Business Maverick

Business Maverick

SA Mining: What an Iraqi in Norway can teach us all

SA Mining: What an Iraqi in Norway can teach us all

It is tragic that a country built on mining and in search of new energy sources has mining legislation that makes these things very difficult to accomplish. This is a great pity, not only because we are losing investment as a result, but because the damage that it causes is self-imposed. By DIRK DE VOS.

Last year was particularly bad. In the same month that the most recent Mineral and Petroleum Resources Amendment Act was passed, a new version of this Act, the Mineral and Petroleum Resources Amendment Bill was tabled in parliament.

The existing Act brought in a legislative regime while the Bill reversed it. Little has improved since then. The Bill was passed by the previous Parliament, having received the overwhelming parliamentary support from the governing party before the recent elections and is set to become law once President Zuma signs it off. Except it won’t happen.

Post election, we have a new Mineral Resources Minister, Ngoako Ramatlhodi who has asked the President to hold off signing the Bill on grounds that are not yet clear. The only basis for not signing the Bill, and frankly an embarrassing one, is that the piece of legislation – in its present substantive form or the way that it was processed through parliament – was unconstitutional.

The Mineral Resources minister is reportedly studying the Bill with a view of separating traditional mining activities, including coal mining, from the oil and gas sector which would include fracking. Where would coal bed methane belong? Who knows?

This utter confusion would be understandable had the elections brought in a new government, but it didn’t. The current government’s election manifesto included that it “had a good story to tell” and wanted a fresh mandate from the electorate. One could reasonably expect then some sort of continuity but there is little evidence of this. This is all compounded by a fresh but separate dispute brewing with the Mining Charter and the issue of Black ownership of mining operations.

There is space for sympathy here: mining made modern South Africa. The country’s industrial base and relative wealth was built on mining. South Africa has always had fabulous mineral wealth and it is still the top-ranked country for metal and mineral reserves, which a recent Citibank study estimated to be worth R28 trillion, or more than seven times our annual GDP. However, our mineral wealth has always been in hard-to-get places. We have very little tradition of panning for gold or the equivalent of wildcatters in the context of oil extraction. We have had to raise considerable wads capital to build our mining sector and therefore a modern economy to support it.

But the costs have been enormous. Our mining sector was also built on cheap black labour. The 1913 Land Act and land restitution is again back in focus but lest we forget, the 1913 Land Act was not primarily enacted to confiscate land – even then land was of diminishing importance – it was to force black people off the land so they had no other option but to find work on the mines as migrant labour. Mining, more than anything else, fixed the economic, social and racial relations we see today. It is probably too much to expect that relationship between a government elected by the descendants of the victims of mining and the mining sector itself would not be a fraught one.

The recent platinum strikes and the tragedy of Marikana show that we have not broken from our past. Still, there is no excuse for what we are seeing. Mining still pays our collective bills and will need to do so for a long time to come. Unclear, ever-changing and over-complex discretion-based regulation of the sector is just irresponsible.

It should be abundantly clear that our government struggles to regulate because it does not really know, does not want to confront or possibly even disclose what it really wants from our mineral wealth. This ongoing mishmash of ever-changing legislation and regulation appears to be merely a salve to wildly disparate and conflicting impulses on the part of our governing party.

Some of these might include extracting maximum resource rents, to nationalise, to expropriate, to build a wealthy black capitalist class, to encourage exploration, to improve worker welfare, to empower local communities and much else. While some of these things can be done together in a coherent way but many of them contradict each other. While this continues, we get the worst outcome.

The respected Canada-based Fraser Institute now ranks South Africa in the bottom half of the rankings of the major top mining destinations. We repulse the type of investment we need but this attracts rogues and an assembly of rentiers like bees to a honey pot.

Maybe we need to accept that South Africa, even with its 150 year old mining heritage has just run out of ideas and look elsewhere. We could do a lot worse than examining the one country that has made a success of its resource wealth. That is Norway.

Norway made its own luck because it was already a well-developed democracy with a strong ethos of equality for all citizens before it discovered its vast oil wealth in the North Sea. But the main architect of the regulatory system put in place in the late 1960’s was a young Iraqi geologist, Farouk al Kasim. Why he was in Norway at the time is a fabulous back story all of its own. But Norway knew nothing about oil before it was discovered – it only wanted to avoid fast money and multi-national corporate influence.

By that time al Kassim had already seen how Iraq’s oil wealth, once in the hands of international oil companies, expropriated and placed in the hands of national oil concerns. But it quickly became just another petro-state which placed the country’s oil and therefore money and power in the hands of a few connected individuals. The resource curse just deepened creating a total dependency as the rest of Iraq’s economy spluttered.

