20 days for large-scale mining licences.
The obligations imposed on the holders of mining licences are also stable, having remained effectively the same since the statute was adopted. Nor has Botswana threatened the mining industry with nationalisation or expropriation, whether direct or indirect.
Botswana has reaped substantial benefit from its 1999 reforms, becoming one of the most attractive mining countries in the world on various elements in the Fraser index.
South Africa could have followed its neighbour’s example and ensured that the MPRDA complied with international best practice. Instead, South Africa chose to move in the opposite direction. It has paid a heavy price for this, for its attractiveness to mining investors – whose decisions on where to invest are governed 60% by geology and 40% by policy – has steadily decreased since the MPRDA came into force.
If South Africa is to start catching up with Botswana, it should, as a starting point, recast the MPRDA along the lines of its neighbour’s mining law and make it clear that these reforms will not be reversed in the future. This might give mining companies the confidence they need to commit large sums of capital to an industry where lead times are unusually long and profitably rides on the vagaries of commodity price cycles – meaning that boom cycles are needed to subsidise price troughs.
Recognising the weaknesses in current empowerment policies
But mining policy in South Africa will need to go even further than that. Central to the success of better mining policy will be its ability to tackle the empowerment challenge – for there is no greater policy challenge facing our country. Effective transformation is essential to overcome the apartheid legacy, break down the current insider/outsider dichotomy, and give the disadvantaged a meaningful chance to climb the economic ladder. For more than 80 years such policy has been a key objective of the think-tank I work for – and it remains our greatest policy priority. Regrettably - empowerment policy has to date contributed very little to socio-economic progress and where our country has seen the poor, the unemployed, and the disadvantaged climb the economic ladder that progress can more often be attributed to factors that fall outside the confines of the government’s narrow empowerment policy objectives.
Since 1994, our country has made progress - far more progress in expanding the economy, generating jobs, reducing poverty, and improving the living standards of the black majority than most politicians and other commentators are willing to allow. Mining has played a significant role in making the progress possible and would be justified in taking some credit for it.
Here are some of the highlights of these achievements:
- Between 2001 and 2007, on the back of the GEAR policy and some good fortune, South Africa witnessed the sharpest increase in real GDP per capita since the first half of the 1960s;
- The post-1994 growth recovery supported extraordinary improvements in the lives and living standards of South Africans, with the labour market participation rate rising by 15 percentage points, the number of black people in employment more than doubling, the proportion of people within the lower third of the living standards spectrum falling from more than 40% to just 10%, and new car sales doubling as the middle class expanded in like measure.
- In some suburban housing markets black buyers now exceed white buyers and at some newly established private schools the early grades show more black pupils than white pupils;
- The number of university students more than doubled. You are miners, and employ engineers, but may not know that in the early 1990s over 40 white engineers were graduating for every one black engineer. Now there are more black engineering graduates than white engineering graduates;
- The ANC has been far more successful in service delivery, and in raising living standards, than it has ever been given credit for. The number of families with electricity has tripled. The proportion of black families in a formal house has increased from around 50% to nearer 75%. For every shack built after 1994 ten formal houses have been built – all via the tax revenues redistributed out of South Africa’s private sector including the mining sector.
It is pure nonsense to say little has improved in the country, or that the benefits accrued purely to the rich, or that the middle classes and the private sector, including the mining sector, have done little to make the country a better place for all its people.
Let us dispense with the idea that our first 20 years as a democracy have been a failure in the main and that the private sector has completely failed in its obligations to society.
The real progress South Africa has made, as felt in households across the country, was made possible, without exception, by an expanding economy the benefit from which was far more evenly distributed across social and racial strata than many analysts are willing to admit. More importantly - it was progress that dwarfs anything that was achieved through corporate social investment spending our through narrowly defined empowerment transactions.
It follows that future empowerment policy, if it is to be effective in creating channels out of poverty and disadvantage, should be drafted to support and reward the very same four fundamentals – fixed investment, job creation, tax payments, and exports – that underpinned the bulk of our country’s socio-economic progress to date.
However, the growth rate has never been high enough to generate the millions more jobs required by a constantly expanding labour force, while the quality of the schooling, housing, sanitation, and other essentials provided by the state has often been poor.
With the economic growth rate now lagging behind the population growth rate for the fourth successive year and the jobless rate at a 14-year high, poverty levels are rising once again. Popular expectations of continued improvements in living standards are being thwarted thus fuelling increasingly violent demonstrations and undermining social stability.
The mining industry has often, and increasingly, been pilloried for being ‘anti-transformation’. But even against the inadequate benchmark of its narrowly defined empowerment targets mining companies have done BEE ownership deals valued at more than R205bn (in 2014 rands). They have thus transferred some R159bn in economic value (again in 2014 rands) to the disadvantaged. The industry has also increased black representation in management to more than 50% in general, and greatly expanded its procurement from black-empowered companies.
But this is not where mining’s contribution to real empowerment should be measured as the benefits of current empowerment policy in the mining sector (as opposed to its broader economic contribution to society) have been largely confined to the few. This is not the fault of the industry. Rather, it is an outcome which current empowerment policies are sure to bring about. No matter how much the current rules are tightened up, the great majority of jobless, poorly skilled, and disadvantaged South Africans will never benefit from ownership deals, management posts, or preferential tenders from mining (or other) companies.
