The 600-page State Intervention in the Minerals Sector (Sims) report submitted to African National Congress (ANC) leaders in Johannesburg on Friday (3 February 2012) is not about nationalising South Africa's mines.
Among its major short-term contributions to the country is that it will hammer a, hopefully final, nail into the coffin of South Africa's interminable non-debate over nationalisation - in reality an endless restatement of positions by mining and finance capital on one side, and the ANC's Youth League leadership on the other.
The mind-numbing ping-pong has distracted many in the ANC, and in broader society, from creatively addressing a serious challenge: how to use South Africa's multi-trillion rand minerals resource to fuel sustainable economic development and to begin eroding the country's chronic unemployment crisis.
The Sims report provides a framework for a debate that will rage ahead of the ANC's July policy conference and through to its 53rd national conference in December.
Nationalisation will remain a possibility - although an increasingly unlikely one - until then.
Sims' authors comprehensively rebut the case for nationalisation as the mechanism for addressing the ANC's economic development and job-creation objectives: there are not enough skills at the state's disposal, there are other operational priorities, it's too expensive if it's with compensation (R1-trillion-plus), and too damaging to foreign investment if it's without compensation.
Having disposed of nationalisation-as-panacea, the authors turn their attention to the real challenge.
They propose sweeping changes to legislation and government structures.
It criticises the Mineral and Petroleum Resources Development Act (MPRDA) as an inadequate instrument to maximise developmental benefits, particularly job creation. The legislation's objectives will have to be amended in order for the state to impose the necessary conditions on all prospecting or mining licences and rights. The Act should also be amended so that companies which fail to comply with community and worker conditions in the Mining Charter have their mining licence suspended. If this is not rectified in a reasonable period, the concession should be cancelled.
The document's proposals are grouped under ownership and control; governance; economic linkages; and regional integration.
SADC
Sims recognises that South Africa's developmental goals for the industry will not be reached without regional and economic integration. While the South African mineral sector constitutes a large market for mineral input industries, the southern African region is rapidly growing in this regard. Also, there is significant future mineral potential. It suggests a Regional Development Fund to invest in southern Africa's infrastructure to increase regional trade.
In 2010 SADC overtook the European Union (EU) as South Africa's largest consumer of manufactured exports. But access is severely constrained by poor or non-existent trade infrastructure. The fund's mandate would be to open regional markets for South African goods and services, and imports from the region. Only SADC construction companies would be eligible to tender for infrastructure projects.
The document proposes the South African government be mandated to extend the membership of the Southern African Customs Union, with a reassessment of relevant import tariffs. The Industrial Development Corporation should develop linkage industry investments in other member countries to facilitate equitable benefits.
It suggests South Africa puts regional economic integration back on the agenda, initially by creating a free trade area for steel and petrochemicals, followed by a customs union for all products.
Regional power supply will also have to be investigated and improved. It is estimated that SADC states in the tropics have in excess of 100GW of hydropower potential. The report says this unique clean energy advantage should not be ignored. It also argues that the gas resources in Angola, Mozambique and Tanzania should be factored into regional planning.
Tax regime
Sims argues that international experience demonstrates that the growth, development and employment potential of South Africa's mineral assets can only be realised through the maximisation of mineral-economic linkages - forward linkages include beneficiation; backward linkages include the production of capital goods, services and consumables. These upstream and downstream activities would survive beyond the exhaustion of minerals and provide opportunities for broader industrial development and job creation.
It says South Africa needs to ensure that, as a resource owner, its citizens are getting a fair share of the resource rents from their extraction by mining companies. A resource rent is the surplus value - the difference between the price at which a resource can be sold and its extraction costs plus reasonable returns. The document proposes the creation of a Sovereign Wealth Fund financed by a 50% tax on mining "super profits" in the form of a Resource Rent Tax (RRT). It identifies several countries that secure resource rents, and puts RRT rates in oil and gas extraction globally at between 50% and 90% of the profit above a "reasonable return". Examples include:
- Australia, currently introducing an RRT for hard rock minerals;
- Botswana, which captures surplus value through a formula tax over-and-above benefits flowing from the 50% state holding in the Debswana mining company; while
- Chile has a 100% state holding in copper mine Codelco.
The report argues that an RRT will not deter serious investors because it will only kick in once they have secured a reasonable return.
RRTs also protect local currencies during commodity booms.
Once an RRT regime is established, the report proposes that mineral royalty rates be reduced to 1% of revenue to enhance optimal resource extraction. Royalties will be ring-fenced and used to fund a minerals commission (see below), the rehabilitation of ownerless mines, and investment in local economic development.
To discourage mineral rights speculators, the document proposes a 50% prospecting right transfer capital gains tax, payable if the right is on-sold or the company changes hands before mining starts.
And to encourage direct investment by transnational companies listed on major bourses, rather than via opaque subsidiaries registered in tax havens, Sims proposes the introduction of a "mineral foreign shareholding withholding tax". If a foreign mining company is held in a tax haven, the rate should be 30%, rather than the normal 10%.
The report argues for delaying the carbon tax proposed by National Treasury because of its potential damage to the economy, particularly to energy-intensive beneficiation operations. It argues for the reconfiguration of the tax, possibly by having an RRT above 50% linked to carbon emissions.
Sims also proposes uniting all state and trade union pension fund holdings in mining companies into a single special-purpose vehicle, potentially a huge shareholder ally in the heart of the sector.
Beneficiation and strategic-mineral classification
A key to developing the industry will be beneficiation. Most minerals are supplied back into the country at monopoly or import-parity prices. Sims proposes that critical minerals which will develop the economy need to be classified as strategic minerals (see Minerals commission below). They will be supplied into the economy at reasonable returns or, at most, competitive prices.
Export tariffs or restrictions are used by several countries surveyed by the Sims team, among them China, Venezuela, India and Zambia, to encourage beneficiation. They are based on the assumption that the raw mineral producer will be persuaded to transform the product into a higher value-added product that will not attract the tariff, or offer a discount to local beneficiators. South Africa will not be able to take full advantage of this as its trade agreements with the EU commit it to not using export tariffs. However, it could be useful for the many unbeneficiated minerals which go to the East.
This is particularly significant for platinum, of which South Africa has 80% of the world's reserves. Sims argues that, because there are currently no viable substitutes to platinum, the country's producer-power could be used to negotiate supply and local beneficiation. Because platinum has become an international investment instrument, it should be treated like gold in South Africa's exchange control regulations - which prohibit the sale of precious metals without National Treasury exemption. This will give the state the right to market platinum.
Domestic sales
A focus on spatial linkages will see the creation of joint ventures between Transnet and users to upgrade relevant lines. A condition of such a venture will be that users will have to supply the domestic market with iron ore, manganese ore and coal on a cost-plus basis.
Because South Africa's energy sector is mainly reliant on coal, Sims argues the public enterprises minister be statutorily empowered to instruct Transnet to only allocate export rail or terminal capacity to energy mineral exporters once local power producers - and specifically national power utility Eskom - have been satisfied at cost plus reasonable return.
Job creation
To ensure the rapid creation of jobs, Sims proposes the creation of two or three pilot special economic zones, or beneficiation hubs. These could be based on existing industrial development zones, as well as new locations close to areas of exceptional unemployment (60%) and poverty. The hubs will be assessed by a team comprising union and government every five years, and if they fail to create jobs and attract investors, they will be discontinued. The hubs will be financed from a Minerals Development Fund, which will be financed by the proposed RRT.
Preliminary economic modelling indicates that a 30% increase in mineral exports could generate up to 280 000 new jobs.
Education
Skills development for the industry also needs attention. International surveys show that only countries which improve their human and technology development are able to effectively industrialise. A large part of resource taxes need to be reinvested into technical professions such as engineers, artisans and technicians. The document also proposes converting the state tertiary education subsidy (generally 70% to 80%) into a notional loan that will be written off over 10 years of employment in the country. The loan will operate as a bond, paid off, at prime, over 10 years by working in South Africa, or for a South African company. It is aimed at curtailing the exodus of engineering and science graduates. If graduates decide to emigrate before 10 years, they will be liable for the full outstanding portion of the loan.
