Submission to the Department of Mineral Resources regarding the Draft Broad-Based Socio-Economic Empowerment Charter for the Mining and Minerals Industry, 2018, Johannesburg, 31st August 2018

1 Introduction

The Department of Mineral Resources (DMR) has invited public comment on the Draft Broad-Based Socio-Economic Empowerment Charter for the Mining and Minerals Industry, 2018 (the 2018 draft charter), published in the Government Gazette on 15^th June 2018. The deadline for public comment on the draft charter was initially set at 30 days, but was thereafter extended to 31^st August 2018.

This extended period provides more scope for meaningful public involvement in the adoption of the draft charter. However, the increased time is likely to mean little in practice as the minister of mineral resources, Gwede Mantashe, seems already to have prejudged the outcomes of the current public participation process. He did so in a public statement issued on17th June 2018, two days after the document’s gazetting, in which he said that the current text was ‘unlikely to be altered much’.[1]

This submission is made by the South African Institute of Race Relations NPC (IRR), a non-profit organisation formed in 1929 to oppose racial discrimination and promote racial goodwill. Its current objects are to promote democracy, human rights, development, and reconciliation between the peoples of South Africa.

According to Mr Mantashe, the 2018 draft charter has been gazetted by him under the powers given to him by the Mineral and Petroleum Resources Development Act (MPRDA) of 2002, as amended by legislation adopted in 2008 and brought into effect in 2013. However, the MPRDA does not give the minister the power to enact a new charter different from the one that was adopted in 2004 under Section 100 of that statute (see Section 3, below).

2 The regulatory background to the draft charter

Regulatory certainty and predictability are vital to the South African mining industry, which generally requires enormous upfront capital investments and has long lead times. Since 2004, however, when the MPRDA took effect, repeated revisions to the Act, the initial mining charter, and other relevant rules have steadily eroded that predictability.

The initial charter was adopted by the then mining minister, Phumzile Mlambo-Ngcuka, under Section 100 of the MPRDA and took effect in 2004. Under this document, 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 added that ownership deals were to be done at ‘fair market value on a willing seller/willing buyer basis’. It also stated that ‘the continuing consequences’ of all previous transactions must be taken into account in measuring HDSA ownership, even if HDSA beneficiaries had since sold out or otherwise exited from these deals.[2]

Since 2010, when a revised mining charter of doubtful validity was gazetted by the then mining minister, Susan Shabangu, these key principles have steadily been eroded. At the same time, the burden of empowerment obligations has been sharply ratcheted up. The 2018 draft charter has ameliorated some of the worst features of the 2017 charter, which was gazetted in June 2017 by mining minister Mosebenzi Zwane and then put on hold pending a court challenge to its validity by the Chamber of Mines (now the Minerals Council South Africa). However, this does not alter the fact that the current document is still profoundly investment unfriendly.

The 2018 draft charter will impose a number of additional costs on mining companies, many of which are already operating at a loss. These companies are price takers (as commodity prices are set in international markets) and will not be able to increase their selling prices to cover these additional expenses. The draft charter will thus damage the sustainability of the industry. It will also make it very much harder for South Africa to compete with other countries for essential new mining investment. By increasing ownership and other empowerment targets, the draft charter also signals that such obligations are likely to keep changing in the future. This undermines the predictability of the country’s minerals regime, which in itself is a significant deterrent to fresh investment.

The draft charter thus has many damaging economic ramifications (see Section 4, below). In addition, it cannot lawfully be adopted under Section 100 of the MPRDA, while many of its specific provisions are also invalid and illegal.

3 The unlawfulness of the 2018 draft charter

The 2018 draft charter is unlawful and invalid in a host of ways. The most fundamental legal barrier to its validity stems from Section 100 of the MPRDA, which empowers the mining minister to ‘develop a broad-based socio-economic empowerment charter’ within six months of the statute coming into effect. This section does not give the minister any power to amend, repeal, or replace such a charter. The 2004 charter is, of course, the document that was lawfully adopted under this provision. On the clear wording of Section 100, the minister has no power to amend this initial charter, let alone repeal and replace it with a different document. This means that the 2018 draft charter is ultra vires the minister’s powers under the MPRDA and unlawful in its entirety.[3]

Many other provisions of the draft charter are also unlawful and invalid. The relevant clauses (which are more fully described in the IRR’s full submission) are briefly set out below, together with an explanation (in italics) of why they are invalid.

3.1 Existing rights holders must ‘top-up’ to 30% BEE ownership within five years.[4]

This is unlawful, as the Pretoria high court confirmed in April 2018 (in a case brought by the Chamber of Mines on the validity of the ‘continuing consequences’ principle), unless the relevant mining right was expressly made subject to this specific top-up requirement at the time of its granting.[5]

3.2 The ‘continuing consequences’ principle will not be applied to existing rights holders who have previously failed to attain 26% BEE ownership.[6]

This is illegal as the minister has no power under Section 100 of the MPRDA to remove this principle from the 2004 charter. This charter is also the only one which can be recognised as valid under the statute.