This is the fundamental misalignment that sits at the heart of the failure of South Africa’s empowerment policies. The things the policies want to achieve and the things that are needed to empower the disadvantaged – are different things. Mining policy as currently conceived cannot possibly help to draw the investment to make possible the growth necessary to create the jobs, tax payments, dividends and exports to enable actual socio-economic empowerment. If anything the opposite is true and current mining policy will have the effect of reducing living standards and cutting off channels out of poverty – a grotesque outcome for a policy drafted in the supposed interests of reversing the historical inequalities laid down in our apartheid past.
Devising effective new empowerment policy
A bold new alternative is being developed by the IRR and is called ‘economic empowerment for the disadvantaged’ or ‘EED.’ An EED policy would rest on a scorecard that rewards the private sector for contributing to growth and effectively empowering the truly disadvantaged.
An EED charter for mining
Under an EED mining charter, companies would earn EED points for their contributions in four categories: economic, labour, environmental, and community. Given the overarching importance of growth, their economic contributions would count the most.
In the economic sphere, mining companies would gain EED points for capital invested, minerals produced, profits earned, dividends declared, and contributions made to tax revenues, export earnings, and R&D spending.
These contributions to empowerment are the most important ones that mining companies can make. Without these fundamentals, the most impenetrable barriers to upward mobility – low growth and high unemployment – can never be overcome.
Investment in mining is crucial to a faster rate of economic growth, while an expanding mining industry is necessary for increased employment, both in the industry itself and in upstream and downstream enterprises. At the same time, jobs and earnings are vital to the dignity and self-reliance of individuals. They also offer people the surest and most sustainable path out of poverty.
In addition, the minerals that mining companies produce are the bedrock for the profits they generate, the dividends they distribute (which go mostly to the pension funds and unit trusts in which ordinary South Africans invest their savings) and the revenues they contribute to the fiscus. These revenues are vital in meeting the infrastructure, education, welfare, and other needs of the country.
Mining’s export earnings, as earlier noted, constitute 60% of merchandise exports and are crucial in reducing the trade deficit. They also help to maintain the value of the rand and thus to hold down inflation, which always harms the poor the most.
Innovation is also vital to South Africa’s economic success, as the World Bank has recently stressed. The development of new mining technologies is particularly valuable, making it easier to exploit narrow mineral seams often located at great depths and to improve working conditions in mines.
In the labour sphere, mining companies would earn EED points for jobs maintained and, better still, expanded, as well as for salaries paid and/or increased. Additional points would also be available for companies that improve skills, safeguard health, and enhance mine safety, among other things.
As regards the environment, companies would obtain EED points for reducing electricity and water consumption, minimising rock and other waste, treating polluted water, rehabilitating land, and so on.
As for their community contributions, companies would earn EED points for topping up the education, housing, and health care vouchers of poor households in mining communities, or for helping to improve the standard of provision in these key spheres. Tax-funded vouchers for education, housing, and health care are integral to EED.
Time to shift to EED
A shift to EED would also be in keeping with what most South Africans desire. Ordinary South Africans are well aware that current government policy does not help them as it should. In a field survey only about 14% of black respondents reported that BEE policies had helped them personally, while 86% indicated that BEE had passed them by. It is no wonder then that popular confidence in business leaders and politicians alike has slipped in South Africa – as these two groups continue to foist onto the poor majority empty promises of better implementing a policy that does not help the poor and that they do not want.
A shift to EED, in combination with necessary reforms to the MPRDA along the lines of Botswana’s mining law, would greatly help to strengthen and expand the mining industry and, most critical of all, align the best interests of South Africans to the best interests of the industry while rewarding the industry for the things it does that actually improve lives – namely job creation, tax and dividend payments, expanding exports, and rising levels of fixed investment.
If essential policy reforms are to be achieved, the mining industry must play a leading role in pushing for their implementation. The industry has been hoping to ‘get along by going along’. It has swallowed slurs and twisted facts and tried to negotiate with key politicians behind the scenes. It has done too little to remind South Africans of its enormous economic contribution – and the good that contribution has brought about in their lives.
We have been in this business for decades and can assure you that appeasement does not work. Hostile policy makers will pocket each concession made, before pushing on with the next damaging intervention. Now litigation is in train – always a marker inadequate policy lobbying - and a damaging stand-off looms.
The way out of this impasse lies, not in tinkering with the MPRDA and the current mining charter, and not in belittling and insulting members of the Cabinet, but rather in a positive, utterly creative, and bold new policy approach, as outlined here – one that captures not just the minds of policy makers but the hearts of ordinary South Africans. And the first practical step towards these necessary policy shifts lies in the mining industry starting to challenge and change the current terms of the debate so that these reflect its real contribution to society – while insisting that future mining policy enables and rewards that contribution. If you turn the hearts the minds may follow and if you then lead them with bold new policy thinking - the outlook for your industry will grow better by the day.
Frans Cronje is CEO at the IRR – a think-tank that promotes political and economic freedom. This speech was based on years of policy research into mining conducted under the auspices of the IRR’s Head of Policy, Dr Anthea Jeffery. Learn more at www.irr.org.za.