Policy quality a key ingredient if SA is to serve up a mining sector that will lure investors
Policy certainty, such as the new Mining Charter, is all well and good, but is pointless without quality
“Policy uncertainty” has become the buzzword to account for SA’s inability to achieve higher economic growth, with policy stability hailed as key to resolving most of the constraints that hobble the country’s growth potential.
This narrative has been particularly prominent in mining. Recent developments, such as the new Mining Charter and the anticipated withdrawal from parliament of the troubled amendment to the Minerals and Petroleum Resources Development Act, have been widely hailed as representing decisive steps in regaining certainty. From this it has been anticipated that growth in mining will resume. My 25 years’ experience in sustainable growth and development throughout Africa and beyond, as well as my past 15 years with mineral-rich countries, tells me this hope is likely to be disappointed.
A vast swathe of the country’s touted mineral reserves, sometimes estimated to be worth more than R35-trillion, has in effect been sterilised
The cause of my pessimism? Policy certainty is being systematically conflated with policy quality, to the detriment of the latter. Policy certainty is only one dimension of the effectiveness of policy. Quality is arguably as important, if not more so: North Korea provides a case in point, with great policy certainty but appalling policy quality.
Over the past 20 years SA’s mining sector has consistently underperformed its peers and missed out on the famed commodity supercycle. There is ample data to prove this. The Fraser Institute’s rating of the investment attractiveness of mining jurisdictions has seen SA fall to the ranks of poorly attractive — until recently below countries such as Botswana, Ivory Coast and the Democratic Republic of the Congo.
Many in policy circles have repeatedly dismissed the Fraser rating as representing “mere” perception. This has been a mistake. Investment decisions are largely based on perception, and investor sentiment closely tracks competitiveness. In the case of SA, there has been a strong correlation between the decline in mineral rents and that of the country’s performance in the Fraser rating.
The same applies to other metrics of economic attractiveness and competitiveness, which all show continuous decline in SA’s position — from the Global Competitiveness Index to the Ease of Doing Business Index. A study my team and I did, presented at the recent Joburg Indaba, found that since the inception of the act in 2002, the mining sector has underperformed in all key metrics of performance and socioeconomic contribution. This holds true in absolute and comparative terms, with SA having progressively lost its position as one of the world’s leading mining countries.
Critically, the key differentiator of performance has been SA’s policy environment, which has had a negative effect on the sector over the past 20 years. Initially, between 2000 and circa 2010, policy lowered the benefits of the commodity supercycle. Post-2011 it increased the negative effect of declining prices. Through the entire period, the industry experienced a continuous escalation of policy shocks. At first the reaction to these shocks was noticeable and pronounced, as in the case of the act and the first Mining Charter in 2002.
Progressively, the immediate effect of individual policy shocks was diluted: the industry adjusted to the continued decrease of policy certainty and quality by lowering investment (relative to its peers and prevailing commodity price conditions) and optimising operations. Subsequent policy shocks became swamped by a continuously degrading policy environment. This is the infamous “SA discount”.
SA’s mining industry needed to be transformed to become a sustainable contributor to the economy and society. A trade-off between full potential growth and necessary levels of transformation was in principle justifiable to repair the most egregious abuses of apartheid. However, there is no evidence that such a trade-off exists.
On its own, transformation would have been a much lesser drag on performance and socioeconomic contribution. But coming after the act and intense national policy changes, transformation turned into another shock, adding to the cumulative layers of policy shocks that decisively lowered the industry’s attractiveness.
Performance in mining is determined by four interrelated factors: commodity prices and demand; input and operating costs (including capital); mineral policy; and corporate strategy. During the commodity supercycle, rising prices and demand compensated somewhat for the rise of costs and the growing weight of policy. The supercycle ended at the same time as cost escalation increased enormously, fuelled by widespread perception that the returns of mining were unequally shared as well as by catastrophic increases in administered prices (electricity, fuel, transport).
Policy pressure in the form of the Minerals and Petroleum Resources Development Act Amendment Act and Mining Charter II continued unabated in the context of threats of nationalisation and extensive state intervention. Faced with declining prices, less attractiveness to investors, and an inability to obtain meaningful relief from its partners (unions and the government), the industry used the only lever left to it — strategy — to contain what became an existential crisis after 2011. Through overseas diversification and ring-fencing, as well as restructuring and the optimisation of local operations, the industry in effect entered a long and painful recession, from which it has yet to emerge.
Inescapably, exploration and development became casualties and just about stopped as the industry focused on harvesting remaining economic assets. Lack of exploration and development has put the future of the sector at great risk, with the prospect of catastrophic production cliffs growing.
The gold sector is the harbinger of what may come to other mineral sectors if deep changes are not brought about urgently. A vast swathe of the country’s touted mineral reserves, sometimes estimated to be worth more than R35-trillion, has in effect been sterilised. The platinum group metal sector is a tragic demonstration that sterilisation has had little to do with depleting ore bodies, since SA has about 70% of known reserves. As a result, key metrics of the socioeconomic performance and contribution of mining have declined at the very time SA needed this contribution most.
Unless profound changes are brought to the industry, this contribution will continue to degrade. One just needs to look at the employment numbers to take a measure of the catastrophe playing itself out in front of us. Production plummeting within the next 20 years would be devastating to mining’s economic contribution, and to an economy that has depleted its growth engines.
SA has become yet another victim of the infamous resource curse: the unnecessary and wasteful consequence of poor policy and absent, if not downright nefarious, political leadership.
President Cyril Ramaphosa’s investment drive seems to signal a return to good economic sense: that investment is a product of sentiment, and that sentiment is influenced by policy and the investment climate. This investment turns into economic benefits that can then feed into social outcomes, and when investment is undermined the entire socioeconomic benefit chain is compromised.
In the same vein, mineral resources minister Gwede Mantashe has commendably made policy certainty his mission, and it seems that policy quality is part of the subtext of his actions. His decision to request that parliament withdraw the amendment bill addresses the likelihood that had the bill been passed, policy quality would have lowered to the point of making SA a junk mining jurisdiction. His decisive handling of Mining Charter III also spoke of taming this dragon. This is a good start. But much more is urgently demanded to improve SA’s policy competitiveness.
• Baissac is CEO of Eunomix, an advisory firm that focuses on sustainable development, strategy and risk in resource-rich countries.