BRIEFING TO THE PORTFOLIO COMMITTEE ON MINERAL

RESOURCES

For an Equitable Sharing of National RevenueFor an Equitable Sharing of National Revenue

17 September 2014

PRESENTATION OUTLINE

1. Introduction to the Financial and Fiscal Commission

2. Evolution of mining and contribution to economy

3. Recent developments and challenges

4. How can mining’s contribution to national and regional development be enhanced?

5. Small scale/illegal mining and poverty reduction

6. Departmental analysis

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ROLE AND FUNCTION OF THE FFC

• What?– Permanent statutory body established in terms of Section 220 of Constitution– Independent and subject only to Constitution and the law– Must function in terms of the FFC Act

• Mandate of Commission – Makes recommendations, envisaged in Chapter 13 of the Constitution or in

national legislation to Parliament, Provincial Legislatures, and any other organs of state determined by national legislation

• Commission is concerned with intergovernmental fiscal relations (IGFR)– Legislative provisions or executive decisions that affect either provincial or

local government from a financial and/or fiscal perspective– Includes regulations associated with legislation that may amend or extend

such legislation– Commission must be consulted in terms of the FFC Act– Current research strategy focuses on developmental impacts of IGFR

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EVOLUTION OF MINING AND CONTRIBUTION TO THE ECONOMY

HISTORY

• Commercial mining has its origin in the 19th century with opening of Kimberly Diamond Mines in 1860s followed by Witwatersrand gold mines in the 1880s

• Discovery of gold and diamonds induced rapid structural change from predominantly agriculture and rural economy toward urban economy centred around mining and supporting industries

• Share of agriculture in employment dropped from 75% to 33% between 1865 and 1921

• Exports grew rapidly with decline in agriculture share matched by an increase in mineral exports

• Profits from diamond and gold became main source of revenue for government and source of finance for private investment (Nattrass, 1981)

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Sub-sectorProduction Reserves

SA Contribution

World Ranking

SA Contribution

World Ranking

Primary Commodities

Precious metalsGold 10.3 2 40.4 1

PGMs 56.7 1 87.7 1

Silver 0.35 17

Non-Ferrous

Copper 0.73 17 1.4 14

Zinc 0.28 25 3.3 8

Lead 1.2 11 2.1 7

Nickel 2.6 9 8.8 5

Cobalt 0.58 0.12

Antimony 2.5 7 4.7 4

Ferrous ores

Chromite 41.9 72.4 1

Manganese 14.6 2 80. 0 1

Iron 2.5 7 0.93 9

Minerals sands Titanium 19.5 2 16.7 2

Zirconium 32.7 2 19.4 2

Energy Coal 3.6 6 6.6 8

Uranium 1.6 11 10 .0 5

SA’s contribution to World’s Mineral Supply: Production and Reserves

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Sub-sectorProduction Reserves

SA Contribution

World Ranking

SA Contribution

World Ranking

Processed Commodities

Ferro-alloys Chromium 54.5 1

Manganese 6. 0 4

Silicon 2.8 7

Vanadium 39.8 1 31.6 1

Aluminium 2.4 9

SA’s contribution to World’s Mineral Supply: Production and Reserves [cont.]

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ROLE OF MINING IN RSA

• Enabled SA to be most industrialized African country

• Large employer of semi-skilled and skilled workers

• Net generator of foreign exchange

• Significant multipliers into the rest of the economy (large procurement, investment and wage spender)

• Large magnet for foreign investment inflows (which help fund current account)

• Significant contributor to transformation in the economy

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MINING CONTRIBUTION

• Country abundantly endowed with mineral resources and a key global player: – 90% of platinum metals– 80% of manganese– 73% of chrome– 45% of vanadium and 41% of gold on earth

• Mining sector accounts for 8.6% of GDP directly on a nominal basis• Investment

– A third of the market value of the JSE

• Energy– Mining is responsible for 93% of electricity generation via coal power plants– A third of liquid fuels supply via Sasol’s use of coal

• Complementary role in deep rural areas: – Remittances– Clinics, schools, community centres– Jobs etc.

