Avoiding the sunset: Jeffery – ‘Re-imagining the mining industry’ via draft charter.

Mining once lay the bedrock to South Africa’s vast potential, but as the industry continues to be mis-regulated, and investment parts ways, one could be forgiven for saying the sun is setting on this once lucrative sector. Mining contributed R219bn to South Africa’s GDP in the first quarter of 2016, not far from a record quarterly low of R214bn (first quarter 2009), and well below the quarterly average R234bn from 1993 till present (all figures from Statistics SA). Anthea Jeffery, the people’s canary in government’s mine, says this new draft mining charter will only fast track this setting sun and in order for the sector to relive its heydays and unleash its potential, a fundamental rethink of flawed policies is needed. Another critical read. – Stuart Lowman

By Anthea Jeffery*

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.

The Department of Mineral Resources (DMR) says it is seeking to ‘re-imagine the mining industry’ via the draft reviewed mining charter it unexpectedly unveiled in April 2016. To explain the thinking behind the draft charter and show how it will help turn the mining industry into a ‘sunrise one for 100 years to come’, the department is busy holding public consultations on the document – one of which the IRR recently attended. However, the draft charter is more likely to turn the mining sector into a sunset one instead.

The DMR says that the draft charter reflects ‘the wisdom of hindsight’ and is based on all the lessons it has learnt since 2002, when an initial mining charter was drawn up. The draft charter, it adds, is needed to speed up transformation, encourage economic growth, reduce inequality, and ensure that ‘growth and transformation become symbiotically reinforcing’.

The draft charter is also required, the DMR says, to align the mining industry’s black economic empowerment (BEE) obligations with those set out in the revised generic codes of good BEE practice which took effect in May 2015. (These rules now trump those in all sector codes, but the mining industry has been exempted from complying with them until the end of October 2016, by which time the department plans to finalise its new charter.)

However, the current draft goes well beyond what the BEE generic codes require – and especially so in its insistence on 100% compliance at all times with three ‘ring-fenced’ elements: ownership, human resources development, and housing for mineworkers.

On ownership, for example, the BEE generic codes would give mining companies credit for partial performance, sanction them comparatively lightly (by reducing their level of BEE contribution by one level) if they fail to reach a 40% minimum score, and take account of indirect black ownership via pension funds and unit trusts.

The sun sets behind a shaft outside the mining town of Carletonville, west of Johannesburg, July 7 2015. South African gold producers said on Tuesday that union wage demands were "unaffordable" and could add 16.5 billion rand ($1.3 billion) to the sector's wage bill.The producers, which include AngloGold Ashanti, Sibanye Gold and Harmony Gold, said in a statement that the industry's total wage bill in 2014 was 23.5 billion rand. REUTERS/Siphiwe Sibeko
The sun sets behind a shaft outside the mining town of Carletonville, west of Johannesburg, July 7 2015. REUTERS/Siphiwe Sibeko

By contrast, the draft charter recognises only direct ownership, gives no credit to BEE ownership at any level below 26%, and threatens companies with a devastating penalty – the loss of their mining rights – if they fail to fulfil this target at any time over a period of 30 years or more.

In explaining this discrepancy, the DMR stresses that its intention is ‘not to duplicate the DTI codes but rather to align with them on various issues’. The draft charter’s ring-fenced elements are the equivalent of the three ‘priority’ elements in the generic codes. On ownership, however, the draft charter ‘takes its mandate from the MPRDA’ (the Mineral and Petroleum Resources Development Act of 2002), which aims especially at transforming the ownership of mining companies.

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

Explains the DMR: ‘Compliance with the mining charter is the condition on which you hold your mining right. The mining charter is that serious, whereas the generic codes are a licence to trade with the government and are aspirational… The genesis of the mining charter is distinctly different from that of the codes, and we want to emphasise this point.’

The department adds: ‘We want 100% compliance all the time on this and cannot be satisfied with 90% or 95% of the target. Hence, the draft charter does not include pro rata ownership points, but asks a simple question: Is the holder of a mining right 100% compliant with the 26% ownership target: yes or no?’

The DMR adds that non-compliance will not immediately lead to the cancellation of mining rights, as companies will ‘be given the chance to rectify.’ However, this is unlikely to provide much reassurance to investors, who need much greater security of mining titles.

A mine worker is seen underground in Gold Fields' South Deep mine outside Johannesburg, in this file picture taken June 4, 2010. Gold Fields is looking to break even at its South Deep mine in South Africa by the end of the year, its chief executive said on Thursday after posting a drop in full-year earnings. REUTERS/Siphiwe Sibeko/Files

In addition, even if companies do manage to score 100% on the ownership element – and also on skills development and housing – they could still have their mining rights terminated if they fall down on other requirements, including the unrealistic employment equity and procurement obligations included in the draft charter. This too is a major threat.

The DMR adds that the draft charter is crucial in countering the inequality still evident within the country. Says the department: ‘People speak of [zero] growth in 2016, but for many years we had 3.5% GDP growth. But this growth was not inclusive. Instead, it landed us as the most unequal nation in the world…

‘We reached that point when GDP was growing fast… We need to understand that absolute inequality cannot persist as it threatens our social cohesion. Our intention is to re-imagine the mining industry going forward, and the draft charter is part of that.’

Much of this analysis is unconvincing, for South Africa is not in fact the most unequal country in the world. Inter-racial inequality has been steadily diminishing ever since the 1970s, while the last 20 years have brought major improvements in living standards to millions of black South Africans – thanks largely to increased salaries, along with social grants and the wider social wage.

Inequality is now greatest within the black population. This is partly because BEE in mining (and elsewhere) has helped turn a small black elite into millionaires and even billionaires, even as it has passed some 90% of black South Africans by.

However, the main reason for remaining inequality is the accelerating unemployment crisis. On the expanded definition, which includes those too discouraged to look for work, the jobless rate now stands at 36% in general and at 67% among young people. In terms of numbers, some 7.9 million black South Africans are currently unemployed, up from roughly 3.5 million in 1994.

A growth rate of 3.5% of GDP is simply not high enough to overcome joblessness on this enormous scale. By contrast, when South Africa managed to bring its growth rate up to 5% of GDP – as it did from 2005 to 2007, when the global commodities’ boom was at its height – unemployment fell significantly for the first (and only) time since 1994.

Read also: Anthea Jeffery: Time to take Mining Charter from BEE to EED

The message from these figures is clear. If South Africa wants to reduce poverty and inequality, it must push the growth rate up from the 0% of GDP projected for 2016 to 6% or 7% of GDP each year. On this basis, the size of the economy would double every decade and millions more jobs would be generated.

This would help bring South Africa into line with its BRIC partners, which generally have much lower jobless rates: 7.6% in Brazil, 5.2% in Russia, 4.9% in India, and 4.1% in China. With millions more earning income from employment, the Gini coefficient would decline sharply, while social stability would expand in equal measure.

However, growth will not accelerate and employment will not grow while the government remains intent on dirigiste policy interventions that erode business autonomy and jeopardise mining titles and other property rights.

Any real attempt to ‘re-imagine the mining industry’ and unleash its vast potential must thus start with a fundamental rethink of flawed policies such as the MPRDA and the draft mining charter.

  • Anthea Jeffery, Head of Policy Research, IRR