[miningmx.com] — IT WAS soon after Julius Malema threw down the gauntlet over nationalisation that Mineral Resources Minister Susan Shabangu said it was futile for public discourse to focus on the issue. The danger was not deriving at the wrong answer, she said, but asking the wrong question. The real question was not whether South Africa should nationalise or not, but how the country should make use of its vast mineral wealth to eliminate poverty, inequality and unemployment.
The extent of these social ills, which she dubbed the “evil triplets’, especially among the youth, is well researched.
South Africa’s official unemployment rate is 25.7%. Among 15- to 24-year-olds the employment rate is 13.2%, compared to 40% in Asia and Latin America. Also, 48.2% of those available to work in the 20- to 24-year age group are jobless; 86% of unemployed youths have not gone beyond Grade 12; and two-thirds of them have never worked.
The poorest 20% earn 2.3% of national income, while the richest 20% earn about 70%.
ANC national executive committee member and executive director of the Mapungubwe Institute for Strategic Reflection, Joel Netshitenze, has said this situation not only had major macro-social implications for South Africa, in that it was fuelling crime and youth mortality, but it also threatened social stability.
“It’s patently unsustainable,’ Netshitenze wrote in a column for The Sunday Independent. “South Africa differs (to other countries) in the sheer size of the problem, the low education and skills levels, the very high levels of inequality and the historical and racial dimensions to the phenomenon of youth unemployment.
“In our situation, it’s systemic, manifesting even during high growth periods. As the National Planning Commission points out in its Diagnostic Overview, the central problem in our country is that too few people are involved in economic activity.’
CURRENT CONTRIBUTIONS
If talks over nationalisation, therefore, make way to questions on how mining could help alleviate poverty, the industry’s current levels of contributions to the economy have to serve as a base to start from.
According to a research report by Citigroup Global Markets, published in June, the distributions of multi-national mining firms with assets in South Africa, to their stakeholders globally, amounted to $49bn during the preceding year.
Industry suppliers represented the biggest single group to have derived value from this, receiving 42% ($20.6bn). Employees and community investments were in line for a 17% ($8.33bn) slice of the pie; Government – in the form of taxes – got 11% ($5.39bn), while loan capital providers received 2% ($0.9bn).
The mines themselves retained 21% ($10.29bn) of distribution value, mainly for capital expenditure purposes.
As for the providers of equity – those who paid for the exploration and development of all mines – they derived only a 7% stake of the pie, equating to $3.4bn. This is the amount that would’ve been added to the fiscus if all mines had belonged to the State and were managed with efficiencies similar to those in private sector.
Also, the $3.4bn (R25.5bn at R7.50 to the dollar) represents only 3.4% of the South African Revenue Service’s collection target of R741bn for the current financial year. That would’ve been no significant contribution to the State’s spending power and should serve as a wake-up call to anyone who had an illusion of massive dividend flows to the State’s coffers from nationalised mines.
As for employment, the mining industry represents 515,000 of South Africa’s 8.2m workers.
The Citigroup report goes on to illustrate that South Africa is not capitalising on the potential of its mineral inheritance. It has the world’s largest in situ value resource base with an estimated $2.5tr of value in the ground, almost 50% higher than 2nd placed Russia ($1.6tr).
Having the resources only provides value generation potential, Citigroup said, adding that as a ratio to its resource base, South Africa has the lowest rate of greenfields growth among the world’s major mining destinations.
The reasons why South Africa has not succeeded in growing its mining pie is well documented.
Citigroup raises the nationalisation debate together with security of tenure issues as one of the major reasons, saying that the mixed messages from the ANC around nationalisation an “unfortunate event’ like the Kumba Iron Ore/Imperial Crown Trading/ArcelorMittal dispute raised a perceived risk of doing business in South Africa.
“Miners are likely prepared to pay significantly higher taxes for better perceived security of tenure,’ states the report.
