A New Approach to empowerment in mining

A mining charter likely to cause ‘irreparable’ harm

The new mining charter, gazetted on 15th June 2017 by mining minister Mosebenzi Zwane, overlooks South Africa’s worsening economic malaise. The growth rate is negative in per capita terms, while   the unemployment rate has risen to close on 28% in general and to 56% among young people aged 15 to 24.

The mining sector is vital to any recovery in economic growth. It is also a key source of jobs for relatively unskilled labour. Yet the new charter, according to the Chamber of Mines, has made the sector largely ‘uninvestable’ and will cause it ‘irreparable’ harm.

The chamber was quick to reject the charter, saying it had ‘spooked the markets’ and would ‘significantly impact on the viability of many mines’. It denied that the industry was ‘anti-transformation’, noting that mining companies had done BEE deals valued at more than R205bn (in 2014 rands) and transferred R159bn in economic value to the historically disadvantaged. However, ‘it would be irresponsible for the industry to accede to unworkable targets’ and put its sustainability at risk.

Soon the chamber embarked on legal action. It applied to the North Gauteng High Court for an urgent interdict to suspend the charter, saying it would thereafter seek to have the document set aside on judicial review. The chamber’s interdict application is to be heard in mid-September 2017, and its application for judicial review thereafter. What the courts will decide remains to be seen, but the chamber’s legal objections are generally well-founded. Many of the changes in the charter are at odds with its founding statute, the Mineral and Petroleum Resources Development Act (MPRDA) of 2002, which can be amended only by Parliament – and not by the minister.

Changing and costly requirements

Because mining generally requires enormous upfront capital investments which may take ten years or more to start yielding returns, regulatory certainty and predictability are particularly vital to the industry. Since 2004, however, when the MPRDA took effect, repeated revisions to the Act, the original mining charter, and other relevant rules have steadily eroded that predictability. The new mining charter is particularly damaging because its demands are so unrealistic and costly to meet. It also signals that ownership and other targets are likely to keep shifting in the future, making it ever more difficult for investors to know what is expected of them if they are to keep their mining rights.

Under the original charter, mining companies were expected to transfer 26% of their equity or assets to historically disadvantaged South Africans (HDSAs) by the end of 2014. The charter also said deals were to be done at ‘fair market value on a willing seller/willing buyer basis’ – and that ‘the continuing consequences’ of all previous transactions should be taken into account in measuring HDSA ownership.

Under the 2017 charter, by contrast, all existing holders of mining rights must increase their BEE ownership to 30% within a year. The extent of the top-up required depends on what level of ‘black person’ (no longer ‘HDSA’) ownership companies are recognised as having already achieved.

Since the Department of Mineral Resources (DMR) refuses to recognise the ‘continuing consequences’ principle, it takes the view that only 20% of mining companies met the 26% target by the end of 2014. This 20% will have to top up black ownership by 4% within a year, but the other 80% will have to top up by much more. AngloGold Ashanti, for instance, which the DMR sees as having only 6% black ownership – rather than the 27% it has achieved on the ‘continuing consequences’ principle – would have to top up by 24% within 12 months.

Once the charter is in operation, applicants for new prospecting right will need to have ‘a minimum of 50% + 1 black person shareholding’ (shortened here to 51% black ownership). Those seeking new mining rights will have to show ‘a minimum of 30% black person shareholding’. This must be structured in an 8:8:14 ratio, with 8% going to employees, 8% to communities, and 14% to BEE ‘entrepreneurs.

The many additional BEE deals now required will often have to be financed by vendor companies themselves. However, these companies will find it difficult to afford such financing when the new charter also obliges them to:

- distribute 1% of annual turnover to BEE shareholders every year, in preference to other shareholders and over and above whatever dividends they may declare;

- spend 5% of payroll (on top of the 1% of payroll required by the state’s skills development levy) for human resources development;

- make annual contributions to mine community development which are ‘proportionate’ to the size of their investments;

- put significant resources into creating and sustaining the 51% black-owned companies from which 26% of all mining goods and 80% of all relevant services will have to be bought each year;

- write off any loans that still remain unpaid by BEE shareholders after ten years if the dividends paid to them have not sufficed to discharge these debts; and

- in many instances, pay an extra 1% on the cost of any mining goods or services purchased from foreign suppliers, so as to compensate the latter for the 1% levy the new charter will require them to pay.

The more funding companies must allocate to ownership deals and the charter’s many other requirements, the less capital they will have for mine investment. Yet, as Henk de Hoop and Sandile Mbulawa of Rand Merchant Bank have noted, ‘the mining sector requires constant investment for the value sitting below the surface to be realised sustainably for generations to come’. If mining companies lack the capital for such investment, then mineral resources may increasingly be left below the ground. Companies will also have incentives to strip out the most valuable ores as rapidly as possible, so reducing the potential life of their mines.

