Mines, state must develop trust

inlsa

STATE ASSETS: A file picture shows the final stages of construction of the Vlakfontein Mine in Mpumalanga. How the country responds to the debate on nationalisation of the mines could either lead to disaster or prosperity, says the writer.

For some years now, one of the most prominent burning issues in countries rich in mineral wealth has been whether or not local populations get an equitable share of the proceeds of their countries’ endowment.

In recent years, and as global inequalities get worse, the question is leading to increasing political and social conflicts. Because the mining sector operates at the epicentre of this, it is inevitable that it will become an increasingly frequent topic of political discussion.

In many instances, the solutions proposed are premised on redistribution. This is the use of tax to ensure that the proceeds of mining reach ordinary people through government programmes. There is nothing wrong with this thinking in principle, and it has been tried and tested over a long time in many different countries across the world.

The question we must ask, however, is whether or not the demands for more will cease anytime soon.

In my view, these demands will not cease and instead will gain more prominence as economic difficulties continue to affect the most vulnerable. Mining companies are not the only ones under pressure.

Governments too have to bear the brunt of a voting public that is no longer patient with promises of improvements which always seem to take the back burner as the world rushes off to stave yet another economic collapse.

The statistics are certainly staggering. Here in SA the rate of unemployment is approximately 25 percent, a frightening figure given that it excludes those who have given up looking for work. Of these, over 50 percent are under the age of 24. This has serious consequences for this country and the region, and needs to be arrested urgently.

Of SA’s almost 50 million people, more than 20 million are said to live below the poverty line. Of these, 16 million rely on the government’s social grant system. In addition to supporting these indigent people, the government also has to allocate resources to programmes that will grow the economy and stabilise society, like education and basic health. It is a difficult task that is abstract to most of us who don’t work for the government but is a serious headache for those who do.

There is a view that the problem is very low tax rates for mining companies, who then take super-profits when commodity prices increase. The transmitters of this view insist that mining carries a lower social responsibility than it should.

Of course this view ignores the many benefits accrued by countries in the early years of otherwise risky, large capital projects. Not only do these result in employee and other tax collection, they also stimulate local economies as they generate further consumption of goods and services by companies and individuals. It is also their sole responsibility to keep these operations alive and keep workers employed when markets take a turn for the worse.

They also don’t take into account the actual tax payments made during the life of operations including revenue-based royalties such as we have in SA. The problem is not tax but how we collectively choose to respond to our social challenges.

At the heart of mining’s credibility problem is a low level of trust between the sector and those who regulate it. There is an overreliance on institutional arrangements, policies and laws to ensure that all parties meet their social and other obligations. In the case of taxes, this is a minimum requirement.

In countries like SA, however, where there are additional social obligations, relationships become particularly important. However, it is debatable whether we have the kind of relationships that facilitate the resolution of social and economic problems without resorting to yet another bout of legislation and regulation.

I believe that strengthening relations between mining companies and the government will help achieve a fundamental shift in the working relationship. We need to move from over-regulation to public-private partnerships premised on helping each other fulfil mutual interests. Regulation is by nature less efficient than relationships of trust, where decisions can be taken and implemented quickly without going through the onerous process of law-making.

There are five things that I believe can be done to counter the threat of overzealous resource nationalism without resorting to the familiar use of institutional and political power to force one side to back down.

First, we must find a way of inverting the policy-making pyramid so that it gives us better results, quicker. In the South African context, promulgating a new law can take anything from three to five years, if not more. In essence, the government conceives and tries to implement a policy position and only once the formal legislative process has commenced is there an attempt to achieve consensus.

While enshrined in our constitution, this process is not always efficient, in particular where there are pressing socio-economic challenges that need urgency.

There must always be an attempt to achieve consensus, at least at a principle level, before the formal legislative process starts. This means the government and related industries need to agree, in principle, on a set of national strategic objectives which will be given meaning through legislation or policy.

The second is for countries to conceive over-arching national mining sector plans which combine state regulation and investment with private investment and expected domestic and international market developments. Natural resources, when appropriately managed, can be a boon for countries which seek to diversify into other areas of potential global growth. The rents and other benefits accrued from the mining sector can be used for this purpose, but this is an extremely delicate balancing act.

Responding to new developments with speed and efficiency is the key, but this can only happen where there is strong co-ordination of the roles played by the various arms of government and the private sector.

If there is an over-arching plan, all parties know what indicators to track and generally there is a way in which the collective or parts thereof can respond in unison.

The third imperative is to cultivate a culture of information sharing between the government, trade unions and mining companies. For far too long this tripartite relationship has been characterised by finger-pointing, accusations and the preservation of self-interests.

Statements made in public by all parties are sometimes unhelpful as they focus on apportioning blame rather than building consensus towards shared outcomes. There will be less acrimonious contestation of ideas if all parties have sufficient quality information at their disposal and act always to preserve national development consensus.

The fourth imperative is for all parties to recognise the evolving nature of political economies and in particular that the global economy remains uncertain.

African countries do not have an experience of organic, indigenous mining companies that have grown to play a significant role within and outside those countries. Black Africans, for historical reasons, have always felt that even the companies formed within their countries, somehow are not theirs.

This feeling is part of the reason the relationship between workers and companies remains difficult. It also partly informs their attitudes towards nationalistic ideas, which are on the ascendancy right now.

To them the best hope for a local champion appears to be a state- owned entity in instances where there is a good relationship between the unions and the state or ruling parties.

The fifth and final imperative is for governments and mining companies to recognise the incidental ambassadorial role played by those who raise capital in foreign financial markets for mining projects. It is not in their interests to relate to an environment in which relations with ordinary people and their government are apprehensive and there is constant possibility of more ill-defined intervention at a fiscal and licensing level.

When the government has chosen to intervene or get involved in the mining sector, it is critical that the nature of that intervention does not unduly harm the country’s ability to attract further private investment either to the mining or other sectors of the economy.

Uncertainty arises when that role remains ill-defined for a very long time, and the space is filled with rhetoric, which often does not reflect the true intentions of the government.

Resource nationalism is not happening in a vacuum. It is a response to global arrangements that seemingly do not produce results that meet expectations of all sectors of society.

How we respond to such calls could determine whether the debate results in disaster or prosperity. Centrally, my argument is that we need a fundamental shift in attitude, both on the side of mining companies and that of governments.

Whether we admit to this or not, we can no longer continue to treat each other as partners of convenience rather than committed activists in the interests of shared prosperity for shareholders and national populations.

n Sangqu is the executive director of Xstrata SA. This is a shortened version of a speech delivered to the Africa Mining Congress in Sandton earlier this week.