Red Alert: A Key Challenge for Mangaung - consolidating a progressive, developmental mineral resources policy

In the media the ANC's forthcoming Mangaung National Conference is about little more than leadership elections. Leadership elections are, of course, important. The SACP trusts that the ANC will emerge stronger and more unified. But unity needs to be forged not just around leadership collectives, but also and especially around a progressive policy package.

A key component of such a policy package is a much more decisive mineral resources policy. SA is sitting on top of the most abundant mineral resources in the world (if you exclude oil and gas). But for more than a century, the manner in which our minerals have been exploited has been a curse for most - producing enormous wealth and power for a few, but a skewed growth path and dire under-development for the majority.

The Mineral and Petroleum Resources Development Act marked an important step forward, proclaiming that the minerals in the ground were not private property but the heritage of all South Africans to be held in custodianship by government. This was an important move, but its full potential is far from being carried forward decisively.

This is where the ANC-commissioned "State Intervention in the Mining Sector" (SIMS) document becomes absolutely critical. The SIMS document shifts the debate away from sloganeering and posturing. It is an extensively researched and lengthy document - partly for this reason, and partly because of the cacophony surrounding the debate on mining, its key proposals have often got lost. As the SACP we believe that it is absolutely crucial that the ANC's Mangaung conference revisits and adopts the broad principles of the SIMS document proposals - for this reason we summarise below the ELEVEN KEY PILLARS of the SIMS strategy.

Pillar One: The key strategic objective of state intervention into the mineral sector

In the first place it is important to clarify what our overall STRATEGIC OBJECTIVE is in bringing state intervention to bear on the sector. For SIMS, correctly, our key objective should be to maximise the developmental impact of minerals through labour absorbing growth, by capturing resource rents and investing in long-term physical infrastructure, skills development, and industrialisation through backward and forward linkages. To do this, we need to locate the mining sector at the heart of our growth and development strategy. Minerals are our strongest comparative advantage, our only natural resource sector that is exceptional in global terms.

(Note that SIMS does NOT see state intervention in this sector to be primarily about facilitating BEE ownership - this, unfortunately, has often been the dominant reality in the recent past. Nor is state intervention about pursuing some arbitrary passive state ownership quota for its own sake - as if a 60% state ownership were necessarily more "progressive" than a 20% stake.)

Pillar Two: Setting up a state mining corporation (SMC)

However, strategic state ownership IS important. There is a general agreement within the ANC and in government that we should set up a STATE MINING CORPORATION. SIMS proposes that this State Mining Corporation should initially be capitalised by transferring appropriate capacity and state mineral holdings from, for instance, the IDC in particular (including its stakes in SASOL Mining, AMSA, Impala, Merafe, etc.), as well as mineral holdings in the Central Energy Fund, and elsewhere in the public sector.

But what is the purpose of a State Mining Corporation?

Pillar Three - The core mandate of the State Mining Corporation

The State Mining Corporation should focus on strategic minerals (in partnership with other investors if necessary) in order to supply these minerals into the domestic market at competitive or "utility" prices. For example, coal for our power stations, or iron ore and manganese for local steel manufacturing cannot be priced (as they often are at present) as if they had been imported from half-way around the world.

Pillar Four - The State Mining Corporation's ownership model

Several countries use a combination of state and pension schemes to control key mining companies (eg. Brazil with Vale and Petrobras). In SA there are already many examples where both the public sector and trade union pension funds have significant holdings in major mining companies. However, the trade union pension holdings are generally managed by private sector fund managers - giving little scope for direct strategic influence by unions. SIMS proposes that trade unions should pool their mineral holdings with the state's holdings in a Special Purpose Vehicle, which could then exercise a significant strategic influence on mining companies.

Pillar Five - What about Broad-Based BEE and a State Owned Mining Company?

At present, there is no alignment between B-BBEE in mining and the idea of public ownership. But, as the SIMS document notes, "state holdings are ultimately owned by the people and arguably constitute the most Broad-Based BEE holdings possible." We couldn't agree more - in fact there is nothing arguable about it. Currently the Mining Charter calls for a 26% B-B BEE shareholding in all mining operations. 

The SIMS document proposes instead that the Mining Charter be amended so that the target could be 30% for a combined state and B-B BEE stake. The state holdings would include IDC, PIC, SMC, Eskom and other public sector investments in mining. This might well lower the percentage BEE stake, but it would certainly increase the strategic role of the public sector and of a truly broad-based empowerment approach.

Pillar Six - How to locate the governance of mining assets

The SIMS document notes that almost all states that have managed to leverage long-term sustainable industrialisation and development out of their mineral assets have NOT had a stand-alone government mining department. Norway, for instance, has a Directorate of Mines and a Geological Survey entity within their Department of Trade and Industry.  To overcome the long-standing "dis-articulation" in SA, in which the mining sector has reigned supreme over the rest of the economy, the SIMS document recommends the idea of an economic "super-ministry", housing mining along with economic development and trade and industry.  We are not sure how time-consuming and practical such institutional restructuring would be here in SA at this point. However, the underlying point is valid. We need to institutionally integrate the Mineral Resources Department much more effectively within an overall economic governance capacity and discipline.

Pillar Seven - An innovative approach to granting mineral rights for known deposits - auctioning

Here the SIMS document makes a relatively innovative proposal.  Extracting a natural resource on a sizeable industrial scale typically costs hundreds of billions of rands. For this reason states (even socialist states like Cuba) require private investors for part or even all of the operational investments. But how does the state still ensure that the public gets the best deal possible?