An increased threat to mining titles

The new charter identifies its ownership, skills development, and community upliftment elements as ‘ring-fenced’ elements with which mining companies must demonstrate ‘100% compliance at all times’. Targets in these three spheres are expressly made ‘applicable throughout the duration of a mining right’, which is generally 30 years (but could be longer if a mining right is renewed).

Any mining company which fails to maintain a 100% score on these three elements and to score at least 60% on other charter elements, will ‘be regarded as non-compliant with the provisions of the mining charter and in breach of the MPRDA’. It will then be liable to have its mining rights suspended or cancelled.

However, at current rand prices for minerals, many mining companies are already battling to break even. Hence, they cannot easily afford their increased obligations on the three ring-fenced elements, where 100% scores will now have to be maintained for 30 years or more. Most will also battle to afford their further costly obligations under the new charter. A host of non-compliant companies could thus have their mining rights cancelled or suspended.

The security of mining titles in South Africa has thus been severely undermined. This is a further major deterrent to investment – and helps explain why a number of pending mining deals have been cancelled since the new charter was gazetted.

More scope for officials to abuse their powers

Many of the rules in the MPRDA and its accompanying mining charter are already vaguely phrased and open to different interpretations. This discretionary element has not only made the regulatory environment less predictable, but also opened the door to corruption and abuses of power.

Abuses have long been evident in the granting of mining rights, for DMR officials have frequently insisted on choosing the ‘right’ BEE investors for mining companies to partner with. They have often also been able to help favoured BEE applicants gain confidential information, or obtain prospecting rights in breach of the relevant rules. Unwarranted and abusive threats to cancel mining rights have also been made at various times.

Even more extraordinary abuses have recently emerged in the story of how Glencore plc was pressurised into selling three key coal assets – the Optimum and Koornfontein coal mines and the Optimum Coal Terminal at Richards Bay – to Tegeta Exploration and Resources (Tegeta). Tegeta is effectively owned and controlled by the Guptas, an immigrant family from India with close ties to President Jacob Zuma. One of Mr Zuma’s sons, Duduzane Zuma, has a significant stake in Tegeta (currently worth some R775m), giving the president a personal interest in the company’s success or failure.

According to former public protector Thuli Madonsela’s State of Capture report, supplemented by the leaked Gupta e-mails and other sources, key people at Eskom and the DMR put great pressure on Glencore to compel it to sell these assets. These individuals – all of whom have apparent links to the Guptas – refused to renegotiate a 40-year-old coal supply contract on which Optimum was losing R100m a month. They also then fined Optimum R2.2bn for the delivery of allegedly ‘sub-standard’ coal. These financial pressures forced Optimum into business rescue.

Thereafter, these Gupta allies refused to entertain an offer to buy from another company, leaving Tegeta as the only purchaser still in the running. They also insisted that Glencore’s profitable Koornfontein mine and Richard’s Bay coal terminal had to be included in any deal. They further increased the pressure on Glencore by suspending Optimum’s mining right for a period, and seemingly tried to cancel all of Glencore’s 14 mining rights as well.

Once the sale to Tegeta had been agreed, these Gupta allies used prima facie unlawful and sometimes fraudulent means to help Tegeta raise the R2.1bn purchase price. After the sale had gone through, more-over, the R2.2bn fine which had helped force Optimum into business rescue was reduced by almost 90%, despite Eskom’s prior insistence that the penalty was non-negotiable and had to be paid in full.

A key risk from the new mining charter is that its onerous requirements and often vague terms will pave the way for further abuses of this kind. Gupta-linked companies are thus likely to benefit substantially from the new rules. So too will South Africa’s state mining company, African Exploration Mining and Finance Corporation (African Mining).

Creeping mine nationalisation under the charter

African Mining is currently a subsidiary of the Central Energy Fund, but in 2016 the DMR put forward a draft bill seeking to establish it as a separate company reporting to the mining minister. According to the bill, it will also be able to acquire mining rights from the DMR, undertake its own mining operations, and ‘acquire shares or other interests’ in companies already engaged in mining.

The new charter will help African Mining fulfil these aims. The rule requiring 51% black ownership for the granting of prospecting rights will help ensure that these rights go to it, rather than to the established mining majors. A further requirement that all mining assets must first be offered to 51% black-owned companies will help it to acquire the shares and other assets of existing companies, as it plans to do.

The costly obligations to be imposed on mining majors under the new charter could also encourage them to sell off their mining assets, which African Mining would then have a preferential right to buy.  In addition, if the mining rights of existing companies are cancelled for non-compliance with the new charter – and full compliance will be virtually impossible to maintain – then African Mining will be waiting in the wings for the DMR to grant it these newly available rights.

The state mining company’s acquisition of prospecting rights, mining rights, and mining assets is thus likely to proceed apace once the new charter is in force. This will help bring about the incremental and uncompensated mine nationalisation for which the ANC Youth League and other ANC allies have long been calling.

