Address by Minister in The Presidency: National Planning Commission Trevor A Manuel at the Mining Indaba Conference, Cape Town International Convention Centre
Much of Asia’s developmental model is premised on using a country’s comparative advantage to build a set of institutions and capabilities to reposition themselves for a different future. In Korea for example, significant progress in agriculture enabled the generation of resources to be spent on infrastructure and skills for a modern industrial economy. In China, low cost manufacturing is providing the resources to invest in infrastructure and skills for China to move up the value chain and raise incomes and living standards.
At the heart of the National Development Plan that we presented in November last year is a focus on building the capabilities for a very different economy that we want to twenty years time. The capabilities similarly include institutions, skills and infrastructure. In our case, we seek to build a more labour absorbing economy, a dynamic knowledge based economy and an economy able to provide decent jobs to all who seek it.
To pay for the development of these capabilities, we need to generate the resources, from both within and from the global economy. Simultaneously, we need an effective state able to use these resources to help build the capabilities for all of our people to a different tomorrow.
Given our history and our present capabilities, the mining sector has to be a major part of the plan to generate the resources to build the capabilities for a different economy tomorrow.
The National Development Plan provides a clear and cogent programme to raise mining output, increase local value add, increase exports, provide the supporting infrastructure and build the linkages to promote employment growth through the economy. In addition, the mining sector has to grapple with complex social challenges such as education and health in the communities that they operate in. The sector also has to adapt to global challenges such as the full pricing of carbon and energy that the sector relies on significantly.
Importance of Mining in South Africa
Mining has a deep footprint in South Africa’s social and political economic history. From the Iron Age works at Mapungubwe, to our great cities today, communities in South Africa worked the seams and staked their futures on precious metals and minerals mining, and in ancillary industries. Such has been the significance of the mining industry to our history and political economy, that by 1970 South Africa’s collective share of mining activities accounted for up to 21 percent of GDP, employing 660 000 people. To put that into some context; the United States has for most of the past century been the largest producer of cars in the world – but the industry has historically contributed only between 3 and 5 percent to that country’s GDP. It is, therefore, impossible to ignore the significance of mining to South Africa’s political economy.
Nonetheless, from its high-water mark of 1970, South African mining declined steadily over the next two decades, and by the early 1990s the industry sunk to a new low. Another two decades later, by 2010, the industry share of GDP dropped to a mere six percent, with around 440 000 people employed in the industry. In real 2005 Rand terms, the mining sector shrank from R103 billion in 1993 to R92 billion in 2009 – notwithstanding the synchronised global commodities boom over most of the past decade. This decline is especially critical, when compared to the significant growth achieved in most other major mining countries, and in other components of the South African economy. This weak growth of the tradable sectors of our economy, especially mining and manufacturing has exacerbated our unemployment crisis because these sectors have traditionally provided the bulk of the employment opportunities for unskilled and semi-skilled workers.
To achieve our broader and longer term economic and social objectives, we have to reverse this trend.
The plan to boost investment and employment in mining rests of four elements:
• Provide policy and regulatory certainty to the sector
• Sensibly extract rents from the sector in the form of taxes
• Invest in infrastructure to support the sector
• Build the backward and forward linkages to boost value add and employment
• Support the sector while nudging them to lower their carbon emissions.
Given the long lead times in mining, providing policy and regulatory certainty seems like a no-brainer. However, policy change is also often needed to better achieve the country’s objectives. We must make no bones of the fact that the industry has a tainted past. In many ways the mining sector helped reproduce the iniquities of colonial political economic preferences and then of apartheid; especially the ill-treatment of migrant workers, of workers in general, and the suppression of black skills and opportunities. It is this legacy that helps shape the pessimism around mining in South Africa. There is a widespread perception that most of the benefits of profits accrued through mining and minerals exploitation can, today, be found in the erstwhile metropolitan centres of the colonial empires. It is this perception that feeds into the belief that mining is an ‘uncaring’ industry and a ‘sunset’ industry.
