"South Africa is in it for the long haul", Finance Minister Pravin Gordhan stated in his recent Budget speech. This implies a desire to create a sustainable economy which, in turn, requires the long-term reconstruction and development of this country and steering "South Africa Inc" from consumption to economic growth that is investment-driven and creates employment. It therefore came as no surprise that Minister Gordhan deemed it necessary to call upon corporate South Africa to revise their perception of the risk of doing business in South Africa.
The call comes in the wake of the Marikane incident, wide-spread and unprotected strikes, retrenchments and mine closures in the mining industry. Minister Gordhan soberly remarked that "the events in the mining sector have brought a new sense of reality to bear" on government. A proposed review of the country's mining tax policies, increasing costs, fractious labour relations, declining production output and the risk of mine nationalisation is the reality that faces the South African mining industry.
It is as a result of these risks that "South Africa Inc" is increasingly becoming a less attractive mining investment destination mindful that we have to still compete with other resource rich countries for limited funding resources following the recently demised "commodity boom".
The macro-economic reality is that South Africa does not possess a sufficiently skilled industry to export itself out of its problems and is therefore a net importer of goods with a consequent drain on the Gross Domestic Product of the country. In order to increase the market value of the goods and services produced in South Africa, continuous foreign investment is required and this can be facilitated by, amongst other measures, fostering an investor friendly environment for foreign direct investment in the South African mining sector.
The mineral patrimony of this country was recently valued to be in excess of a trillion dollars yet South African ranks behind countries like Botswana, Ghana and Zambia.
It has often been said that foreign direct investment in the mining sector in Africa requires primarily a stable political and legal regime. The success of the mining sectors in other African countries is largely due to the conscientious efforts of their governments to provide regulatory certainty. What does an investor friendly mineral regulatory regime entail? Based on what has been said above, one would expect for such a regime to include the following basic principles: efficient macro-economic management, effective investment protection mechanisms, the rationalisation and integration of fragmented legislative requirements for the grant of the suite of authorisations required to mine, competitive mining taxes, security of tenure, objective criteria for the grant of rights to exploit mineral resources, limited administrative discretion, a defined role for Government and a capacitated and responsive mining administrative department.
Prior to the promulgation of the Mineral and Petroleum Resources Development Act, 2002 (the “MPRDA”) nearly a decade ago, the entitlement to mineral rights was based on a secure system of private ownership. The MPRDA now recognises the internationally accepted right of the state to exercise sovereignty over South Africa’s natural resources and sets out to promote social transformation by virtue of the exploitation of its mineral resources through the principle of state custodianship.
Security of tenure was maintained by the implementation of various transitional provisions of MPRDA which arguably vested in the Minister a limited discretion not to transition extant mineral rights into the new regulatory regime if the mineral right holder did not persuade the Minister that it would facilitate the meaningful and substantial participation of Historically Disadvantaged South Africans. The Minister was required to develop a charter for the transformation of the minerals industry which would provide guidance in respect of the ambit of this noble but open-ended social-economic objective. It is generally accepted that the charters and codes developed to date all suffer from imprecision, mutual contradiction and ambiguity. The terms and concepts introduced by these documents leave much uncertainty and scope for dispute and it is, unfortunately, difficult to predict what a court will do when confronted with the differences in usage and terminology in giving meaning to the "spirit" and purport of those documents. South Africa interested into over forty bilateral investment treaties to allay concerns of foreign investors. It was recently announced that South Africa intends to reconsider a number of BITs. Amendments to the MPRDA have recently been proposed which would absurdly require any share traded in a company owning mining assets and listed on the Johannesburg Stock Exchange requiring the Minister’s prerequisite consent. Although the Minister of Mineral Resources, Susan Shabangu, reiterated during the annual Mining Indaba in February that mine nationalisation is something that her administration would never consider, the international investor community still responded with a call for a bolder stance in order to restore some of the lost confidence. Countries, such as Ghana and Zambia, with growing mining industries, proclaimed that nationalisation would be unconstitutional in their countries.
The average delay in being granted the suite of authorisations (i.e. mining right, water use licence, environmental authorisation, etc.) required to mine is in excess of two years. In Tanzania and Ghana is takes less than three months. The Chamber of Mines has called upon the Department of Mineral Resources to legislate for the rationalisation and integration of fragmented statutory requirements for the grant of authorisations to mine.
Many mining executives also expressed concern during the recent Mining Indaba that South Africa has mooted an increased mineral resource royalty whist many other African countries are implementing investor-friendly legislation in terms of their own tax regimes. It has been suggested that mining companies would need to brace themselves for a tax on “super profits”. The mechanics of the royalty calculation in its current form does not allow the State to share in “super profits” as an upper cap applies. This seems to be the current bone of contention, and is the one fundamental difference between the current royalty regime and a resource rent type tax. A resource rent tax can be described as the levying of tax on super profits which would be triggered after a “normal” return on investment has been achieved. "The broader review of the tax system will consider whether this approach is sufficiently robust and assess what the most appropriate mining tax regime is to ensure that South Africa remains a competitive investment destination," Treasury said in documents presented to parliament as part of its budget.
Ultimately, the future of this country is a shared responsibility and everyone must, according to Minister Gordhan, “start believing in South Africa Inc and recognise that we have a collective future”. We can all perhaps learn from the resourceful South African mining industry which, amidst, rising operational costs, is still a world leader in the development of mining technology for the optimal exploitation of mineral resources. We do, after all, currently operate the deepest mine in the world.