Read the full text of the Zambezi Protocol here.
African economies are heavily dependent on extractive industries, which comprised 28 percent of the continent’s combined gross domestic product in 2012, 77 percent of total exports and 42 percent of all government revenues. Studies by the International Mining and Minerals Council (ICMM) show that for every $1 generated by mining, at least an additional $3 is generated elsewhere in the local economy, and that for every direct mining employee, as many as 15 more jobs are created elsewhere in that economy.
During the commodities boom, there was considerable optimism that African economies were changing and that they were no longer dependent on raw material exports. However, the commodity price downturn has illustrated the continent’s continued dependency on this sector and its vulnerability to variations in external demand, especially from China which, since 1990, has grown its share of worldwide metals consumption sevenfold to more than 40 percent.
In this new, highly competitive yet austere environment, governance and policy attractiveness will become increasingly important differentiators in the performance of African countries. Just as important will be the state of health of regulatory and administrative processes needed to ensure strong and diversified growth. These factors, too, will be vital determinants for attracting investment and growth in mining projects. Indeed, as the World Bank has noted, after geological factors, governments are the single largest determinant of where mining investments flow globally.
Despite the commodity boom, the relationship between the mining industry and government in Africa has been characterised by abiding levels of mistrust on both sides, often fuelled by misperception. Legend persists that mines have massive wealth and, at an extreme, deliberately steal ore or withhold tax through under-declaration or “transfer pricing”. Meanwhile, the mining companies complain that the long-term nature of their business, through good and bad times, and the levels of risk they have to take are not understood by those who set the rules. Such tensions are compounded by increasing capital intensity and mining mechanisation, the effect of which is felt particularly in those countries where mining is the mainstay of the economy and often the main or even only source of jobs.
A vicious downward cycle
While the success of mining demands a partnership of common interest and Africa’s young and burgeoning population demand jobs and growth, policy instability has planted the seeds for a vicious downward cycle. Policy uncertainty leads to investor uncertainty, limits the pool of capital available and thus decisions on many major mining investments are consequently put on hold. As large mining companies rebalance their portfolios seeking the best returns for the least risk, policy uncertainty fuels a move from reputable to less reputable and ultimately small-scale mining companies, and the eventual “de-evolution” of the mining sector.
These smaller mining companies tend to have less developed governance systems, which increases the burden of regulatory oversight in an environment in which many governments already possess only limited capacity. Lower capacity and the increased need to regulate can result in further distrust and renewed dissatisfaction of government and society, creating political pressure for even more change.
Zambia’s mining policy changes illustrate this cycle.
The giant $2.1-billion Kalumbila Mine in the north-west, which is beset with challenges of power provision and land title rights, was the country’s last major new mining investment. New investments and mine life extensions are being deterred as a result of government changes to the mining tax regime and abrogation of development agreements that assured investors of a 15-year stability period on fiscal policy.
The country’s tax regime has offered precisely the opposite to the stability investors seek.
In 2011 the Zambian government implemented a six percent turnover tax and 30 percent corporate tax for the mines. In January 2015 it switched to a flat eight percent turnover tax on underground mines and 20 percent Mining Royalty Tax (MRT) for open pit operations. As the International Monetary Fund concluded in June 2015, “at 50 percent, the AETR [Average Effective Tax Rate] for Zambia was second-highest among major copper producing countries”. This came on the back of an earlier change to VAT arrangements, resulting in government prevarication on repaying about $1-billion to mining companies.
Then the new tax regime was overturned within eight months in favour of a 9% royalty tax for open pit operations and 30% corporate tax plus a variable tax of 15% above a specified profit threshold. After much heated debate, in 2016, the government proposed a 30% corporate tax and sliding royalty scale of 4-6%, still some way off the global sweet-spot of a 30% corporate tax and a 3% royalty.
The mining industry in South Africa is also suffering through a combination of policy instability amid persistent fears about nationalisation and labour militancy. The publication by government of the 2016 Mining Charter draft in spite of industry representations, is cited as a current example; the manner of the publication of the Codes of Good Practice for the Mining Industry in April 2009, and its subsequent amendment, is cited as an earlier example.
A 2010 Citibank survey for instance put South Africa as the world’s richest mining country in terms of non-oil reserves, worth an estimated $2.5-trillion at then current prices, more than Russia and Australia with around $1.6-trillion apiece. Yet, whereas by the late-1980s South Africa’s share of global mining was 40%, with about 880,000 jobs in the sector, by 2014 it had declined to 4.5%s and under 500,000 jobs, even though the sector still accounted for eight percent of GDP and more than half of South Africa’s merchandise exports. Employment peaked in the mid-1980s at 880,000, with gold alone accounting for 540,000 jobs. By 2011, South Africa’s global share of greenfield mining projects was just 5%; Australia’s was 38%.
Such a drop in investment is consistent with trends in other parts of Africa, and undermines growth. It does not have to be this way.