3.3  The ‘continuing consequences’ principle will be repealed when the draft charter takes effect, will not govern applications for new mining rights, and will be lost to existing rights holders on the renewal or transfer of their mining rights.[7]

All these provisions are illegal since the minister has no power under Section 100 of the MPRDA to remove the ‘continuing consequences’ principle from the 2004 charter.

3.4  Applicants for new mining rights must have 30% BEE ownership, which must be structured in an 8:8:14 ratio, with 8% for employees, 8% for mine communities, and 14% for ‘BEE entrepreneurs’.[8]

This is unlawful, as the Minerals Council has previously pointed out, as there is nothing in the MPRDA which authorises these specific and arbitrary requirements.[9]

3.5  Holders of new mining rights must re-do the relevant portion of their 30% ownership deals if BEE entrepreneurs sell out before the end of ten years.[10]

This demand is also inconsistent with the ‘continuing consequences’ principle, which the minister has no legal power to remove.

3.6  Holders of new mining rights must pay a ‘trickle dividend’ (calculated as 1% of earnings before interest, taxes, depreciation, and amortisation) to qualifying employees and host communities, both in the sixth year of a mining right (where ordinary dividends have not yet been declared) and in any other year in which ordinary dividends are not paid.[11]

The obligation to pay dividends to some shareholders but not others prima facie contravenes the Companies Act of 2008, which requires equal treatment for all shareholders.[12]

3.7  Trickle dividends must seemingly also be paid to BEE entrepreneurs. In this context, such dividends are defined as ‘dividends with a cash flow’ which must apparently be paid ‘throughout the term of the investment’. According to the draft charter, ‘a percentage of such cash flow is used to service [debt] while the remaining amount is paid to BEE entrepreneurs’.[13]

This provision likewise contravenes the Companies Act. It also contradicts the doctrine against ‘vagueness of laws’, which (as the Constitutional Court has ruled) requires that ‘laws must be written in a clear and accessible manner’. The draft charter fails this test, as it provides no clarity as to how such dividends are to be calculated and when they are to be paid.[14]

3.8  Mining rights holders must maintain 100% compliance with the ownership target throughout the duration of a mining right, which is normally 30 years.[15]

This requirement is inconsistent with the more flexible ownership provisions in the revised BEE generic codes of good practice which took effect in 2015. Moreover, under the Broad-Based Black Economic Empowerment Act of 2003, as amended in 2013 (the BEE Act), the generic codes are supposed to take precedence over all conflicting empowerment rules, including those governing the mining industry.[16]

3.9  Foreign suppliers are confined to supplying 30% of mining goods and a mere 20% of relevant services, as the remaining 70% and 80%, respectively, must be locally purchased.[17]

These restrictions are in breach of South Africa’s binding obligations under both the General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade in Services (GATS) of the World Trade Organisation (WTO). The GATT bars preferential treatment for local suppliers, instead confirming that member states must accord foreign suppliers treatment which is ‘no less favourable’ than that given to domestic ones. The GATS includes a similar obligation. The charter’s breach of both these binding agreements is unlawful and may also be unconstitutional.[18]

3.10 Foreign suppliers must pay a levy, which is to be set at 0.5% of the annual turnover they generate from supplying goods and services to mining companies in South Africa. The proceeds of this levy are to be paid to the Mandela Mining Precinct to help fund mining research.[19]

This levy is nothing other than a tax and hence can be introduced only via a money bill adopted by Parliament. In addition, the Constitution provides that all tax monies, other than those ‘reasonably excluded by an Act of Parliament’, must be paid into the National Revenue Fund. The minister thus lacks the legal authority to introduce these clauses. He is also seeking to give the charter an extra-territorial application, even though foreign firms are not bound by South African law.[20]

3.11 Junior miners are seemingly bound by the charter, but may ‘make representations’ to the minister regarding ‘the extent to which’ the document will apply to each of them.[21]

This wording contradicts the doctrine against vagueness of laws, as it provides no objective criteria to help guide the minister’s unfettered discretion.

