Address by Peter Leon, Partner and Head of Mining Regulatory, Webber Wentzel, Johannesburg, to the Belgian and French Chambers of Commerce, Johannesburg, November 25 2014
HOW TO TURN AROUND THE SOUTH AFRICAN MINING INDUSTRY: SOME THOUGHTS ON THE CURRENT INVESTMENT CLIMATE
It is a great pleasure to be here this evening, not least after I enjoyed spending some time in the early European summer in your respective capitals, including the wonderful Thalys high speed train between Brussels and Paris on a perfect late May afternoon. I always think it is something of a challenge to determine which city is Europe's culinary capital, but I am pleased to report, in the interests of diplomatic relations, that I found it difficult to decide.
As you will see, I have been asked to address the rather challenging topic of how to turn around the South African mining industry in the current investment climate. When thinking about how to answer this question, I was reminded of John Kennedy's original take on the meaning of the word "crisis".
As you will recall in his truncated, thousand day Presidency - it is almost fifty-one years to the day since his assassination in Dallas on November 22, 1963 - he experienced very many of these from civil rights in the South, Vietnam, to the Cuban missile crisis. President Kennedy observed: "When written in Chinese, the word "crisis" is composed of two characters: one represents danger and the other represents opportunity".
I think this aptly describes the state we are in; the current environment is a danger as much as it is an opportunity. I know that many of you are concerned about where or how this will all end, as much as you are worried about the next round of Eskom load shedding as silo cracks appear all too often at the Majuba power station.
On the face of it, the state of our economy does not present a pretty picture. Real GDP growth this year is projected at 1.4 per cent, less than half of the 3.6 per cent figure achieved in 2011 and well below the 5 per cent minimum projected by the National Development Plan ("NDP") to address poverty, inequality and unemployment. This is the lowest it has been since the beginning of the global financial crisis in 2007.
Ironically, economic growth in South Africa has seesawed just as the financial crisis ended. South Africa is now ranked 56th out of 144 countries in the World Bank's global competitiveness report, a three place fall from last year. The report highlights the country's poor labour market efficiency (where it is ranked 113/144) and last in terms of employer-employee relations. Two sovereign ratings downgrades this year, by Standard and Poor's and Moody's respectively, have done little to allay this sense of gloom.
Ongoing labour unrest, first in the wake of Marikana in August 2012 and more recently as a result of this year's five month long platinum sector strike, infrastructure weaknesses (particularly in relation to energy and logistics), skills constraints, coupled with subdued external demand for the country's exports, have all contributed to this.
This is reflected in the Business Confidence Index which now sits at 46 points (50 is neutral). On the labour front, according to the South African Reserve Bank, some 7.5 million work days were lost in 2014 owing to strike action compared with 1.8 million in 2013. Investment by the private sector has contracted this year; in Q2 by 1.1 per cent.
The recent expulsion of the National Union of Metalworkers of South Africa ("NUMSA") from the Congress of South African Trade Unions ("COSASTU") is only likely to exacerbate the poor state of our labour relations. Equally significantly, it means that the largest private sector union, with some 320 000 members, will not only fall outside COSATU, but outside the governing tripartite alliance which will ultimately have far-reaching political implications.
In this regard, it is salutary to note that some 7.6 million South Africans are now either unemployed or discouraged from seeking employment. The State, by contrast, has become the country's largest employer with some 1.8 million employees, 28 per cent bigger than it was in 2005. According to the World Bank, the economy will now need to generate 1.2 million jobs to close the jobs gap; that is the difference between current levels of employment and that at the beginning of the global financial crisis.
High income inequality, coupled with high youth unemployment, is a key contributor to a frayed social fabric represented by a Gini coefficient of 0.69 in 2011 (where zero reflects perfect equality) one of the highest in the world. That is the danger of which President Kennedy spoke so eloquently.
The government has addressed this through social transfers to some sixteen million welfare recipients or some 30 per cent of the population, which, according to the World Bank, has lifted 3.6 million people out of extreme poverty (living on less than US$2.50 per day). Almost half of all government spending, which this year will comprise some 33 per cent of GDP, is now devoted to social spending, with direct cash grants representing 3.3 per cent of GDP.
And here strangely enough is the opportunity. This year's platinum sector strike, the longest on record, led to a massive contraction in mining output, which fell by 24.7 and 9.4 per respectively in the first and second quarters. This, in turn, reduced GDP by 1.6 and 0.5 per cent respectively in the same period. As mining contributes nearly half of South Africa's exports, the current account deficit ballooned to 6.2 per cent of GDP in this period, while fiscal revenues declined.
The deficit is now at its highest since 2006 and the second highest in the G20 after Turkey. The risk with this deficit is that it is mainly financed by short term capital inflows in the bond and equity markets. These could rapidly reverse in the wake of a decline in economic sentiment. As lower tax receipts reflected these difficult economic conditions, the fiscal deficit rose to 4.1 per cent of GDP (under EU Maastricht rules, the limit for member states is 3.5 per cent).
As government debt is now some 46 per cent of GDP, compared with 36 per cent three years ago, something had to happen and that appears to be the beginning of a change in economic policy. While some of this will be painful, not least a signalled increase in taxes next year, the Minister of Finance's October Medium Term Budgetary Policy Statement ("MTBS") indicates the National Treasury's apparent seriousness about curtailing expenditure while increasing government revenue.
How does this represent an opportunity? Faced with a combination of declining revenue and escalating debt, the country's fiscal space has contracted significantly. Put simply, there is no more money. In addition to proposing spending cuts, a two year freeze on government employment and likely tax increases next year, the MTBS proposes for the first time since the ill-fated Growth Employment and Redistribution policy of 1996 a ZAR 20 billion partial privatisation programme of ‘non-strategic' state-owned assets to support Eskom. Funding for other state-owned entities ("SOEs") such as South African Airways will have to be deficit-neutral, meaning that it will either have to be self-funded or made by way of private sector investment.
I believe this represents an important shift in government policy as it is only likely to be the beginning of a much larger privatisation programme. All the more so when the Treasury has already indicated that the government is not prepared to increase the level of guarantees to SOEs which are already at their outer limit of ZAR 466 billion.
The 2014-2019 medium term strategic framework ("MTSF"), which gives policy effect to the NDP, and which has received surprisingly little attention, gives some further clues to this. The framework aims, among other things, to streamline regulatory processes, particularly in relation to the grant of mining and water licences as well as environmental impact assessments.
It undertakes to give effect to a long outstanding commitment by government to carry out regulatory impact assessments on new as well as existing legislation to ensure compliance with the NDP. It commits to improve government's engagement with business to unlock private sector investment and build trust between the parties. Workplace conflict, particularly in mining, will be addressed through a ‘stabilised' labour market.
That, of course, is a promise about the future. Where do things stand with the mining industry currently? According to PWC, while the revenue of South African mining companies has increased by 12 per cent this year, impairment charges of R49 billion have decreased net profit by 78 per cent to R6 billion.
This has led to a 34 per cent decrease in distributions to shareholders (R19 billion), a seven per cent reduction in net operating cash flows and a nineteen per cent reduction in capital expenditure to R57 billion. While some of this is obviously attributable to the platinum sector strike, much of it is due to a combination of declining commodity prices and increased costs, which currency depreciation has done little to mitigate.
What bedevils the South African mining industry currently? First, there is no overarching social compact between government, labour and business; the two attempts at these over the last decade or so have not worked for different reasons. The October, 2002 Mining Charter was an attempt at this, albeit in the form of quasi-legislation, as it least bound all three actors to a set of different commitments around a sustainable mining industry.
By contrast, the September 2010 Mining Charter only binds business and imposes no obligations at all on government or labour. The July 2013 framework agreement between government, labour and business (discussed below) is clearly a step in the right direction, but it lacks any enforcement mechanisms or sanctions and, critically, the Association of Mineworkers and Construction Union's ("AMCU's") signature, as a significant trade union.
The NDP, which government and the African National Congress respectively endorsed in August and December 2012, recognises this as "an opportunity lost" and that the mining industry "has performed poorly over the last decade."[1] It therefore recommended that the Mineral and Petroleum Resources Development Act ("MPRDA") should be amended to "ensure a predictable, competitive and stable regulatory framework."[2] In other words, that government should move towards a world class regulatory regime. It also recommended aligning the Mining Charter more closely with the needs of local communities.
This is illustrated by South Africa's ranking in this year's Fraser Institute survey where it was ranked 64th of out of 112 global mining jurisdictions, but significantly only eighth out of sixteen African mining countries (Botswana was first and ranked 25th overall). In 2001/2002, South Africa ranked 14th out of 45 countries surveyed. On the policy perception index, South Africa had a score of 39%. An investor described the country's regulatory regime as "changing environmental and regulatory laws (have) resulted in extended delays...lengthy red tape and (a) multitude of departments overseeing permits."[3]
The MPRDA Amendment Bill, passed by Parliament earlier this year but as yet unsigned by the President, appears to do exactly the opposite of what the NDP proposes. It increases administrative discretion by delegating important regulatory functions to the Minister of Mineral Resources particularly in regard to local beneficiation of minerals.
It removes all statutory time limits for the grant of rights in the Act itself which will in future be subject to Ministerial regulation. The Bill likewise abolishes the open access system for the grant of rights, which operates in the overwhelming majority of mining jurisdictions, replacing it with an opaque quasi-auction system, which may potentially be open to manipulation.
Finally, it creates an export licensing system for "designated" minerals, under which the Minister must "designate" minerals for local beneficiation, in the quantities, qualities and timelines which he may specify.[4] Producers must supply such minerals for local beneficiation at a "mine gate" or agreed price. If not so supplied, mining companies will be unable to export such minerals without the Minister's written permission.[5] None of these provisions appears investment enhancing.
As far as labour is concerned, wage increases in the mining industry have averaged 12.3 % per year for the past five years, in other words, nearly double the current inflation rate, without any concomitant increase in productivity (or, indeed, any agreement linking the two). Labour costs now represent over fifty per cent of the industry's fixed costs.
At the same time, an absence of mandatory secret balloting before strike action, coupled with what are effectively "closed shop" agreements, which deny recognition to minority unions, are not conducive to labour stability. The migrant labour system, endemic to much of our mining industry and an unpleasant hangover from colonialism and apartheid is a scar on the industry which desperately needs reforming.
On the platinum belt, mineworkers, living out allowances, used by some 60 % of workers, and generally sent home as remittances, have led to the establishment of informal settlements and often second families.
While it is true that mining companies cannot obtain and maintain a mining right under the MPRDA without a social and labour plan ("SLP") approved by the Department of Mineral Resources ("the DMR")[6], there is (i) no obligation on the DMR to consult with mine or near mine communities and (ii) sometimes inadequate consultation with local and district municipalities. Nor is there any requirement that such communities approve the SLP which presumably is for their benefit. This has led to inefficient infrastructure development and non-alignment with a local authority's integrated development plan.
While business faces declining commodity prices as China's economic boom deflates, graphically represented by this year's 45 % fall in the iron ore price, the cost pressures on mining companies are ever increasing. In addition to a ballooning wage bill, administered costs for energy, provided by Eskom, a SOE monopoly, have according to the Chamber of Mines increased by a staggering 238 % between 2007 and 2012.[7]
Unlike in Australia or Brazil, mining companies are dependent on Eskom for power as they are on Transnet, a SOE monopoly, for rail capacity and port facilities. Lack of cost-competitive access to essential infrastructure has a severe impact on economic growth; the Chamber of Mines has estimated that if this constraint were removed, it would ensure an annual increase in GDP of between 3-5%. It is not clear why government should continue to own, operate and monopolise the infrastructure - energy, rail and ports - on which the industry relies, when this is not the case in most other mining jurisdictions
In view of this, I think an honest and frank conversation is needed between government, labour and business in which all these issues are put on the table. Several steps can, however, be taken in the short term:
The NDP needs to be implemented in its entirety in relation to the mining industry. The NDP is clear that the MPRDA requires fixing to create "a predictable, competitive and stable regulatory framework". The NDP ascribes this to: "uncertainty in the regulatory framework and property rights; electricity shortages and prices; infrastructure weaknesses, especially in heavy haul rail services, ports and water".[8] The MPRDA Amendment Bill should be reconsidered with this and the Framework Agreement, described below, in mind. The NDP is likewise equivocal about beneficiation, observing that it is capital and energy intensive (in an energy constrained environment) and not necessarily labour absorbing.
The Framework Agreement for a Sustainable Mining Industry, signed by government, labour and business on 3 July, 2013 is a good start, as it imposes obligations on all three partners. It is also positive that President Zuma has assumed responsibility for this in his June State of the Nation address. The agreement recognises the need for a sustainable mining sector "for the future of the country and our people". It recognises that living and working conditions for mineworkers are not optimal, that it "cannot be business as usual" and that the rule of law is a "fundamental pillar" of our democracy.
It commits the signatories to building a relationship based on mutual trust and respect, as well as avoiding actions that will endanger this. Significantly, the agreement requires government to ensure consistency and certainty in the application and development of the law and policy, while promising fairness and impartiality, as well as avoiding conflicts of interest, in all matters of governance affecting the mining industry.
There are two problems with the Framework Agreement which need addressing: first, AMCU needs to be persuaded to sign it and, second, an enforcement mechanism and sanctions need to be introduced to the agreement for non-compliance. Had AMCU signed the agreement last year and had it contained sanctions for non-compliance, it is possible that this year's five month long platinum sector strike, which cost the industry and workers R24 billion and R10 billion respectively, may have taken a different turn.
The President should now use his new responsibility for the agreement to achieve both objectives as soon as possible. In addition, the agreement's vagueness on the key issues of collective bargaining and migrant labour needs to be addressed, as does the issue of labour productivity. Clear time frames need to be introduced and commitments made in relation to upgrading informal settlements around mining areas.
The Labour Relations Act, 1995 must be amended to provide for the compulsory secret balloting of union members prior to strike action, as well as enabling the recognition of minority unions.
By following international best practice principles, South Africa can create a growth-enhancing environment of certainty, predictability and stability for the mining industry. As Paul Collier observes countries can maximise their resource endowments by following a simple formula: "nature + technology + regulation = prosperity."[9]
As I began with President Kennedy, it may be appropriate to end with him:
"We don't see the end of the tunnel, but I must say I don't think it is darker than it was a year ago, and in some ways lighter."
I hope that is the case as we come to the end of a tumultuous year; on the subject of light, of course, that is Eskom permitting.
Footnotes:
[1] National Development Plan 2030: Our Future - Make it Work (National Planning Commission, 15 August 2012), 146
[2] Ibid
[3] Fraser Institute, loc cit
[4] See clauses 21 (b) and (c) of the Mineral and Petroleum Resources Development Amendment Bill, 2013
[5] See clause 21(d) of the Mineral and Petroleum Resources Development Amendment Bill, 2013
[6] See s 23(1)(h) of the Mineral and Petroleum Resources Development Act, 2002, read with Regulation 46 of the Mineral and Petroleum Resources Development Regulations published in GN R527 in Government Gazette 26275 of 23 April 2004.
[7] Chamber of Mines of South Africa, Submission to National Energy Regulator of South Africa, 31 January 2013, 1 (published in Politicsweb 1 February 2013)
[8] National Development Plan, op cit, 146
[9] Paul Collier, The Plundered Planet, Penguin, 2010, 4
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