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A mineral policy’s effect on the mining sector


Claude Baissac is a Mining Specialist and CEO of Eunomix, advisory and development economics firm. Tokollo Matsabu is a Research Consultant and Engagement Specialist at Eunomix.

‘Policy uncertainty’ has become somewhat of a buzzword when explaining the structural challenges facing South Africa’s uphill battle towards feasible economic growth levels. And concurrently, policy stability has been hailed as the solution to addressing some of the issues in various sectors that are currently under duress (eg mining and agriculture).

When it comes to the mining sector in particular, no one seems to be having the frank conversations about policy quality. A policy governing a sector can be very stable and predictable, but if it’s not conducive to reaping adequate returns for companies while its indirect benefits produce results for government and the population: there will be certainty from investors that they don’t want to invest in South Africa’s mining sector.

While the capital-intensive nature of exploration and mining requires a stable operating and regulatory environment that’s conducive to an internationally competitive sector, it also requires quality legislation and policy that allows for the simultaneous maximisation of returns for mining companies and down/side-stream benefits through jobs, government revenue and mining’s developmental impact.

An empirical analysis conducted by economics advisory firm Eunomix and presented at the Joburg Indaba last month reveals that since the inception of the Minerals ad Petroleum Resources Development Act (MPRDA) in 2002 – South Africa’s mining sector has either declined or stagnated in all key metrics of performance and economic contribution: mining as a percentage of GDP, gross fixed capital formation, production, fixed investment and employment.

The state’s mineral policy interventions over the past two decades have had a detrimental impact on the economic contribution and performance of the mining sector. Furthermore, these interventions have failed to deliver on some of its key socio-economic objectives as the adequate linkages (supplier development, knowledge and skills development etc) have not developed: in a nutshell, not one stakeholder has come out at as a winner.

The Eunomix study demonstrates that when you look at all aspects of performance of mining, the current policy trajectory will only lead to a further decline. Mining is currently sitting at about 4% of GDP, if doubled there’s the potential to generate up to 300,000 more jobs.

Value creation in mining is determined by four interrelated factors: commodity prices and demand; input and operating costs; corporate strategy and mineral policy. If we were to put this all on a scorecard, South Africa would be failing at three out of the four. And when three out of four value factors are negative, investment dries up.

Investment is a product of sentiment. Sentiment is influenced by policy and the investment climate. Investment turns into economic benefits which can then feed into social outcomes. When you undermine the first, your entire socio-economic benefit is compromised.

Strategy has been the only remaining lever available to the sector in its quest for viability but only limited to the optimisation of existing mining operations. Investment in exploration and development, well below the inherent potential of the country’s mineral endowment, has been the unavoidable casualty of haphazard, vague and ineffective mineral policy.

Claude Baissac, mining expert and CEO of advisory firm, Eunomix expanded on this in a recent interview with mining weekly: “The sector needs to be careful of what it asks of government. If it demands certainty, it may find itself in a situation where investors are certain that they must rationalise operations.”

The policy making machine is not working.” he continues, “it is urgent that a new policy formulation model be found to regenerate a crucial sector for and economy which has run out of steam and has ever fewer options for growth. Mining is the proverbial low-hanging fruit – it is high time all parties focus on protecting its potential rather than fighting over spoils.”

Placing onerous socio-economic targets on mining companies that fall outside of their core business and into the realm of government’s basic civil duties has proved to be an ineffective way to reap the most national benefit from South Africa’s natural resource wealth. It chips away at investment and detracts from the primary area where mining companies need to focus: operational efficiency, maximisation, sustainable production and returns on investment.

And while this might sound a bit neo-liberal in thinking, we cannot continue to ignore the reality that capital is at the heart of any functioning society and economy. Capital is needed to provide social services, capital is need for a thriving micro and macroeconomy and capital goes where it can grow the most. Unless South Africa can find an alternative leverage to capital by mining its resources itself (which the state lacks capacity, governance and adequate accountability measures to do so), the mineral policy dispensation will have to play by the rules of capital’s game.

Simultaneously, while capital has significant leverage when it comes to steering the mining sector debate, the poor socio-economic conditions of mining affected communities are an enormous risk and point of uncertainty for mining companies that affect the sustainability of their operations.

That being said, one thing is abundantly clear: communities and the mining sector cannot continue to rely on South Africa’s collapsing government to deliver the outcomes and environment conducive to their interests and well-being. Action is needed by the sector and mine-affected communities to come together and implement innovative, collaborative socio-economic solutions (in procurement, social investments and sustainability) to address the gaps in lacklustre policy.

In the mineral policy debate, the elephant in the room which politics is especially avoiding is this: the private sector is taking on all the risk and is the only one capable of extracting our natural wealth from the ground – they need to be given adequate incentives and tools to extract that natural wealth more efficiently. This leads to higher production, higher revenue streams and resource rents – ultimately resulting in an expanding mining sector which government can extract further value from a comprehensive mineral fiscal regime.

If South Africa continues to play politics with the mining sector and does not wake up to the harsh realities of a dying industry that has disrupted many lives on the ground due to inadequate policy, mining will continue to be a sunset industry where the country’s competitive advantage of a substantial mineral endowment goes to waste. DM

Claude Baissac is a Mining Specialist and CEO of Eunomix, advisory and development economics firm. Tokollo Matsabu is a Research Consultant and Engagement Specialist at Eunomix


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