The ANC and its allies like to pretend that state ownership and control of the mining industry will increase and spread the benefits of South Africa’s great mineral wealth. But international experience shows that state mining companies generally fail, managing to produce only a fraction of what the private sector is able to achieve.

The reasons for this are plain, and should resonate among all South Africans. State mining companies are generally plagued by poor management, rising inefficiency, and diminishing competitiveness. They also battle to raise the funds for new or expanded mining operations – and especially so when public debt is high, tax revenues are static or shrinking, and governments face many other demands on the public purse.

However, the most important obstacle to success is usually poor governance. State mining companies (in the careful words of the Extractive Industries Source Book) are often captured by small and privileged elites, which use them for their own gains rather than in the national interest.

In practice, the mining revenues generated by state companies are often concealed and then siphoned off to individual bank accounts abroad. This risk is particularly telling in South Africa, where the rapid enrichment of the Gupta family – and a small elite within the ANC – has shown how easily public resources can be commandeered and spirited out of the country with the help of the politically powerful.

The new mining charter will encourage self-enrichment of this kind. It will further empower the state, while bringing great wealth to a few politicians and their favoured ‘crony capitalists’. At the same time, it is likely to have devastating consequences for the mining industry and the wider South African economy.

An urgent need for an ‘EED’ empowerment strategy

The charter is thus a particularly damaging BEE instrument. However, it is also very much in line with other BEE policies, which have invariably helped only a small minority while greatly harming the remainder. If South Africa is to succeed in positive transformation, it needs to shift away from BEE to a far more effective empowerment policy. This alternative policy is being developed by the IRR and is called ‘economic empowerment for the disadvantaged’ or ‘EED.’

EED would actively promote investment, growth, and employment, always the key foundations for prosperity. It would 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, and far exceeds what most other developing countries can 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.

The state’s repeated promises to do better have brought little change. 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.

Tax-funded vouchers for meaningful empowerment

Re-directing the education 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, by both companies and non-profits, 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 to roughly 10 million South Africans between the ages of 25 and 35. These would be worth some R110 000 over ten years, so 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 some R400 000 over ten years.

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 would 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 would want maximum value from their vouchers, tax revenues would 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 destitute.

Key differences between EED and BEE

Tax-funded vouchers for education, housing, and health care are thus integral to EED and are a key factor distinguishing this strategy from BEE. Other differences between the two approaches 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 instead 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 effectively empowering the truly disadvantaged.

The benefits of shifting from BEE to EED would swiftly be felt across the country. However, the gains to be made are now 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.

An EED charter for mining

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.

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.)

Time to shift from BEE to EED

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.

What then is to be done? The ANC’s allies have long been using the predictable failures of BEE to push for ever more state ownership and control. The South African Communist Party (SACP), the Congress of South African Trade Unions (Cosatu), and the ANC Youth League have all said that BEE’s failure to generate ‘more egalitarian outcomes’ means that the government must now start nationalising land and ‘strategic’ sectors, including the mining industry.

More recently, Mr Zuma’s preferred presidential candidate, Nkosazana Dlamini-Zuma, has also called for the nationalisation of key industries, while the president himself has repeatedly demanded a strong emphasis on ‘radical economic transformation’. As Mr Zuma told Parliament in his State of the Nation Address (SONA) in February 2017, such transformation requires ‘fundamental change’ in ‘the structure...of the economy’, as well as in its ‘ownership, management and control’.

Given the president’s repeated emphasis on inter-racial inequality, most commentators assume that what the ANC wants is a shift from supposedly ‘white’ ownership – though most listed companies are in fact mainly owned by pension funds and similar institutions – to ‘black’ ownership. However, the ANC’s real objective, in line with its long-standing commitment to the national democratic revolution (NDR) it first endorsed in 1969, is to take South Africa from its predominantly free market economy to a socialist and then communist future. This requires a shift in ownership and control, not so much from whites to blacks, as from the private sector to the state.

To achieve its objective of public ownership and control, says Mr Zuma, the government must now ‘utilise to the maximum the strategic levers that are available to the state’. These include ‘legislation, licensing, and...procurement [rules], as well as BEE charters’. The ruling party also requires ‘more direct state involvement in mining’, to be achieved through the state mining company. The new charter, as earlier outlined, will greatly help the ruling party to realise this last goal. This is why Mr Zwane sees the document as ‘a revolutionary tool’ and ‘a key instrument for radical change’.

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 as the economy falters even further and a corrupt and inept political elite expands its power.

By contrast, a shift to EED in mining (and elsewhere) would free the country from the leg-iron of ever more damaging BEE requirements. It would also empower the majority in a way that BEE interventions – and the new mining charter in particular – will never be able to achieve. With the mining industry in the doldrums and the new charter’s fundamental flaws readily apparent, it is time to revive investor confidence, kick-start growth in a vital sector, and re-ignite prospects of upward mobility for millions of South Africans by shifting from BEE to EED instead. 

This is a synopsis of a longer @Liberty article, published earlier this week, which has the same title and is available on the IRR website (www.irr.org.za)