In the case of proven oil and gas deposits, it has become common internationally for states to arrange a public tender (or auction) for the right to extract. With a well-designed tender, bidders compete on the tax rate they are prepared to pay, and on contractual commitments they make to linkages (both in the local sourcing of inputs into their mining operation and in the pricing of mining outputs for local beneficiation, for instance). They also compete on investment commitments into training, research and development.

Here in SA, we have begun to use public tendering in these ways with, for instance, our major procurement of rolling stock for Metrorail - but we are NOT doing this with our massive mineral resources. And yet SA is fairly well geologically surveyed, and therefore the private mining corporations have a good idea of the value of the resources in the ground.  In other words, in many cases, there is no major risk in terms of known deposits to investors opening up a new mine. It is imperative that we now strongly considerpublic tendering (or auctioning) of mining rights with well-structured requirements to get best long-term and sustainable value.

Sadly the horse has already bolted in many cases - a large number of "new order" mining rights have been given away. As the SIMS document notes: "Unfortunately, although the Mineral and Petroleum Resources Development Act transferred ownership of minerals [in the ground] to the nation, the known unexploited deposits were subsequently given away for nothing (...on a ‘first-in-first-assessed' basis) with no attempt at maximising the development impact and job creation."

For this reason, SIMS also recommends retrospective action through:

Pillar Eight - A Presidentially-appointed Mineral Rights Audit Commission

In line with the MPRDA, SA has undergone a massive conversion from "old order rights" (i.e. where private mining companies "owned" the minerals in the ground) to "new order rights" (where the minerals belong to all South Africans and are held in custodianship by the state). However, the process of conversion was fraught with major irregularities.

In many cases, private mining companies were sitting passively on top of "old order" known mineral deposits. They were simply keeping out competition without actively mining. This was especially the case with most of the Bushveld platinum mineral group and chromium. In Brazil, when private rights are not actively mined they are lapsed and auctioned. This was not done in SA when we converted from old to new order rights.

According to SIMS: "The wholesale handing out of our nation's known unexploited mineral assets (old order dormant rights), probably cost SA several hundred thousand jobs...In order to reclaim at least some of the people's mineral assets that were recklessly given away, our President needs to establish a Presidential Mineral Rights Audit Commission to carry out a forensic audit on the granting of all New Order Rights..."

Pillar Nine - What about lesser known mineralised areas?

SIMS argues correctly that where less is known about mineral deposits these should be reserved for the State Mining Company and a publicly-owned Central Geological Survey. These public entities should then develop such areas for either public tender (as proposed above) or state mining once the value of the resource is better known.

Pillar Ten: A Resource Rent Tax (RRT)

A Resource Rent Tax (RRT) - also known as a "super-profits" tax, or a "windfall profits" tax - is a central pillar of the SIMS package.

Currently, mining operations are taxed through Mineral Royalties on production (turnover, revenue, or sales). Mineral royalties are a blunt instrument for the mining sector because they fail to take into account the diverse conditions of different operations with different grades of ore and different costs. They therefore often increase the cut-off point at which mining becomes uneconomic, sterilising mineral assets and losing jobs in the process. But Royalties also miss out on the massive revenue potential to the state in times of mineral boom.

So what is a Resource Rent Tax? It is a tax on the difference between the extraction costs of a mineral, plus a "normal" return, on the one hand, and exceptional (or super, windfall) profits on the other hand. SIMS argues: "it is proposed that we introduce a resource rent tax that only triggers in once the investor has made a reasonable return, consequently such a tax would not deter investors, particularly for marginal deposits or deposits with average returns."

However, once returns exceed average or "normal" returns, a RRT could be set at a reasonably high rate - SIMS proposes 50% on these super-profits.

Pillar Eleven - A Sovereign Wealth Fund

However, it is not just a question of capturing these huge potential rents for the state, it is also critical that they are re-invested to maximise long-term development, including for future generations after the mineral resource is exhausted.

In line with the New Growth Plan, SIMS proposes that we should establish a "sovereign wealth fund" using the revenue captured through the RRT. Although SA has massive mineral reserves, mining extracts a non-renewable resource. Sooner or later the resource is exhausted, mining jobs are lost, and, without investment and development, mining centres become ghost towns. This is why countries that have successfully leveraged their mineral resources for long-term sustainable development have often used mining revenues to set up a ring-fenced "sovereign wealth fund".

A sovereign wealth fund can also be used to counter the dangers of "Dutch Disease" - a chronic challenge in economies dependent, like our own, on mineral exports. Basically, the "Dutch Disease" is triggered by a mineral boom. The boom results in the value of the local currency appreciating. This makes manufactured exports uncompetitive. And so you get a vicious cycle - instead of a mineral boom fuelling industrialisation, it undermines it. To counter this "disease" a sovereign wealth fund can be used to "off-shore" savings, investing outside of the country.

SIMS recommends three funding windows for a South African Sovereign Wealth Fund:

A fiscal stabilisation fund to reduce revenue instability in times of mineral price falls;

A regional development fund to invest in Southern African infrastructure to promote regional trade and industrialisation - in this way "off-shoring" some of the Resource Revenue to counter the "Dutch Disease" risk; and

A minerals development fund - to invest in discovery and development of new mineral assets, in management of mineral assets, in industrial zones beneficiating minerals, as well as in mineral related skills and technology development.

There are many other important proposals in the SIMS document - but we believe that these 11 pillars are critical to developing a coherent and decisive strategic approach to our massive mineral resources. The ANC's Mangaung Conference presents us with a critical opportunity to consolidate this package of proposals, without which a radical second phase of the NDR will be a pipe-dream.

This article by SACP first deputy general secretary, Jeremy Cronin, first appeared in Umsebenzi Online, the Party's online journal.

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