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KEY POLICY/STRATEGIC THRUSTS

• Broad Based Socioeconomic Charter for SA Mining Industry also known as Mining Charter

– To redress historic inequalities, government enacted Mineral and Petroleum Resources Development Act (MPRDA) (Act 28 0f 2002)

– Section 100(2)(a) of MPRDA makes provision for the development of a mining charter as an instrument to effect transformation with the setting of specific targets

• Mining Charter aims to bring about redress with respect to: ownership, procurement, beneficiation, employment equity, mine community development, housing and living conditions and sustainable development and growth in the mining industry

• Every mining company must report its compliance with the Mining Charter annually

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KEY POLICY/STRATEGIC THRUSTS[CONT.]

• Beneficiation Policy and BEE

• National Development Plan

– SA has failed to match the global growth trend in mineral exports due to

• poor infrastructure

• regulatory and policy frameworks that hinder investment

• uncertainty as regards property rights

– Beneficiation not a fix-all solution to growth and employment problems

• Activities are energy intensive and capital intensive

– Measured approach targeting capital equipment, chemicals and engineering services

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RECENT SECTORAL DEVELOPMENTS AND CHALLENGES

TOTAL MINING PRODUCTION GROWTH

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MINING PRODUCTION SALES

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PRODUCTION: GOLD AND NON GOLD MINERALS

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PRODUCTION: GOLD, PLATINUM AND DIAMONDS

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VOLUME OF MINING PRODUCTION

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KEY POINTS

• Year on year growth in overall mining production fell further in July, to -7.7%, from -5.4% in June and an average of -2.7% for the first seven months of the year– There was a minimal recovery in production of platinum group

metals (PGMs) despite the ending of the strike

– The softness of mining production is also reflected in the plunge in the growth in the value of mineral sales to -12.0% in June, from 0.9% in May and an average of 2.6% in the first half of the year

• Sadly, the cornerstone mining sector upon which the South African economy was built continues to languish as the weakest segment of the economy, with average annual growth of -0.8% between 2008 and 2014, way less than the overall growth of the economy over this period, of 1.3% per annum 18

KEY SECTOR CHALLENGES• Global economic outlook • Public expenditure growth cutbacks • Implementing change/transformation and gaining consensus on

right economic and ownership strategy for mining– Ownership– Beneficiation– State Mining Company

• Other pressing issues– Impact of the mining strikes on growth, inflation and

investment– Lingering uncertainty around nationalization and – Issues about confusion between municipalities and traditional

leaders  and impact on mining investment

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HOW CAN MINING’S CONTRIBUTION TO NATIONAL AND REGIONAL

DEVELOPMENT BE ENHANCED?

IMPROVING MINING CONTRIBUTION TO

DEVELOPMENT: NATIONAL AND LOCAL• Most of the big financial benefits of mining (FDI, exports, government

revenue etc) accrue nationally…

• …but the physical and human impacts are mostly at the community level

• It follows that:– Mining’s contribution greatly depends on how these large central

government revenues are used

– Mining’s (small) employment contribution is mainly at local level, and displacement of local labour (e.g. artisanal miners) can result in a significant negative effect on livelihoods locally

– Local procurement can have significant additional indirect effects on total employment and incomes. But the opportunity for these effects to be realized is often overlooked, both by governments and by investors. In weakly developed economies they must be actively fostered

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IMPROVING MINING CONTRIBUTION TO DEVELOPMENT: NATIONAL AND LOCAL

[CONT.]• At the national level, through fiscal links– Transparency and accountability for revenues

– Fiscal policy targets to be met over entire business cycle

• At the local/regional level– Visibility of mining revenue

– Improving local capacity– Transparent revenue sharing mechanisms.