Yet mining can and should make a positive contribution to the growth and development of a post apartheid economy. It is this contradiction that we have not managed well. The effects are there for all to see. South African mining output (by volume) has grown by just 1 percent a year over past decade. This compares with annual growth of about 5 to 7 percent in Brazil and Australia. A clear and transparent licensing process is required, administered by a credible set of administrative institutions. Certainty over property rights is critical to attract long term investment. We also have to ensure that there is certainty around electricity costs and supply. The recent debates over nationalisation builds on the uncertainty the developed during the conversion of old order mining rights. We need to resolve these debates speedily because if we fail to do so, we will continue to lose out from higher global demand.
The mineral wealth belongs to the country as a whole and it is critical that sensible taxation and royalty regimes be put in place to extract the rents from this sector so that we can invest the proceeds in the country’s broader development. Our country broadly has sensible taxation regimes and competent revenue administrators. The mineral royalties regime adds a dimension to our company tax regimes that recognises the unique nature of resource extraction. That it can be improved is in little doubt. Whether the levels are correct or not is also open to debate. But the basic elements are there and can be built on.
We have underinvested in the infrastructure needed to support higher mining output. The usual narrative that we have missed the commodity boom due to investor concerns on property rights is probably only a third right. We have not put in place the requisite water, rail, port and electricity infrastructure needed for much higher output. If such infrastructure is in place, there is no reason why mining output cannot double in decade (implying 7 percent annual growth). In the main, government has failed here. The plans to rectify this are well advanced and in some instances, being implemented already. However it is also true that pricing policies for key infrastructure in the mining sector has been sub-optimal. Prices have been too low, not reflective of the economic cost of maintaining the infrastructure and expanding it over time.
The proposed development plan deals in detail with the infrastructure needed to unlock the Western Limb for platinum and the Waterberg for coal. We provide detailed recommendations on the iron ore lines, the coal lines, port infrastructure and energy needs. The state in partnership with the private sector will invest in these resources, but they must be properly priced. The state can take some of the risk but the fiscus cannot subsidise these services in the long term.
Given that commodity prices are volatile, if we are to raise mining output, we will also have to take steps to protect the economy and the fiscus from volatile capital inflows and revenues. This could be done in the form of running surpluses when times are good, to investing sensibly in diversifying the economy. This is not a contradiction. We do seek to diversify our economy over the long term, because commodity prices will not stay high forever. Variable taxation regimes combined with counter cyclical fiscal policy can help to achieve this balance.
The more complex challenge is around building the backward and forward linkages to grow value add and raise employment. Mining directly creates relatively few jobs, relative to the billions of investment that is required. It is critical that we use the industry to grow other industries that either support this industry globally or that benefit from the location of the industry in our country. Beneficiation is a double edged sword. Sometimes it is a sensible strategy to drive industrialisation and raise value addition. However, sometimes it also requires capital and energy that we do not have. A balance in approach is required, focusing on our capabilities and the realities on the ground.
South Africa can position itself as a global and continental provider of mining services, inputs and expertise. We already have many of the capabilities to do this, but we need greater investment, coordination, easier skilled migration and more investment in research and development. State investment in mining research and development has fallen, as has investment by our mining firms. We need to re-establish South Africa as a centre of excellence in mining technology. This requires partnership between educational public institutions and mining houses.
Can we sustainably exploit our mineral resources while still meeting our international obligations to reduce our carbon emissions? This is a difficult question. In short, the answer has to be yes. We do have to raise mining output. We do also have to gradually become more energy efficient and our energy mix has to have a lower carbon content. This will cost, make no mistake about it. If we sequence the transition properly, invest in the necessary research and technology and use the appropriate balance of fiscal measures, we can support the transition to a lower carbon future while still raising mining output. Finland’s famous story of becoming a world leader in environmental sustainable forestry gave the country a new comparative advantage. We have an even greater potential to develop and then export clean mining technologies.
Given that mining is an extractive industry and the resource is non-renewable, our approach to investing in mining communities must be revised. Mining will continue to be criticised if mining houses take short term views on investing in mining and labour sending communities. In general, the requirements of the law are not onerous. The law is there to promote sustainable mining and firms that have invested in mining communities reap positive benefits from the communities too.
Similarly, skills development in the mining sector is critical to both raising output and to sustaining the sector in the long term. We need skilled from high level engineering and geological skills to medium and lower level skills required to drive the industry, raise output and export our services. Again, partnership is needed between the public and private sectors to train more people, including existing mineworkers.