Synopsis of Reviewed Mining Charter – 13 May 2016

Synopsis on reviewed Broad-Based Black Economic Empowerment Charter for the South African Mining and Minerals Industry 2016.

South African Institute of Race Relations NPC
Submission to the
Department of Mineral Resources
regarding the
Reviewed Broad-Based Black Economic Empowerment Charter
for the South African Mining and Minerals Industry, 2016
Johannesburg, 13th May 2016


The Department of Mineral Resources (DMR) has invited public comment on the Reviewed Broad-Based Black Economic Empowerment Charter for the South African Mining and Minerals Industry, 2016 (the draft charter), published in the Government Gazette on 15th April 2016. According to the Gazette, such comment is due not later than 30 days from this publication date and thus by 14th May 2016. The stipulated period is too short to meet the constitutional requirement for proper public consultation.

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.

The mining sector is enormously important to the South African economy, for it attracts foreign investment, provides more than a million direct and indirect jobs, contributes to tax revenues, and makes up some 35% of merchandise export earnings. It thus helps to finance the budget and current account deficits, maintain the value of the rand, and hold inflation in check.

However, the sector currently confronts a perfect storm of adverse conditions. Commodity prices have dropped sharply since 2011, while input costs have continued rising. The market capitalisation of JSE-listed mining companies has plummeted since 2014. Mining production has recently declined by 18% and now stands at levels last seen some 40 years ago.

However, it is not merely the recent rout in commodity prices that lies behind the mining sector’s malaise. Even during the commodities boom from 2001 to 2008, South Africa’s mining industry shrank by 1% a year, whereas the top mining countries saw average growth of 5% a year during that same period.

South Africa fares poorly on the Fraser Institute’s global assessment of mining jurisdictions. Among other things, it lags far behind its Botswana neighbour on labour issues, community development conditions, and disputed land claims, as well as on its legal system and tax regime as they relate to mining.

On mining policy issues, South Africa does particularly badly on the Fraser Institute index. In 2015, for example, it was ranked 84th out of 109 countries on uncertainty in administering existing mining regulations. Botswana, by contrast, with its clear and unambiguous rules, was ranked 2nd best in the world.

South Africa’s mining legislation, as reflected in the Mineral and Petroleum Resources Development Act (MPRDA) of 2002, is onerous, uncertain, and open to discretionary interpretation and application. As far back as 2007, the government thus pledged to introduce a number of necessary reforms. Instead, it has increased the regulatory burden through its 2010 changes to the mining charter and its proposed amendments to the MPRDA itself. These changes (both actual and pending) have added to policy uncertainty, undermined the security of mining titles, and made it increasingly difficult to attract mining investment or sustain existing operations.

The DMR has twice declined (in 2010 and again in 2016) to give adequate credit to mining companies for the major efforts they have made to comply with unrealistic and shifting empowerment requirements. In 2010 the department used alleged non-compliance to insist on the sweeping changes to the mining charter that were introduced that year. In 2016, the same story seems to be playing out, with the DMR’s unfounded criticisms being used to justify the introduction of the damaging draft charter.

The draft charter refers to ‘black people’ (rather than historically disadvantaged persons, as in the past), thus introducing an implicit demand for racial classification and racial preferencing. However, this is contrary to the Constitution’s emphasis on non-racialism. It is also inconsistent with the affirmative action provisions in the equality clause, which say nothing about racial targets and neither authorise nor justify their use.

The draft charter requires that black ownership be maintained at 26%, even if BEE investors sell out. It further demands this, not simply for a ten-year period, as before, but throughout the life of a mining operation, which could be 30 years or more. Having to do ever more BEE ownership deals will dilute the value of other shareholdings, prejudice black pensioners and other indirect investors, and place a crippling financial burden on many mining companies. These new requirements are also intended to apply retrospectively, which is contrary to the rule of law and thus inconsistent with the Constitution.

In addition, the draft charter raises employment equity and preferential procurement targets to unrealistic levels, while giving mining companies a mere three years to comply with these new demands. It also requires high levels of expenditure on skills development, housing programmes, and community development, which mining companies are expected to maintain irrespective of their profitability.

