Peter Leon, a partner at Webber Wentzel, recently had the following article published in the Business Day:
ASKED about the historical effect of the French Revolution of 1789, Zhou Enlai, premier of the People’s Republic of China from 1949 until his death in 1976, is alleged to have remarked:"It is too soon to say." Faced with a question about whether there is an existential crisis in SA’s mining industry, I can only observe, similarly, that "it is too soon to say".
Unfortunately, this question cannot be too easily dismissed, particularly as it refers to a key sector of the local economy, which accounts for more than 5% of SA’s gross domestic product (GDP), provides employment to about 500000 workers directly and a further 500000 indirectly, and contributes a third of SA’s exports. Citigroup last year valued SA’s mineral resources at $2,5-trillion, the biggest in the world.
Despite SA’s impressive mineral resource inheritance and the longest sustained commodities boom in history (October 2001 until mid-2007), SA’s mining industry shrank by 1% over the same period, measured in value added to GDP. According to Canada’s Fraser Institute, SA continues to slip down the "policy potential index", which ranks the attractiveness of mining destinations to investors — a 28% decline between 2002-03 and 2010- 2011. According to Ernst & Young, there has similarly been a marked fall in the number of local mining and metals transactions over the p ast decade — deal values fell 77,8% from 2001 to 2010.
SA’s mining sector is now in recession after contracting in both the first and second quarters of this year. Recent figures indicate that South African mine production fell by 5,1% in July from a year earlier.
The state of the local mining industry is in stark contrast to that in the rest of the world. Between 2001 and 2008, the global mining industry grew by just less than 5% a year. SA’s decline can, to a large degree, be linked to the regulatory uncertainty precipitated in no small part by the architecture, as much as the implementation, of the Mineral and Petroleum Resources Development Act, 2002 (the MPRDA).
Other factors contributing to the mining industry’s decline include:
- Lack of regulatory certainty and maladministration: In resource-rich developing economies with ambitious transformation and development goals, such as SA, investors require regulatory certainty and administrative efficiency. This requires that laws and policies are clear, definite and consistently applied. There are many examples of legal uncertainty in the local mineral regulatory regime. The MPRDA is fraught with vague and ambiguous provisions. So too is the Mining Charter, an ancillary document aimed at providing a framework for the promotion of black economic empowerment (BEE) in the mining industry.
The Department of Mineral Resources’s (DMR’s) processing of mining and prospecting right applications takes longer than almost all of SA’s competitors. On the DMR’s own statistics, more than 90% of mining right applications take more than a year to process; some even up to five years.
- A flawed BEE policy: The original Mining Charter was substantially amended, with the industry’s agreement, on September 13 last year, despite the fact that the MPRDA makes no provision for its amendment. The intention behind both the original and revised Mining Charter was to champion the government’s BEE policy, which itself is an attempt to deracialise the economy by requiring mining companies to divest equity in favour of black South Africans.
According to the minister’s recent budget vote address to Parliament, the aggregate black ownership achieved in the mining industry in 2009 was about 8,9%, well below the target of 15%. Public hearings on the revised Mining Charter were recently held before the parliamentary portfolio committee on mineral resources. It emerged that there is a real dispute as to the actual level of black ownership of the mining industry.
The promotion of BEE in the mining sector has, ironically, become a catalyst for the populist support for the nationalisation of SA’s mines. This is because both the original and revised Mining Charters promote a form of "narrow" BEE, resulting in the enrichment of the well-connected few, as opposed to the economic empowerment of workers, as well as poor and marginalised black communities. A flawed BEE policy will continue to fuel discontent among the historically underprivileged majority in SA. This is likely to strengthen the hand of those stoking the fires of nationalisation. This was illustrated recently by a poll among urban black South Africans, which demonstrated 45% support for mine nationalisation.
- The spectre of mine nationalisation: As the demand for effective socioeconomic transformation increases, so too does the demand for mine nationalisation. The resource nationalism trend appears to be gathering pace in southern Africa as a whole. SA is in the midst of a serious debate on mine nationalisation. Contradictory statements that nationalisation is a question of how, not if, as well as statements that nationalisation will never happen, have been confidently made by key participants in the debate.
The African National Congress’s (ANC’s) decision to defer the mine nationalisation issue until next year leaves a cloud of uncertainty hanging over the industry as we await the decision of next year’s ANC conference, potentially increasing the country’s sovereign risk profile.
- The state-owned mining company: Although it is far from clear whether the ANC will embrace a policy of nationalisation, it is clear that the Zuma administration is much more assertive about the exploitation as the patrimony of SA’s treasure trove of mineral resources. This first became evident with the 2008 resurrection of the state-owned mining company, African Exploration Mining & Finance Corporation.
There are several fundamental problems with the notion of a state-owned mining company: it sets the state up in competition with the private sector; it makes the state both player and referee in a situation where African Exploration benefited from a key regulatory exemption for nearly three years and was granted rights on this basis; and it may presage further advantages. Some of these concerns could be addressed by the introduction of an independent industry regulator, as well as by ensuring that African Exploration competes for rights on the same basis as the private sector and is not unfairly advantaged by taxpayer-funded subsidies.
- Positive signs from the DMR: In the midst of all these concerns, the minister of mineral resources has announced a series of measures, which should result in the general improvement of SA’s mineral regulatory environment. First, the DMR introduced a seven-and-a-half month moratorium on all new prospecting right applications while conducting an internal audit into those that had been granted. Next, the DMR introduced a new electronic mining cadastre system in mid-April. This system should add greater transparency to the process of applying for prospecting rights, mining rights and permits, though not, according to the minister, at the cost of efficiency. Finally, the DMR is due to introduce amendments to the MPRDA this year with a view to bring about greater regulatory certainty.
This is a critical time for SA’s mining industry. SA’s precipitous decline in the Fraser Institute rankings, a flawed BEE policy driving populist pressures for mine nationalisation, coupled with the increased assertiveness of African Exploration do not, at first sight, paint a pretty picture. At the same time, the DMR’s introduction of a new mining cadastre system, the continuing audit of rights by the DMR and the prospect of significant amendments to the MPRDA this year may well presage a better future for the mining industry over the next year.
As I began with Zhou Enlai’s reputed remarks on the French Revolution, it may be apt to end with Dickens’s on the same subject: "It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going the other way."
- Business Day