Economic growth is a prerequisite for black empowerment - why is Government getting it so wrong in the mining sector?

Introduction

The most recent attempt by Government, to expand the opportunities for historically disadvantaged persons to enter the mining and minerals industry and to benefit from the exploitation of South Africa’s minerals resources, is contained in the 2018 Mining Charter, promulgated by the Minister of Mineral Resources and Energy (“the Minister”) in terms of the Mineral and Petroleum Resources Development Act of 2002 (“the MPRDA”).[1] The aspect of the 2018 Mining Charter that received most public attention, was the increase of the prescribed BEE ownership from 26% to 30% in a company applying for a mining right and the fact that this ownership requirement would also apply to any application for the renewal of existing mining rights.

Litigation concerning the 2018 Mining Charter

In litigation brought against the Minister by the Minerals Council of South Africa (“the Minerals Council”), the court had to decide on the legal nature of the 2018 Mining Charter and whether the Minister was enabled by the MPRDA to make legally binding requirements on applicants for mining rights. 

The Minerals Council contended that the 2010 and 2018 Mining Charters were unilaterally adopted by the Minister in a marked deviation from the expectations of the signatories of the original 2004 Mining Charter. The 2010 and 2018 Mining Charters repealed the 2004 Mining Charter and for the first time adopted a prescriptive approach by imposing sanctions for non-compliance. The original 2004 Mining Charter was a formal document recording a pact between Government and industry, co-signed by them, in which they committed themselves to a framework for progressing the empowerment of historically disadvantaged persons in the mining and minerals industry, with a timetable and aspirational targets. It sets out the factors that would be taken into account (read with a scorecard) in making licensing decisions.

In its judgment last month,[2] the court concluded that the MPRDA does not empower the Minister to make law. In other words, the 2018 Mining Charter is not binding subordinate legislation but only an instrument of policy. As a result, many of the provisions of the 2018 Mining Charter, which the Minister had considered as binding, were set aside by the court.

Provisions of the 2018 Mining charter that have been set aside in this judgment are, in particular:

• increasing the BEE ownership requirement from 26% to 30%, not only for new mining right applications, but also where mining rights are transferred and where application is made for a renewal of a mining right which is expiring; and
• 70% of all procurement is to consist of South African produced goods, of which 21% is to be made up of goods manufactured by a company owned and controlled by historically disadvantaged persons, 5% is to be spent on goods produced by a company owned and controlled by women or youth (ie. aged between 18 and 35), and 44% is to be spent on goods produced by a BEE compliant company. 

This judgment should be viewed against the fundamentals concerning economic growth and the risks inherent in the mining industry

The fact that investment is a pre-condition for economic growth may seem self-evident, but it is disconcerting to see the degree to which this is not taken into account by Government. An initial investment, if successful, would be followed in due course by economic growth and increased employment, generating business income and Government’s increase in revenue through taxes levied on that income. Confidence is a crucial factor in any investment decision. An important part of the overall assessment by investors, is to have confidence that the rules of the game are stable and will not be changed by Government in an unpredictable manner. 

An additional complicating factor in this context is simply that mining is itself a risky business. Mining projects have long lead times and often need substantial upfront capital financing, long before any cash flows may appear. The geological and metallurgical risks have to be added into the equation, and if you are exporting a mining product, international commodity prices and the US Dollar/SA Rand exchange rate (over which you have no influence) may move against you in a substantial manner, leaving you with an unprofitable venture.

Given all these risks which are inherent in the mining industry, the added risk that Government may change the rules at any time, cannot avoid adding a serious negative element to any investment assessment. It is therefore not surprising that little money is currently being injected into the South African mining industry for new projects or ventures, especially not from abroad. And as far as we know, there is practically no mining exploration being done, since why should money be spent on such extremely risky activities, if there is no appetite to fund a project if something promising is actually found in the ground? 

What we find most concerning in general, is that we see little sign of appreciation in Government that economic growth is a pre-requisite for empowerment by historically disadvantaged persons. Devising complicated charters which industry has to comply with to increase ownership and involvement by such persons serves little purpose if the content of these very charters (finalised without the industry’s agreement), inhibits investor confidence, which is itself a precondition for investment and resulting growth in any sector of the economy. Successful empowerment, as envisaged by Government, cannot succeed in a stagnating or shrinking economy.

What is important for investor confidence, is the action on the ground. Investor confidence is not boosted by high-profile investment colloquia hosted by Government, where ambitious promises are made but no concrete action follows. A mining charter which is agreed by both Government and the industry, would therefore have a positive influence, not only on investor confidence, but also on the prospects of meaningful empowerment.

Conclusion

There is no indication yet as to whether the Minister will appeal against the recent judgment mentioned above. We can only hope that the court’s decision has shown Government that it should avoid attempting to impose its will on a unilateral basis. We hope that it will lead Government and the mining industry to sit around a table and agree on a document (as was done in 2004) to deal with empowerment in the mining sector. We have no dispute with the approach that a more balanced mix of races at all levels is necessary and we would assume that the industry is of the same view. However, the fact is that ruling by decree serves no purpose if it debilitates investor confidence and hence, economic progress. This message is not limited to the mining industry, but applies to the economy as a whole. 

Anton van Dalsen
Legal Counsellor
anton@hsf.org.za

[1] Broad-based Socio-Economic Empowerment Charter for the Mining and Minerals Industry, 2018. Government Notice 1002, published in the Government Gazette of 27 September 2018.