South Africa should look to Botswana’s example on mining – Moneyweb, 2 July 2016

Policymakers need to understand that the country’s best interests and those of the mining industry are the same.

By Frans Cronje

While South Africa struggles with the fallout brought about by low commodity prices and utterly counter-productive mining policies, few analysts have identified that much of the policy solution may lie in the example of our northern neighbour, Botswana.

The Botswana government reformed its mining law in 1999 to promote greater certainty and predictability, just as South Africa was going in the opposite direction. Botswana has since reaped the benefits (in both boom and bad times), whereas South Africa has suffered significantly as a result of its poor policies.

In Botswana the following key criteria are applied in the granting of a mining licence (the equivalent of a mining right under South African mining law):

  • The capacity to “ensure the most efficient and beneficial use of the mineral resources in the proposed mining area”;
  • Access to adequate financial resources, technical competence, and experience to carry on effective mining operations;
  • A proposed financing plan that does not rely too heavily on debt (the debt-to-equity ratio should ideally not be more than 3:1); while
  • The proposed mining area must not be the same or overlap with an existing mining area.
  • The minister is generally obliged to grant the licence if these conditions are met. In the case of competing applications, the licence will go to the applicant “whose proposed mining programme will make the more beneficial use of the mineral resources of the area”. A licence lasts for 25 years and can be renewed for a further 25 years.

 

When a mining licence is issued, the government has the option of “acquiring up to 15% working interest participation in the proposed mine”. If it exercises this option, it must be issued with a single special share, which gives it the right to appoint two directors and receive all dividends relevant to its percentage. However, the government is then also obliged to contribute an equivalent percentage to the expenditure incurred in acquiring the mining licence and developing the mine.

The holder of a mining licence must fulfil various obligations, but these are reasonable by any standard. It must start production on the date promised; develop and mine the mineral; keep accurate technical, geological and financial records; submit such reports as the minister may reasonably require; and provide a copy of its annual report.

The minister may suspend or cancel a mining licence only on limited and reasonable grounds: for example, if the holder fails to pay the required fees; or contravenes the conditions of the mining licence; or makes false statements; or becomes ineligible to hold a mining right (for example, if the company is no longer registered in Botswana).

The strength of the Botswana approach is that it identifies and seeks to leverage the benefits of mining investment without requiring miners to take on a range of onerous empowerment, housing, and other social obligations. The legislation shows a clear understanding that the substantial investment required to develop a mine and carry out mining operations is itself a major economic and social good. In this process, capital is committed and jobs are created, while household living standards and expenditure levels rise. At the same time, tax revenues and export earnings are generated for the benefit of the society as a whole.

This understanding is absent from many of the debates about mining investment and mining policy in South Africa. On the contrary, the huge costs and major risks that mining companies take on in developing mines are commonly disregarded. Instead. miners are often portrayed as greedy exploiters engaged in “looting” the country, as a former mining minister once argued. As a result, mining debate and mining policy in South Africa often have a punitive flavour and confrontational tone.

The result is a lose-lose equation both for South Africa and its people and also for the mining industry — which could generate significantly more wealth and more jobs in a less hostile environment.

Instead, South Africa – despite its enormous mineral reserves – now trails behind mining jurisdictions such as Brazil, Ghana, Zambia, and Burkino Faso in its attractiveness to mining investors. So far this year, the South African mining industry has experienced one of its sharpest ever contractions. The result is fewer jobs, reduced tax revenues, and a greater current account deficit for the country. 

In finding a solution to the current malaise, policymakers need to understand that South Africa’s best interests and those of the mining industry are the same. Creating an enabling policy environment for mining investors will simultaneously help the country reap the socio-economic benefits that the industry provides. There is no conflict between the two.

A solution is also urgently required, as South Africa is now in increasing economic trouble. The next set of quarterly GDP figures are likely to show a further economic contraction, confirming that the country is in a recession (at least according to the technical definition). Ratings downgrades remain likely unless the government is able to stimulate growth and stick to its promised public spending limits. The high costs of high youth unemployment have also been demonstrated once again in the violent protests that recently engulfed the capital.

Mining still contributes almost 8% of GDP and accounts for a major part of South Africa’s exports. It therefore remains a key ingredient in any short- or long-term strategy to turn the economy around. The experience of Botswana provides a valuable lesson on how mining’s contribution to that turnaround could be maximised.  

Frans Cronje leads the IRR, a think-tank that promotes political and economic freedom

Read the article on Moneyweb here.