Replacing private companies with state owned ones does nothing. The key conceptual idea that al Kasim and his colleagues was able to see implemented was the establishment of a strong, well funded, independent regulator with clear rules and completely free of political discretion. You don’t try to legislate a desired outcome and try back it up with endless ministerial (aka political) discretion.

This approach was not a free market treatise. At the same time, Norway established a national oil company that could develop local expertise and partner the oil majors who would be encouraged to invest on clear and equal terms. The regulator would be the referee and not prefer the national oil company.

Competition”, al Kassim says, “is the essence of competence.” Another distinguishing feature which separated Norway from other oil producing countries is that Norway invested its own money to cover half the costs, take half the risk and receive half the benefits of developing its oil fields. This ensures that there is “skin in the game” instead of the “20 percent free carry” and rights to acquire the balance ‘on an agreed price” which is a feature of our own unsigned Bill.

We don’t even have to go as far as Norway to find how things could work. Our own renewable energy programme, also known as the REIPPPP provides a wonderful insight. Leaving aside the merits of renewable energy to another forum, a clear programme with clear rules has resulted in new investments totalling R130 billion providing amongst the cheapest renewable energy anywhere in just 3 years since the programme started. This new investment includes over 100 different shareholder groups in 64 different projects. Moreover, this was secured while, achieving greater commitments in terms of economic development, localisation and socio-economic development than any other existing sector.

How this was done is explained in a paper recently published by Public-Private Infrastructure Advisory Facility, an agency of the World Bank. Obviously, the renewable energy programme runs on a public private partnership basis which is different from mining. The paper records that the whole process was run by a highly qualified team with extensive experience that had credibility with both public and private sector stakeholders. This team, as the paper states in rather delicate terms “was also able to overcome some of the mistrust of private business that that sometimes restricts the public-private dialogue in South Africa”. The team set up to run the programme were therefore able to develop an approach that emphasized problem solving but, at the same time, did not undermine quality or transparency.

Clearer thinking might also get us out of another bind – the 26 percent black stake in mines controversy in terms of the Mining Charter. In terms of the new Companies Act, 26 percent is an arbitrary figure but this percentage can be variously valuable or worthless depending on the mine, the commodity mined, the stage of development, the remaining reserves and so on.

Further, we should understand better what purpose this equity stake ought to serve. If it is to further develop a black capitalist mining class, then that should be stated and we can then move onto a sensible discussion as to who should qualify to get these stakes. If the purpose is to achieve broad-based ownership then we need to set up pension fund type structures to hold these stakes for the benefit of black people and clarify the rules to exclude whites from benefitting.

If we would like to place this stake in the hands of the workers, we need to ask whether it is fair that a worker, already hugely dependent on his/her employer in terms of salary should also be exposed to the performance of the shares in his/her employer. Perhaps a gold miner should have a stake in a platinum mine instead?

One thing ought to be clear though, you can’t build capitalism on a rule that says it is a company’s or mine’s responsibility to maintain a 26% or any other stake. If this were so, then BEE shares could only be sold to others with the same BEE profile: blacks can only sell to other blacks. This results in two-tier capital structure: one class of shares is easily tradable without restriction; the other class is illiquid.

So, while white shareholders can exercise their rights as shareholders in terms of dividends and voting rights, sell them if they are unhappy, black shareholders get only dividends — their ability to sell is restricted. Black shareholders become something akin to a permanent ward of the company in which they own shares. The basic criterion for being a capitalist is being able to decide how to deploy your own capital. BEE shares often fail this test.

The situation becomes worse if the shares are financed. Firstly, the dividend yield on shares (an after tax event) seldom exceeds the costs of financing their purchase and interest charged on buying them is not tax deductable. What happens therefore is an endless series of refinancings (which banks and a hive of transaction advisors are only too happy to assist in arranging) and while you are indebted, you are stuck in voting these shares in the way that your creditor would like them voted.

Mining will be a big part of South Africa’s future – however perverse the legislation governing it may be. Mining in whatever form follows geology not sound regulation. A look around the world will show us that mining still happens in the most adverse, conflict ridden places and even in several failed states.

Our mineral wealth is vast. It is the only sure foundation that we have to lift us out of our present predicament. Mining can serve to address the legacy of under-development and racial inequality that it had a big part in creating in the first place and it can help us transition to a different economy when our mineral wealth eventually becomes depleted. But it has to be done right.

There may very well be important technical differences between traditional mining and the as yet uncertain oil and gas sector and those have to be provided for. But the basic principles of regulation are not that different. Best practice does exist and we can benefit from employing it. The present confused and haphazard South African style dirigisme won’t cut it and most of us, deep in our hearts, know it too. DM

Photo: A mine worker walks underground in South Deep mine outside Johannesburg June 4, 2010. SREUTERS/Siphiwe Sibeko

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