3.12 Mining companies that fail to maintain 100% compliance with the ownership element for the duration of their mining rights will be regarded as non-compliant with the charter and hence as in breach of the MPRDA. They will thus be subject to all the penalties for which that statute provides, from the suspension and cancellation of their mining rights to fines and prison terms.[22]

As the Minerals Council has pointed out, the MPRDA does not give the minister the power to cancel or suspend mining rights for a failure to comply with the charter, which is simply ‘a statement of policy’ on how the MPRDA’s objectives may be fulfilled. If the minister is now to be given such powers, this can be done only via an amendment to the statute, which must be adopted by Parliament in the usual manner. These charter provisions are also inconsistent with the Pretoria high court judgment in April 2018, which held that a failure to comply with the mining charter does not constitute a punishable breach of the MPRDA.[23]

The minister’s attempt to expand his powers under the MPRDA also conflicts with the doctrine of the separation of powers and is unconstitutional. As the Minerals Council has stated: ‘The minister cannot by decree elevate the charter’s status to that of legislation, and cannot by decree provide in the charter that non-compliance therewith shall render the mining company in breach of the MPRDA... Only Parliament, by means of appropriate amendments to the MPRDA, can render a breach of the [2018] charter a breach of the MPRDA’.[24]

In addition, the proposed penalties (the cancellation of mining rights or prison terms for directors) for companies that fail to maintain 100% compliance with the ownership target at all times are inconsistent with the BEE generic codes of good practice. These codes require companies to attain a 40% ‘sub-minimum’ on the 25% BEE ownership target (and on two other ‘priority’ elements), failing which they may be penalised by having their ‘level of BEE contribution’ reduced by one level. The far harsher penalties the draft charter seeks to impose are again inconsistent with the BEE Act, which states that the BEE generic codes must take precedence over any conflicting sector code.[25]

3.13 According to the 2018 document, the charter ‘shall also apply to prospecting rights, as contemplated in Section 17(4) of the MPRDA’.[26]

Here, the charter seeks to impose a 30% ownership target on the holders of prospecting rights. This is inconsistent with Section 17(4) of the MPRDA, which merely allows the minister to ‘request’ an applicant for a prospecting right to ‘give effect’ to the MPRDA’s aim of increasing black participation in the mining industry.[27]

3.14 The minister is empowered to ‘review’ the draft charter, simply by publishing a notice in the Government Gazette.[28]

This clause is also ultra vires the minister’s powers under the MPRDA and hence unlawful. To recap, Section 100 of the statute allows the minister to ‘develop a socio-economic empowerment charter’ for the mining industry within six months of the statute’s taking effect, but it does not give him the power to ‘review’ the charter thus developed. In addition, the word ‘review’ – which seems to be intended to mean ‘amend’ – is ambiguous and contradicts the doctrine against vagueness of laws. Moreover, if the charter is to be treated as if it were a part of the MPRDA (as the penalty provisions for non-compliance clearly envisage), then the charter cannot be changed by the minister and must instead be amended by Parliament.[29]

3.15 The draft charter seeks to change the beneficiaries of transformation from the ‘historically disadvantaged South Africans’ (HDSAs), to which the MPRDA refers, to ‘black persons’.[30]

The minister’s attempt to benefit ‘black persons’ rather than HDSAs is clearly ultra vires the MPRDA and is thus unlawful. The charter tries to get around this by saying that references to ‘black persons’ or ‘BEE entrepreneurs’ must be construed as references to HDSAs, until such time as the MPRDA has been amended. However, this proviso does not alter the unlawfulness of the document’s attempt to introduce a different group of beneficiaries by ministerial diktat.[31]

The illegality of these provisions, coupled with the unlawfulness of the entire draft charter under Section 100 of the MPRDA, is a fatal impediment to any attempt to gazette or implement the 2018 document. Many of its clauses are also problematic for other reasons, as further described in the IRR’s full submission.

4 Ramifications of the draft charter

The 2018 draft is better than its 2017 predecessor in various ways. It scraps the 51% ownership requirement for new prospecting rights, gives more recognition to the ‘continuing consequences’ principle, and slightly reduces earlier procurement and employment equity quotas. In addition, it scraps the 100% compliance requirement for skills development and mine community upliftment, instead confining this onerous demand to the ownership element alone.

However, the draft charter still greatly increases the regulatory burden on mining companies in South Africa. Its adoption of a 30% ownership target contradicts all the assurances earlier provided by the DMR that the 26% target was immutable and would not be changed. Now that the DMR has gone back on this pledge, the risk of the ownership target being raised once again – perhaps to 51% next time, as the 2017 charter foreshadowed – looms all the larger.

In addition, some 75% of the country’s gold and platinum mines are loss-making in current conditions and are battling to survive. This is because commodity prices are relatively depressed, while input costs are sharply up. The key factors here are electricity prices, which have trebled in the past decade, and labour costs, which have increased at rates well above inflation in recent years.[32]

The draft charter overlooks the dire economic plight of many mining companies. Instead, it demands that all rights holders do additional and costly BEE deals while simultaneously fulfilling a host of unrealistic procurement and other obligations. These requirements will greatly push up operating costs – and increase the likelihood of shafts being shuttered and mineworkers retrenched.