South Africa’s decline and Australia’s growth is a result of policy choices. At the time of the Citibank report, experts estimated that with the right regulatory environment, South Africa could at least double coal, platinum, iron and manganese outputs within five years, adding 100,000 each to direct and indirect jobs. Put differently, South Africa still has more gold underground than has been mined, even though its output has fallen from first place in 2006 (when it mined 300 tonnes compared to its peak of 1,000 tonnes in 1970) to, 10 years later, seventh (with 200 tonnes) behind China, Australia, Russia, the United States, Canada, and Peru. Yet the last shaft sinking that initiated a major gold-mine in South Africa, Mponeng, was in 1981.
Meanwhile Chile’s economic growth since the 1980s has been nothing short of remarkable, particularly during the 1990s when it averaged an annual rate of over seven percent. In 1972 it was recorded to have the ‘second worst economy in Latin America’, inflation had reached 500%, there were frequent strikes and ‘nationalisation, price controls and high tariffs were the order of the day’, and the state controlled more than two-thirds of economic output. Yet from a low of $4,000 per capita in 1975 in the wake of political instability, real income per person more than tripled over the next 30 years.
This transformation has been built on two pillars. The first was the institution of free market economic reforms in the mid-1980s by a team of bright young economists. The second pillar relied on a massive increase in domestic copper production. Copper, of which Chile supplies nearly a third of the world’s annual consumption, accounts for some two-thirds of the country’s export revenue.
Table: The starkly contrasting fortunes of Chile and Zambia, both copper-producing nations.
|Population (2016 millions)||16.4||17.6|
|GDP (2011 US$ billions)||27||258|
|Copper production (1970, tonnes)||684,000||686,000|
|Copper production (2012, tonnes)||675,000||5,370,000|
|Poverty (% of population below poverty line)||61||15|
|Extreme poverty (%)||42.3||2.8|
|Life expectancy at birth||49||79|
|Infant mortality (per 1000 live births)||53||8|
|Child malnutrition (% of children under 5)||15||1|
The transformation of this sector, however, over of a quarter century has been spectacular. In 1990, the private sector accounted for less than one-quarter of Chilean copper mining output. By the end of the 2000s, the state mining company CODELCO was producing more than twice as much copper as it had done twenty years before, yet the private sector was producing two-thirds of the annual national output of six-million tonnes. In 1970 Chile produced the same amount of copper as Zambia; four decades later it produced eight times more.
Chile is not alone. Botswana, Panama, Mauritania all offer other thought-provoking success stories.
The Zambezi Protocol
Solving the current crisis in the African mining sector requires moving from the current series of short-term tactical actions to a more cohesive, inclusive and strategic approach. The intent must be to exit the current backward looking, destructive, downward spiral in which the industry is currently locked and shift to a positive, constructive cycle which offers a win-win deal for all. The Zambezi Protocol outlines a strategy to achieve this.
For this to occur, all parties need to recognise the inevitable outcomes of the current cycle – the gradual deflation and downsizing of the industry – and the losers: current and future workers, governments, populations, and the mining companies themselves. Such a strategy will need to build on a number of existing initiatives, but do so with much greater cohesion, commitment and urgency.
The difficult issues that have underwritten the current crisis will need to be addressed in an honest and open fashion: How should the historical legacy be dealt with? How much profit is reasonable? What is a mining company’s responsibility to its employees and communities?
Equally important, agreement will have to be reached on what a successful mining industry looks like. There must be, too, be recognition that mining is an inherently risky and long-term endeavour. For success and the mutual benefit that results, risk needs to be reduced, by all parties, as far as possible. But this needs to comprise more than an enlightened business case. Mining also needs to understand the problems that government has to address and in so doing make a strategic contribution to wider issues (enterprise development, water, land, education and so on) in an atmosphere of collaboration not confrontation.
While there is broad consensus on the lack of common industry country narratives, a lack of unity has prevented their development. Such a narrative needs to make a case for the maintenance and development of the mining industry for each audience (government, the nation, lobbying organisations). It needs to address: the status of the industry in society and issues of historical legacy, the need for policy stability, the balance of revenue generation with the need for beneficiation, the need for the minimum essential but fair constraints and the need for a fair settlement for all parties.
The narrative needs to properly communicated using the full range of media, to all sections of society, the aim being to move the debate, through a national dialogue, from one of extraction and exploitation to one of shared enterprise and endeavour through demonstrable and credible actions. Given the depth of emotion this will not be an easy or a quick action to achieve, but failure to address this aspect will ultimately lead to further decline in the industry. With confidence between the industry and governments at a low ebb, there may be considerable advantages to both sides in using a “trusted champion” to help reset the relationship. Such a champion will need a creditable background in the industry and the authority to intercede.
Even so, for such an initiative to stand a chance of success there needs to be recognition that a problem exists and that there is mutual benefit in its solution. DM
Read the full text of the Zambezi Protocol here.
Mills and Davis are with the Brenthurst Foundation, which hosted the meeting leading to the Zambezi Protocol.
All photos by Dr Mills.
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