JOHANNESBURG (miningweekly.com) – Strengthening the fiscal linkages to South Africa's mining industry through a new resource rents tax (RRT), which would effectively target super profits earned by domestic miners, was preferable to ‘blanket nationalisation’, which could not be pursued in the absence of compensation, a co-author of the African National Congress’ (ANC’s) ‘State Intervention in the Minerals Sector’ (Sims) report has argued.

Speaking at a 'Mining for Change' event on the eve of the ANC policy conference, Dr Paul Jourdan again stressed that South Africa's bilateral investment agreements made nationalisation without compensation “impossible” and that paying compensation would “break the bank”.

The ANC’s Enoch Godongwana would present the 400-page report, which was released earlier this year, formally this week during a 45-minute plenary presentation to delegates that will converge on Midrand, Gauteng.

The rents-focused approach outlined in the Sims report, which has been drafted with reference to mining policies in 30 countries, is also said to be in line with moves by governments globally, which contrasted strongly with the tendency during the 1970s for governments to secure the equivalent of such rents through ownership.

Nevertheless, the report insists that a greater share of the potential rents should be ‘captured’ in the interests of the country’s growth, development and employment objectives – a point that had already sent jitters through an investment-wary mining community.

Proposed is a 50% RRT that the authors believe will enable government to “share” in earnings achieved over-and-above that which would have been possible through the ‘normal’ application of capital, labour and innovation. In other words, in instances where the terms of trade had improved through higher commodity prices, or where the geology itself offered superior yields. At the same time, Sims proposes a reduction in the royalty tax to one per cent.

Such abnormal profits are suggested to be anything above a “return of investment greater than the long bond rate, plus seven per cent”. When the report was drafted it was estimated that an RRT of 50% would yield about R40-billion a year, but Jourdan admitted that it would be far lower currently, owing to the recent softening of commodity prices and the current crisis in the platinum sector.

Critics suggest that such a move could further undermine the attractiveness of South Africa as a mining investment destination and argue that the focus should rather be on improving the competitiveness of a sector that is underperforming relative to other resources-heavy economies, such as Australia, Brazil and Chile.

Political risk analyst Mzukisi Qobo argues that the policy debates should rather be centred on building confidence in the mining sector and on the creation of a “clear road map”, outlining ways to place the sector on a strong competitive footing.

“The ambiguities in the Sims report around the RRT, the functions of the State mining company, the nature of strategic minerals and the slew of regulatory institutions, do not inspire confidence. Instead, they compound confusions,” Qobo says.

The Sims report, itself, acknowledges the failure of South Africa to take full advantage of the 2003 to 2008 minerals boom, owing to resource and infrastructure constraints.

However, it asserts that accelerating the development of the sector has to be tied to five ‘economic linkages’, including the fiscal linkage that has, to date, received the bulk of the attention.

In fact, Jourdan (in his personal capacity) even argues that unless these connections are made, it may be best to leave the minerals unexploited, as without such linkages the developmental objectives will not materialise – instead, they would form the basis for further deindustrialisation.

CRITICAL LINKAGES

Sims, thus envisages a strong association between mining and South Africa’s reindustrialisation aspirations, which its argues will form the foundation for 'inter-generational equity'.

The four other linkages outlined identified are:

• A knowledge linkage, which relates to developing the human resources and technological capacity to maximise the spinoffs from mining.
• Backward linkages, which relate to the development, commercialisation and manufacture of the capital goods, services and consumables used by the minerals sector.
• Forward linkages, or beneficiation, of minerals where commercially viable.
• And spatial linkages, through which the infrastructure is developed to ensure ‘life beyond the mine’ and to open up regional opportunities for South African firms engaged in backward linkages.

To achieve this, the Sims reports proposes greater coordination of the government departments overseeing minerals development and trade and industry, possibly through a ‘Super Ministry”, or through the newly created Presidential Infrastructure Coordinating Committee.

It also argues for the RRT receipts to be ring-fenced for use in three sovereign wealth funds, designed to support fiscal stabilisation, regional development and minerals development.

Amendments to the Mineral and Petroleum Resources Development Act would also be required, particularly to ensure that the contribution to backward and forward linkages are made a licence condition, as well as to cater for a category of ‘strategic minerals’ that could be associated with extraction and pricing conditions.

Lastly, it also calls for the expansion and upgrading of minerals-related infrastructure to support the expansion of the minerals sector. Part of the process should involve an upscaled investment in geological surveying “so that we have more deposits in 20 years time”.

“But primarily, it is up to our generation to ensure that the current depletion of our finite mineral assets establishes a competitive industrial platform for the economic prosperity of future generations,” Jourdan concludes.