Mining companies must attain 100% of the stipulated targets on ownership, housing, and skills development, failing which they could lose their mining rights. The same penalty will apply to companies which meet this 100% demand but fall down on other elements, such as employment equity, so obtaining scores below 60% in these other spheres.  These provisions in the draft charter greatly undermine the security of mining titles. They will also make it difficult for many mining companies to borrow working capital or even to commit their own resources to continued operations.

The draft charter is inconsistent with the Constitution in various ways. It conflicts with the founding principle of non-racialism and the express prohibition of racial discrimination. It breaches the rule of law through both its retrospective operation and its vague terms. It infringes the separation of powers, under which legislative powers are vested in Parliament, not the mining minister. In addition, it gives the minister a level of discretionary power that further contradicts the Constitution.

The government has a responsibility to expand opportunities, both in mining and elsewhere, for the 8.9 million South Africans who are now unemployed and the millions more who continue to live in poverty. However, this can be achieved only in the context of a rapidly growing economy which attracts investment, encourages entrepreneurship, and generates millions of new jobs.

Particular care must be taken in crafting policies for the mining industry, where the fixed investment required is enormous, lead times are long, and prices are particularly volatile. Mining legislation must thus provide certainty, stability, and predictability to mining investors.

The draft charter breaches these requirements. Far from helping to expand opportunities in mining, it will encourage retrenchments and make it harder to restore mining production to its earlier levels. It will deter fresh investment, undermine the sustainability of existing operations, and promote disinvestment. Yet, without mining’s major contribution to the economy, the budget and current account deficits will be harder to finance, the rand will fall, inflation will rise, and unemployment will worsen.

To avoid these adverse economic consequences and uphold the Constitution, the draft charter must be scrapped. Instead, the DMR should focus on bringing the MPRDA into line with Botswana’s clear and certain mining legislation, which has served it very well. At the same time, many more opportunities should be created for the poor by shifting away from the damaging BEE rules reflected in the draft charter and embracing an alternative policy of ‘economic empowerment for the disadvantaged’ or ‘EED’.

A shift to EED
EED differs from BEE interventions of the kind contained in the draft charter in two key ways. First, EED does not use race as a proxy for disadvantage, but instead cuts to the heart of the matter by focusing directly on socio-economic status. This allows racial classification and racial preferencing to fall away, thus helping South Africa to uphold the principle of ‘non-racialism’ embedded in the Constitution.

Second, EED focuses not on outputs in the form of numerical targets, but rather on providing the inputs necessary to empower poor people. Far from overlooking the key barriers to upward mobility, it seeks to overcome these by focusing on all the right ‘Es’. In essence, it aims at rapid economic growth, excellent education, very much more employment, and the promotion of vibrant and successful entrepreneurship.

EED policies aimed at achieving these crucial objectives should be accompanied by a new EED mining scorecard, to replace the current one. Under this revised scorecard, mining companies would earn (voluntary) EED points for:
• all direct investment within the country;
• maintaining and, in particular, expanding jobs;
• contributing to tax revenues;
• helping to generate export earnings;
• appointing staff on a ‘wide’ definition of merit (which takes account of how people have had to cope with poor schooling, bad living conditions, and the like);
• providing intensified training and mentoring for personnel appointed on this basis;
• entering into employee share equity programmes with all staff, with further points available for schemes that provide additional benefits to the disadvantaged; and
• topping up the state-funded vouchers which the government should provide to help poor households meet their education, health care, and housing needs.

After decades of damaging mining policies, it is time to call a halt. South Africa cannot hope to expand opportunities for the disadvantaged, either in mining or elsewhere, unless it raises the annual growth rate to 6% of GDP or more. The introduction of Botswana-type mining legislation, coupled with a shift to EED in the mining sector, would help achieve this. By contrast, the introduction of the draft charter will further hobble the mining sector and could help push the economy into persistent and destructive recession. Though this would greatly harm all South Africans, the negative impact would fall most heavily upon the poor.

South African Institute of Race Relations NPC                             13th May 2016