Retrenchments now planned or under way at gold and platinum mines include:

- some 1 600 at Gold Field’s South Deep mine, which has been losing about R1bn a year since it was bought for R22bn in 2006;[33]

- roughly 13 000 at the Rustenburg operations of Impala Platinum (Implats), which plans to shut five of its 11 shafts over the next two years to address six years of losses, currently amounting to R100m a month;[34]

- some 12 600 over three years at Lonmin’s platinum mines, where old mines are being closed as part of a shift to lower-cost and more sustainable operations;[35]

- around 1 700 at Pan African’s Evander gold mine, which is also loss-making at current gold prices;[36] and

- about 2 000 at AngloGold Ashanti, which is seeking to reduce its R3.3bn annual overhead cost by two-thirds.[37]

The price of gold has held up better than that of platinum (for which demand has dramatically decreased), but gold mining companies face other major challenges. In particular, most are running out of accessible gold-bearing rock, while the bulk of the country’s still vast gold resources are located at depths of five kilometres or more. This makes traditional mining methods both too dangerous and too costly to deploy. Further mining will be feasible only if full-scale mechanisation and round-the-clock operation can be achieved. If mechanisation cannot be implemented in time, many gold mining companies will exhaust the ores they can reach by the early to mid 2020s and will have to scale down dramatically, or even close their operations.[38]

Mechanisation of mining operations in hard gold-bearing rock and at the depths in issue will not be easy to achieve. Hence, gold mining companies are unlikely to succeed in this unless they can commission the best research, employ the people with the best skills and experience, and purchase the best machinery and other equipment from the international suppliers best able to meet their complex needs. But the draft charter will make it more difficult for them to do any of these things. Much of the country’s gold wealth is thus likely to remain below the ground because its exploitation is neither feasible nor cost-effective under the charter’s additional burdens.

South Africa still has enormous mineral wealth, of course, which is a major draw card. But decisions on mining investment are guided 60% by geological attractiveness and 40% by the content of mining policies. Prospective investors take careful note of policy differences between countries and tend, in the words of the Fraser Institute’s Mining Survey, to ‘shift exploration investment away from jurisdictions with unattractive policies’. South Africa does particularly badly on the ‘policy perception index’ in the Fraser survey, where it came 81^st out of the 91 jurisdictions monitored in 2017. [39]

The upshot, as Bernard Swanepoel, a former chief executive of Harmony Gold, warned at the Junior Mining Indaba in June 2018, is that ‘exactly zero’ has been spent on greenfields exploration in the past year. Yet without fresh exploration, no expansion is possible and the mining industry will continue to decline.[40]

The overall decrease in exploration budgets in South Africa over the past ten years has also been substantial. According to data from S&P Global Market Intelligence, South Africa’s exploration budget amounted to $363m in 2008, but by 2017 it was down to $87m, a decrease of roughly 75%. Moreover, as the Minerals Council points out, the exploration investment that South Africa managed to attract in 2017 was only 1% of global expenditure on minerals exploration in that year.[41]

In addition, according to research by the Minerals Council, net investment in the South African mining industry has declined by 57% since 2008. This is partly because of economic factors – the adverse combination of lower global commodity prices and higher input costs – but the decrease has also been fuelled by the country’s damaging mining policies. These are not simply too shifting and uncertain, as many commentators have pointed out, but are also increasingly hostile to property rights and the success of the mining sector.[42]

5 A more effective approach to empowerment

For all the reasons earlier outlined, the 2018 draft charter for the mining industry is a particularly damaging BEE instrument. However, it is also very much in line with other BEE policies, which have helped only a small minority while greatly harming the rest of the population. 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 R580bn 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 in 1994 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 R580bn 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 R16 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.

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. Here, the draft charter will clearly do great harm, whereas an EED approach would bring enormous benefits.

An EED charter for mining

Under an EED mining charter, companies would earn 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.)

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, state delivery continues to decline, and an increasingly corrupt political elite expands its power.

At the same time, the 2018 draft charter is ultra vires the MPRDA and unlawful in very many of its provisions, as earlier outlined. The draft charter thus cannot legally be adopted or implemented. A fundamental rethink is therefore required as to how positive transformation can best be achieved in mining (and elsewhere). The answer lies in shifting from BEE to EED.

A shift to EED in mining, in particular, would allow South Africa to draw the full benefits of its enormous mineral wealth. It would also empower the poor and disadvantaged in a way that the draft mining charter will never be able to achieve. With the mining industry in the doldrums and the draft 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 to an EED scorecard for mining instead.

South African Institute of Race Relations NPC 31^st August 2018

Footnotes: