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Here’s how to fix SA’s mining sector, and the greater economy too – Jeffery

JOHANNESBURG — It’s hugely debatable about whether black economic empowerment (BEE) has been as effective as it should be. Critics have lashed out at the system for creating a select, crony elite while failing to create broad-based empowerment. However, Dr Anthea Jeffery has proposed an interesting solution. It involves shifting from a top-down model to a bottom-up model in which government hands out vouchers for education and housing. Citizens will then have a choice about where to spend these vouchers, boosting competition, increasing standards and providing a way to widen the empowerment net. The same principles, in turn, could be applied to the mining sector, which has had a torrid time of late. Well worth a read. – Gareth van Zyl

By Dr. Anthea Jeffery*

The mining industry is the bedrock on which modern South Africa was built and remains vital to the economy.

Dr. Anthea Jeffery is Head of Policy Research at the IRR and author of Patents and Prosperity: Invention + Investment = Growth + Jobs, published this week by the IRR and available on the IRR website.
Dr. Anthea Jeffery is Head of Policy Research at the IRR.

But the new mining charter will make it largely ‘uninvestable’ and cause it ‘irreparable’ harm. It could also usher in a creeping form of mine nationalisation as ever more mining rights and other assets are transferred to the state mining company.

Fortunately, however, the charter is so obviously unlawful that the courts should have little hesitation in striking it down. The key question is what should follow next. Making small changes to earlier versions of the charter will not be enough to restore confidence or reposition the mining industry for growth. Nor will it be enough to help the poor get ahead.

Instead of trying to re-jig the usual BEE requirements, the government should embrace a very different transformation strategy. This new strategy must actively promote investment, growth, and employment, always the key foundations for prosperity. However, it must also make growth more inclusive by helping to break down barriers to upward mobility.

Millions of South Africans are currently held back by bad schooling, poor housing, and failing health care. Yet state expenditure in these three spheres totals some R570bn in this financial year alone, far exceeding what most other developing countries spend.

Despite this high spending, outcomes are generally dismal. Some 80% of public schools are dysfunctional, while at least 84% of public hospitals and clinics cannot maintain proper standards of hygiene or ensure the availability of medicines. In addition, the ‘RDP’ houses provided by the state – despite a massive increase in the housing subsidy from R12 500 at the start to R160 500 today – remain small, badly located, and often poorly built.

File photo of a general view of Driefontein Gold Mine shaft, near Carletonville, South Africa.

The state’s repeated promises to do better have meant little in practice. Hence, the most effective way to kick-start improvements is to empower ordinary South Africans to start meeting their own needs in these three key spheres.

This can be done by redirecting much of the R570bn now budgeted for a top-down system of state provision into tax-funded vouchers for schooling, housing, and health care. These vouchers would go directly to millions of disadvantaged South Africans.

Re-dividing the schooling budget would generate vouchers worth some R20 000 per pupil per year. Once parents had been provided with these vouchers – which could be redeemed solely for education – schools would have to start competing for their custom. Failing state schools would be forced to improve. Many more independent schools would be established to help meet burgeoning demand. The resulting competition would hold down costs and push up quality – as experience with school vouchers in other countries has shown.  

Take housing next. The current housing and community development budget could be re-directed to provide housing vouchers, worth some R110 000 over ten years, to roughly 10 million South Africans between the ages of 25 and 35. A couple could pool their money and receive R220 000 over a decade. A couple earning R6 000 a month could devote R1 500 (25%) of that to housing, which would boost their housing budget to R400 000 over ten years.

Read also: Jeffery: Govt killing the goose that lays the golden eggs. Unshackle mining.

Such sums would help people gain mortgage finance or enable them to start building their own homes. Families would no longer have to wait endlessly on the state to provide them with a small (and probably defective) RDP home. Building activities would accelerate, while dependency would diminish and self-reliance increase.

Re-directing the health care budget could provide health care vouchers, worth some R10 000 a year, to roughly 10 million households. People could then join the low-cost medical schemes that have been proposed (at premiums of some R200 per person per month), or take out ‘combination’ health insurance policies offering both hospital and primary care. Again, this would expand competition, increase efficiency, and help contain costs.  

Since all households will want maximum value from their vouchers, tax revenues will be far better spent. The voucher system would also widen individual choice, build self-reliance, inject a new dynamism into the economy, and bring real benefits to millions of people now marginalised and often destitute.

Zapiro’s cartoon on Minister Mosebenzi Zwane’s Mining Charter. More magic available at www.zapiro.com.

Tax-funded vouchers for education, housing, and health care are thus a key part of an effective transformation strategy being developed by the IRR and called ‘Economic Empowerment for the Disadvantaged’ or ‘EED’. EED would meaningfully assist the poor, whereas BEE helps only a small minority and harms the remainder.

Other differences are also important. BEE focuses on redistribution and promotes rent-seeking and entitlement, whereas EED would stimulate investment, quicken growth, expand employment, and encourage entrepreneurship in place of crony capitalism.

An EED strategy would rest on three prongs: the voucher system; an emphasis on economic growth as the overarching priority; and an EED scorecard that rewards the private sector for contributing to growth and helping the truly disadvantaged to get ahead.

The benefits of shifting from BEE to EED would swiftly be felt across the country. The gains to be made are particularly evident in the mining sector – where the contrast is stark between the harm the new charter will do and the help that EED would bring.

Under an EED mining charter, companies would earn voluntary 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.

File Photo: Members of a mining community sit outside a shack in Nkaneng township, Marikana’s informal settlement, in Rustenburg, South Africa, April 1, 2014. REUTERS/Siphiwe Sibeko/File Photo

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.

In the labour sphere, companies would earn EED points for jobs provided and salaries paid, as well as for initiatives to improve skills, health, and 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 provision in these three spheres. (Companies could earn EED points, for instance, for helping to develop innovative ways to treat polluted water for the benefit of mine communities.)

Read also: A bottomless pit? Increasing the BEE burden yet again… – Anthea Jeffery

The differences between EED and BEE underscore the intrinsic weaknesses of the latter. The costs of BEE implementation have also been very high. Apart from major compliance expenses, BEE has undermined black entrepreneurship, contributed to inflated pricing in procurement, and given impetus to corruption.

In the past five years, BEE requirements have also been greatly tightened up, making them ever more costly and difficult to implement. The BEE ownership requirement, which began at 25% in general (and at 26% in mining) is now also being nudged up to 51%, as the new mining charter once again shows. This demand is putting property rights as well as business autonomy increasingly at risk.

The policy choices are becoming stark. The country can keep on with BEE policies in mining and elsewhere, and reap the bitter harvest that will surely follow. Or South Africans can grasp the policy nettle by recognising the failures of BEE and insisting on a shift to EED. With the mining charter so clearly a recipe for disaster, the mining industry should be the first to demand this change.

  • Dr. Anthea Jeffery is Head of Policy Research at IRR
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