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MINING AND REGIONAL DEVELOPMENT

• What happened with mining 100 years ago in the places that are now developed in South Africa? – Mining led to metals production, manufactured goods exports– Employment generation, skills accumulation: good jobs and lots of

them– Supporting industries established, based on innovation: mining

equipment, service providers • What happens in the country today?

– Few linkages to other sectors, mine workers’ wages are the main stimulus to local economies - but they can be important, 8-10 new jobs per mine worker is common in Africa

– Little innovation– Widening income differences– Crowding out of other sectors– Social friction and conflict

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WHY IS IT SO DIFFICULT TO BUILD DIVERSIFIED LOCAL ECONOMIES

AROUND MINING NOW?• With today’s metals prices, the money is there, but… • Globalization means that

– Inputs can be imported because transport costs and tariffs are lower, therefore difficult to build backward links

– Processed products are exposed to international competition, therefore no forward links

– Processes are standardized and mechanized: there is little room for using the advantage of low local labour costs

– Skills do not have to be developed locally, experts can easily be brought in, therefore fewer high quality jobs are filled by locals

– Easy access to state of the art technology reduces need for local innovation

• Widespread poverty and overpopulation mean that– There will always be unmet demands for jobs– Many have an incentive to act outside the law

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SOLUTIONS

• Nurturing of clusters through partnerships between government and companies – In Mozambique, the establishment of the Mosal aluminium

smelter led to local job creation along a corridor stretching from the border with South Africa to Maputo

– Can this be replicated here?• Pro-active procurement policy of companies, combined with

training and technical assistance– Can this be upscaled and work here?

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SOLUTIONS [CONT.]

• Empowering communities?– In Papua New Guinea, local development committees have

the final word on all development projects, including those connected with mining

• Regional development planning:– Local governments usually do not have the capacity to plan

for long term development, and the capacity has to be built– Development planning has to be inclusive and participatory –

nobody can be left out and decision making has to be for real– The process and its results have to be visible and the actors

have to be accountable

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WHAT PORTFOLIO COMMITTEE SHOULD ASK FOR?

• A strong technology drive,

• An innovative approach,

• Long term development plan and capacity, and

• An understanding of social dimension

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SMALL SCALE MINING, ILLEGAL MINING AND POVERTY REDUCTION?

SMALL SCALE MINING: A NEGLECTED POVERTY PROBLEM• Small-scale mining can be big business• Environmental damage: deforestation, erosion,

destruction of water courses, mercury• Safety hazards: accidents, disease, mercury• Social problems: crime, drugs, prostitution• Costs to economy: loss of agricultural labour,

lack of investment, low productivity, no processing, inequitable allocation of revenues along supply chain

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SOLUTIONS

• Raise productivity: training, improved equipment• Eliminate mercury as hazard to health and

environment: better equipment, alternative technologies• Legalize and integrate: titles to mining claims,

preference for local people• Change the distribution of revenues: organizational

support, licensing of dealers• Processing: training, capacity building, fair trade

schemes• Communities and small-scale mining, workshops,

grants, training, networking30

DEPARTMENTAL ANALYSIS

BUDGET AND PROGRAMMES OF MINERAL RESOURCES

• Departmental budget for 2014/15 = R1.4 billion– This represents an ↑ of R102 million between 2013/14 and 2014/15– This translates to 7% nominal (and 2% real) growth rate from the

2013/14 budget

Programme (R’million) 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Real Annual Average Growth 2010/11-2013/14

Real Annual Average Growth 2014/15-2016/17

Administration 226.7

257.6 295.3 300.4 284.2 296.8 314.5 3.9% 0.2%

Promotion of Mining Safety and Health 137.1

141.3 140.7

161.1 168.0 177.7 188.9 -0.1% 1.0%

Mineral Regulation 188.6

184.4 191.4 199.6 231.4 245.2 260 -3.6% 1.0%

Mineral Policy and Promotion 442.3

446.2 546.3

708.2 787.8 879.5 900.6 10.7% 1.8%

Total 994.7 1 029.5 1 173.7 1 369.3 1 471.4 1 599.2 1 664.0 5.3% 1.3%

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BUDGET COMPOSITION ACROSS PROGRAMMES – 2014/15

