KEVIN TUTANI: Lessons in natural resources for development

Platinum is a key mineral of the present and the future, and SA is fortunate to have more than 80% of the world’s reserves and is the top producer. The country also has abundant reserves of coal, chrome and diamonds.

At the Mining Indaba in February mineral resources & energy minister Gwede Mantashe confirmed recent discoveries of world-class (commercial) deposits of commodities for the future, such as lithium, rare earth elements and copper.

Moreover, during an official visit to SA in April, Namibian President Hage Geingob announced that the SA government and private sector have an opportunity to co-operate with his country in oil extraction in the Orange River Basin, which is estimated to contain about 11-billion barrels of deposits.

SA is also continuing with offshore exploration for oil and gas in its 1.5-million km² exclusive economic zone, which is reported to have the potential to produce 9-billion barrels of oil (equivalent to 40 years of the country’s current oil consumption).

Together of these resources would translate into huge government revenue from the extractive sector, generated through royalties, taxes and, in the case of a partnership with the private sector, profit sharing.

Since mineral resources are non-renewable, it is crucial for the government to establish a framework that can be used to ensure revenue from the extractive sector is utilised for growth and economic diversification and translates to better citizen welfare. Additionally, such major revenues offer the possibility for transferring some of the mineral wealth to future generations through a sovereign wealth fund. 

Defining development goals

At the outset the government needs to set development goals that it will link to to the inflows of natural resource revenues. That means a predetermined portion of revenues from extractives will be directed to fund those goals. When there is clarity on the developmental targets the connection between revenues and the development agenda is more direct and effective. Measurability of the impact of resource revenues also becomes possible.

A portion of the revenues may be used to make cash transfers to local communities where the extraction of resources is occurring. This may be particularly desirable for peri-urban and rural areas, as the additional income will ignite economic activity in the isolated regions. With substantive cash payments the areas may become industrialised or contribute significantly towards reversing urbanisation and pressure on public services in the cities.

As an example, paying a monthly stipend of R100 per individual in the rural areas would amount to a direct cost to the Treasury of R1.9bn a month, or R22.8bn a year. That data is framed using World Bank records, which show that SA had a rural population of about 19-million, and a rural to urban ratio of 32:68 in 2022. Using last year’s total budgeted expenditure of R2.2-trillion, the amount (R22.8bn) comprises just 1% of Treasury’s overall expenses. It is relatively small but its effects could be paradigm shifting.

If commodity revenues are transformational (major), the payments seem possible. Such disbursements may be exactly what it takes to spark burgeoning rural economies. With vigorous rural economies SA’s full economic potential will be unlocked. The reversal of urbanisation from such interventions will subsequently reduce pressure on public services including water, electricity and waste management in cities. 

If the country is to achieve sustainable and robust growth resource revenues should be earmarked for economic diversification. The experiences of Nigeria and Indonesia in investing their oil revenues may provide pertinent, though sharply contrasting, lessons.

When Nigeria began to experience significantly high oil revenues (1960-73) there were accompanying major forex inflows. That led to a sharp appreciation of the local currency, the naira. Subsequently, agricultural and other exports, which were dependent on a relatively weak naira to be competitive, became more expensive in dollar terms in the export market. As a result, the agricultural sector suffered terribly, which drove the nation to be even greater dependence on oil.

In Indonesia, the oil and gas revenues were used to subsidise the agricultural sector through the provision of fertilisers, irrigation, roads and other rural infrastructure wherever agricultural activity was concentrated. The strengthening of the local currency therefore had a limited effect on reducing the competitiveness of agricultural products in both local and foreign markets.

Farming therefore thrived in Indonesia and continued to grow until it became a major agricultural nation globally. From comparable starting points, before the discovery of oil, it took Nigeria until 2008 to reach the level of human development that Indonesia had reached by 1980. In the same manner, SA’s National Treasury should focus on strengthening other sectors of the economy, such as export-agriculture and strategic manufacturing (vehicles and machinery).

With regard to export-agriculture, funds may be availed for extension services, contract farming, transportation, storage and administration. That would increase forex inflows and support local employment and economic growth, yielding all-round income for the government, business and households. 

Deepening investment in education, healthcare, reliable electricity generation, provision of clean water and public infrastructure will also be viable designations for the resource revenues. 

Managing risks and expectations

In some cases citizens may wrongly interpret a discovery of new resources as an immediately shift from poverty to wealth. Where such expectations aren’t managed there is bound to be discontent, which in the worst cases may result in insurgency. This has been the situation in the Niger Delta, where local communities feel deprived of the region’s oil resources.

It is also vital to resist spending revenues before they are earned. This can occur when a government borrows, using future income from the extractive sector to repay the borrowed amount. In 2012 Zambia borrowed $750m to fund energy and transportation projects on the expectation that copper production would continue to drive economic growth.

Just two years later, however, copper prices fell 30% and the kwacha depreciated sharply. The country’s credit rating was downgraded owing to concerns about its ability to service its growing public debt. Zambia is now on an IMF programme to resolve its debt overhang.

Ultimately, it is crucial for the government to maintain policy consistency, from the time when exploration for resources commences to the construction of mines. Without consistency in government policy investments will be delayed or rerouted to destinations other than SA.

• Tutani is a political economy analyst.