It is hard to overstate the extent to which the final incarnation of the revised Mineral and Petroleum Resources Development Amendment Bill will affect South Africa’s economic well-being.
Since the Mineral and Petroleum Resources Development Act (MPRDA) was executed in 2004, the mining industry has been plagued by regulatory uncertainty. This pertains mainly to the conversion of old order mineral rights and confusion over the extraction of associated minerals.
Among other things, such as infrastructure constraints, this has suppressed investor attractiveness. Without private investment, the mining industry will continue to contract, creating an outcome the country can ill afford.
Revamping the institutional arrangements that govern the extractive industries – the primary determinants of the sector’s ability to attract investments – is urgent. The amendment bill is the most important piece of legislation before Parliament.
Despite having already contracted at a rate of 1 percent a year throughout the longest sustained commodity price boom in recent history, the industry contributes 9 percent of gross domestic product directly, and 18 percent indirectly. It is the bedrock of the economy and the primary transmission belt for manufacturing.
Mineral exports account for about 60 percent of foreign exchange earnings. The industry employs half a million people directly and each mining job supports about 10 dependants. With such multiplier effects, and sub-soil mineral reserves worth an estimated $2.5 trillion (R25 trillion), its importance cannot be overstated.
However, this potential wealth is meaningless until extracted and sold, which requires investment in mining projects, vast sunken capital and a minimum 10-year lead time before production begins.
That kind of long-term investment requires more institutional certainty and stability than is available. Institutions are the primary channel through which the hypothesised “resource curse” operates. Politically, resource rents raise the value of being in power for elites in the dominant coalition. In the case of natural resources, rents often present a form of unearned income to governments that reduces demand for taxation, severing a crucial means of citizen-state accountability.
Royalties are one form of rent, which the state receives from literally leasing the resource to private operators, although these can be productive as long as they flow transparently into the fiscus. Directly unproductive rent-seeking, however, tends to occur when mineral rights regimes are administrated arbitrarily and extensive ministerial discretion is legislated.
To improve the probability of re-election, rents are acquired and distributed to expand patronage – this is perceived as less costly than creating inclusive political and economic institutions. These rents make it attractive for political elites to block technological and institutional improvements.
Such manoeuvring invariably produces regulatory uncertainty, which induces rapacious extraction.
Companies discount more steeply and extract more heavily in the short run to reduce the negative effects of future expropriation risk. The upshot is that mineable ore remains untapped, mines close sooner and employment ends more quickly. Income levels fall and development goals remain unmet.
As far as the extractive industries are concerned, recent research indicates that the form mineral property rights take is a critical micro-level institution for determining likely development outcomes.
Different ownership structures alter the bargaining relationship between society and the state. If extractive industry resources are privately owned, for example, this sector is empowered and the state must reduce its reliance on mineral rents as its primary source of fiscal income. Conversely, state ownership and control of mineral wealth tends to result in poor outcomes.
South Africa has a complicated history in this respect. Ownership of land and mineral rights was unjustifiably skewed in favour of a white minority, locking in an ethical imperative for redress in 1994.
The MPRDA of 2002 repealed the Minerals Act of 1991, which had allowed for the outright disposal of state-owned mineral rights to the private sector and was designed to maintain racial privilege.
Mining rights experts Frederick Cawood and Richard Minnitt argue that the Minerals Act aimed to “reduce government involvement and to create a market for state-owned mineral rights… directly opposed to the declared political philosophy of collective mineral ownership held by the ANC according to its 1955 Freedom Charter”.
For purposes of redress, the MPRDA is built on state “custodianship”, where it leases the rights and receives royalty rents, as opposed to exclusive private ownership.
The difficulty of defining mineral rights ownership is no excuse behind which to hide the ambiguity, confusion and inflated ministerial discretion contained in the current amendment bill. For instance, repealing section 9 of the MPRDA that assesses exploration rights on a first-in first-assessed basis, in favour of a regulatory code to be published at a later stage by the minister, exacerbates uncertainty.
To avoid investment-deterring uncertainty, South Africa would do well to emulate Botswana’s example. There, the minister of minerals has little to no administrative discretion – licensing conditions are explicitly stipulated. The mining legislation also provides a retention licence, designed to protect security of tenure for explorers “who, after discovering a mineral deposit, find that it cannot immediately be mined economically”.
Under the amendment bill, explorers would not necessarily have the automatic right to mine that which they discover – an untenable scenario.
Largely because of its policy clarity and administrative efficiency, Botswana is ranked 17th out of 96 mining zones for investor attractiveness by the 2012/13 Fraser Institute Survey. South Africa is 63rd.
If we are to truly harness its mineral wealth for equitable development, South Africa has to take seriously the public submissions that identify specific inadequacies in the amendment bill. If we are to avoid “resource curse” effects associated with unproductive rent-seeking, ministerial discretion must be abandoned.
Redress will be better served by a flawed but clear minerals regime than a perpetually evolving one, animated by perceived expropriation risk in a politically volatile environment.
The deadline for written submissions ended last week. Public hearings start today. The SA Institute of International Affairs will be presenting its recommendations to the portfolio committee on mineral resources on Friday.
Ross Harvey is a research fellow at the SA Institute of International Affairs.