• Largest programme = Mineral Policy and Promotion Programme– Spear-heading rehabilitation of

150 derelict/ownerless mines• Focus of Administration programme

is attracting/retaining skilled workers – ↑ over MTEF driven by training

and staff development, generally improvement to conditions of service – efforts to attract/retain staff resulted in vacancy rate declining from 19% to 15% between 2012/13 and 2013/14

• Promotion of Mine Health and Safety receives smallest portion of budget – allocation ↓ by 1% in real terms between 2013 and 2014– Safety track record in mining

industry remains a challenge 33

SPENDING ECONOMIC CLASSIFICATION

Item (R'million) 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

Real Annual Average Growth 2010/11-2013/14

Real Annual Average Growth 2014/15-2016/17

Compensation of Employees 326.5

364.6

395.9

442.0

476.8 505.7 539 4.7% 1.3%

Goods and Services 206.5 222.6

227.9

249.2

265.6 278.8 356.5 0.8% 10.3%

Transfers and Subsidies 438.1 420.8

525.1

660.2

717.9 803.3 756.4 8.5% -2.2%

Payments for Capital Assets 23.6

18.6

24.5

18.0

11.0 11.5 12.1 -13.5% -0.1%

• To give effect to baseline reductions, transfers and subsidies (to the Council for Geoscience and Council for Mineral Technology) were ↓ by R40 million over MTEF – hence slow down in growth over 2014 MTEF

• Significant growth projected for goods and services over 2014 MTEF period is the result of the rehabilitation of derelict/ownerless mines project –↑ spending mainly on contractors

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IN-YEAR EXPENDITURE – 2013/14

• It appears that the Department is able to maintain relatively stable cash flow/disbursements

• Generally July, September, November and January = high spending months

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DEPARTMENTAL ENTITIES

• Five entities fall under the Department of Minerals:1. Mine Health and Safety Council

• Research and advisory function to the Minister in terms of mine health and safety

2. Council for Mineral Technology Research• Provides research, development and technology to foster the development of

business in the mineral industry

3. Council for Geoscience• Development and maintenance of national geosciences knowledge

infrastructure for onshore/off-shore environment of South Africa

4. South African Diamond and Precious Metals Regulator• Regulation of diamond, platinum and gold sectors

5. State Diamond Trader• Promote equitable access to and beneficiation of diamond resources, correct

historical market failures and grow South Africa’s diamond cutting and polishing industries

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FINANCIAL PERFORMANCE OF PUBLIC CORPORATIONS AND

ENTITIES

• The five entities falling under DMR all obtained unqualified audits in 2011/12, 2012/13 and 2013/14

• Department playing an effective monitoring role over entities and agencies

Name of Entity Amount Transferred

2013/14 R’000

Amount Spent

2013/14 R’000

Audit Outcome2013/14

Mine Health and Safety Council 5 035 5 035 Unqualified

Council for Geoscience 271 232 271 232 Unqualified

Mintek 364 709 364 709 Unqualified

SA Diamond and Precious Metals Regulator 44 824 44 824 Unqualified

State Diamond Trader 0  0  Unqualified

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DEPARTMENTAL CHALLENGES

• Attraction and retention of key staff

– Especially with respect to inspectors and mineral economists

– High levels of staff being poached by private sector at salary levels that government cannot compete with

• Maintaining mine health and safety remains a challenge

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THANK YOU.

Financial and Fiscal CommissionMontrose Place (2nd Floor), Bekker Street,Waterfall Park, Vorna Valley, Midrand,Private Bag X69, Halfway House 1685

www.ffc.co.zaTel: +27 11 207 2300Fax: +27 86 589 1038

Introduction to the Financial and Fiscal Commission 2014

FFC’s Website: www.ffc.co.za

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