Media comment by Peter Leon (Partner and Africa Co-Chair at Herbert Smith Freehills) | 2021 State of the Nation Address

10 February 2021  

The COVID-19 pandemic has had a devastating impact on the South African economy.  According to the World Bank's most recent Global Economic Prospects Report (published last month; here)  South Africa's Gross Domestic Product (GDP) likely contracted by 7.8 per cent in 2020. This is three times more than the average contraction experienced in other Emerging Market and Developing Economies (EMDEs) and three per cent greater than other commodity exporting EMDEs.

It is therefore critical for President Cyril Ramaphosa to identify in his State of the Nation address what measures the South African Government will implement to effect South Africa's economic recovery.  There are a number of fundamental issues that the government simply cannot ignore anymore: 

1.       Mining: According to information published by the Minerals Council (here) mining's GDP declined in nominal terms by nearly four per cent in 2020.  This is despite the fact that most minerals traded above their pre-pandemic levels by October 2020 (here), including gold which is currently trading approximately US$ 300 dollars higher than in January 2020.  What is most concerning is that exploration expenditure amounted to 2 per cent of South Africa's mineral production value and less than 1 per cent of global exploration expenditure in 2020. To change this trajectory,  the Government should:

a.      Urgently amend the Mineral and Petroleum Resources Development Act, 2002 to limit administrative discretion, impose strict time periods for making decisions and remove unnecessary obligations which do not benefit the mining sector or mine communities;

b.      Implement mechanisms that would promote more exploration and greenfield projects; 

c.      Develop and implement an online cadastral system which is open and easy to use.  HSF and the World Bank recently advised the Kingdom of Saudi Arabia on its new mineral law regime and identified the need for a central online system as one of the key mechanisms for any successful mining jurisdiction.  The cadastral system should provide a functioning online platform where all licensing applications are submitted (and tracked) and information in respect of South Africa's mineral deposits and existing licences are easily accessible.  This will grant prospective investors insight into South Africa's actual mineral wealth and highlight investment opportunities; and

d.      Amend Mining Charter III and create a system which empowers workers and communities, and promotes security of tenure in relation to existing rights.  The mineral regulatory system should be fair, predictable and stable.

2.       Energy: 

a.      The Upstream Petroleum Resources Development Bill provides the Government with an unique important opportunity to promulgate legislation that will instill investor confidence.  The initial version of the Bill did not achieve this (our previous comments are available here).  It is therefore important for President Ramaphosa to indicate when the next version of the Bill will be published, and confirm that it will create a clear, transparent and predictable regulatory regime.  

b.      The Government should enhance and further incentivise private sector participation in the sector and clean energy generation.  Notwithstanding Minister Mantashe's comments during the 2020 Mining Indaba to expedite applications for generation licences, this seems to have garnered insufficient attention.  The pressure on South Africa's energy bill as well as its clean energy undertakings under the Paris Agreement could significantly be reduced if the Government increased the licensing exemption threshold from 1 MW to 50 MW.  This would facilitate electricity generation investment by large electricity consumers.  This would be of benefit both to South Africa’s measures to limit climate change and support energy security which is a necessary precursor to economic growth and investment.    

Issued on behalf of Peter Leon, Partner and Africa Co-Chair at Herbert Smith Freehills, 10 February 2021