In a recent discussion document on the issue doing the rounds among some of SA’s major mining companies, the promulgation of the Mineral and Petroleum Resources Development Act is also listed as a cause for underinvestment in new assets, as the conversion of old order rights to new order rights caused prolonged uncertainty of tenure on reserves that could have been developed in that time.
Similarly, Government and the private sector never treated bulk infrastructure investment as a joint venture. While Government pointedly underinvested in critical infrastructure such as electricity and rail, the mining industry hardly raised this as an issue, resulting in a “business as usual’ environment when the seeds of mining constraints were being sown.
“This is a reflection of the fragile state of the relationship between the established mining sector and key Government departments, including the DMR,’ according to the document.
Also mentioned is the decline in critical skills availability and labour productivity.
“The list of reasons is by no means exhaustive, but there’s sufficient evidence to suggest that an expansion of the sector is entirely possible if some of the most pressing bottlenecks were given sufficient attention.’
EMPOWERMENT DILUTION
Less pronounced is the unanticipated effects that black economic empowerment requirements had on the industry. In a well-known investment report of RBC Capital Markets published November last year, the group’s Leon Esterhuizen said it was highly ironic that BEE laws, with a core objective of diluting the dominance of large concentrated corporates, had created entities that were 100% dependent on the very same corporates to stay in the game, constraining the growth prospects of the parent.
“The general structure of BEE deals usually sees the BEE party incapable of funding any growth prospects without being diluted,’ said Esterhuizen. “In such an environment, any company looking to bid for assets will more often than not face the reality of having to free carry the BEE party – paying 100% of the development costs for only 74% of the economic benefit.’
Under normal circumstances, such a shareholder would simply be diluted, but since the company’s mining licence now depends on being able to demonstrate the 26% BEE equity holding, dilution is not an option.
“It goes without saying that such hurdles would naturally scupper any deal by simply destroying the potential returns to well below any reasonable hurdle rate,’ the report read.
Mzukisi Qobo, a political economist and a senior research fellow at the Centre for Politics and Research, said the lingering question over ownership is an issue that has to be depoliticised if mining were to reach its full growth potential.
“You can take the existing cake and shift ownership, but the really important question is how do you grow the cake and develop side-stream industries,’ Qobo said. “If it’s jobs people want, they won’t get it unless you grow the pie. Who the owners are, is irrelevant.’
Integral to any strategy to grow the contribution of mining would be to define the role of the state in industry.
In South Africa the State already acts as regulator – as is the case almost anywhere else – but has also started to up its participation in the sector in the form of the African Exploration and Mining Finance Corporation, ostensibly to secure the supply of strategic minerals.
REFEREE AND PLAYER
Qobo says the mere fact that the State acts both as referee and player could inflict serious damage on South Africa’s reputation as an investment destination if it’s perceived that the State miner receives favourable treatment. As an alternative, Government should consider the creation of a semi-independent regulator – established by parliament – operating independently from the DMR.
The State miner could also redefine itself as an asset manager of sorts and not a miner, a model implemented successfully in Norway. The State investment company could then use the returns it generates from its investments to build a commodities fund that could assist in meeting the country’s development targets, Qobo said.
Qobo also points to the State’s often uncoordinated policy drives, with the DMR, the Department of Trade and Industry as well as the National Planning Commission all having influence over major policy decisions, often leading to leadership and efficiency issues.
A more growth-orientated approach, which would broaden participation in the sector, would be defined in the context of a long-term growth and development plan for the sector, to be accompanied by a strategic investment promotion plan. The model for such a strategy has to be agreed to by industry, Government and labour.
“If we regard mining as the backbone of the economy, there needs to be a clearly defined sector-based strategy,’ Qobo said, referring to the Department of Trade and Industry’s strategy for the motor vehicle manufacturing industry as a good example.
“You need a comprehensive plan to make the most of the $2.5tr resources we have.’