Minerals commission
Sims also notes that South Africa's current licensing regime does not maximise economic development. Licensing should properly be the responsibility of a separate agency, rather than the department of minerals, it argues, statutorily mandated to ensure benefits to all South Africans rather than a politically connected or already-affluent few. The agency should take the form of a minerals commission, administratively overseen by the ministry of minerals - a professional agency akin to the South African Revenue Service under National Treasury. For this it draws on the experiences of other states, among them Brazil, Ghana, Alaska and Botswana, whose mineral policy committees incorporate some of the functions of the proposed commission.
The commission's primary function would be to regulate the granting and administration of mineral rights concessions in a manner that optimises their developmental impact. The commission would also have the all-important tasks of identifying potentially "strategic" minerals for formal classification by the Cabinet.
The commission should also, Sims proposes, ensure strategic minerals are exploited in an "orderly and optimal" manner to satisfy national requirements, demand and pricing.
While the commission is being set up, its functions should be performed by the Mining Development Board.
Presidential mineral rights audit commission
Sims argues for a commission to carry out a comprehensive audit on all licences granted in South Africa, appointed by the president and reporting back to him within six months of its establishment.
Where such rights were improperly awarded, they should be suspended and auctioned to a new concession-holder. In cases in which original concession-holders had made significant investments in good faith, they should be given a free-carry right in the consequent auction of the asset, Sims proposes. Finally, it proposes that improperly licensed black South African concession-holders, qualifying as Broad-Based Black Economic Empowerment (BBBEE) entities under the BBBEE Act, should be given first option on acquiring the outstanding portion of the statutorily required 26% BBBEE proportion of equity shareholding in the concession-holder.
The Sims commissioners were unable to find, in the 14 countries and territories whose minerals regimes it surveyed, a process comparable to South Africa's post-apartheid migration of mineral rights ownership from private to state ownership - locally referred to, respectively, as Old Order and New Order Rights. It was therefore unable to find equivalent international or foreign benchmarks against which to assess South Africa's regime.
However the Old Order unexploited properties held privately during the apartheid era to keep out competition were in effect "private" exploration rights with well-known resources. Sims says in Brazil, exploration rights are auctioned when they are abandoned or not exploited within a reasonable period.
South Africa did not implement a similar system during the migration from old to New Order Rights. "The wholesale handing out of our nation's known unexploited mineral assets (old order dormant rights) probably cost South Africa several hundred thousand jobs. Even under the (prevailing) Minerals and Petroleum Resources Development Act, exploration licenses should have been given on a first in first assessed basis, but the mineral rights conversion process was fraught with irregularities," says Sims.
The document concludes that market forces alone will not optimise South Africa's mineral resources to finance the developmental needs of the country. It notes that to achieve a developmental impact, the mineral sector is the country's strongest comparative advantage and only natural resource which could be regarded as exceptional in global terms. The major challenge will be ensuring that a much higher proportion of the optimal return on the extraction of resources is in the hands of the state to invest for South Africans, while at the same time ensuring that the sector continues to flourish.
Background
The authors of the report visited and surveyed the minerals regime in 14 countries in Latin America, Africa, Asia and the Organisation for Economic Co-operation and Development (OECD) bloc:
- Latin America: Brazil, Chile and Venezuela;
- Africa: Botswana, Namibia and Zambia;
- Asia: China and Malaysia; and
- OECD: Norway, Finland, Sweden and Australia.
The terms of reference of the research team called for a critical analysis of the existing mining sector, including potential and actual upstream and downstream sectors; mineral-related logistics; and energy and environmental sustainability challenges and opportunities.
It also included existing state assets in the sector, and present legislation and regulations, including the licensing regulations and the South African Mining Charter.
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