Minister Jeff Radebe: Launch of Government Phakisa Workshop

22 Jul 2015

In his seminal work, Capital, Karl Marx made a very important observation:

“Although gold and silver are not by nature money, money is by nature gold and silver…" (Source: Capital, volume one, chapter two)

The discovery or gold and diamonds changed the face of our economy from an agricultural based economy to large scale mining and industrialised country, with our country being the leading producer of gold for many decades. As Marx observed, gold (and many other minerals today) created the wealth of our country. It is unlikely that Johannesburg would have been established as the largest city in the world built away from water if it was not for the gold mining industry. 

Both before and during the Apartheid era, the mining sector, and large mining conglomerates in particular, drove investment in the manufacturing of capital and consumer goods, large processing industries, agriculture, financial services and retail. 

The mining sector played a key role in the growth of State Owned Companies so that they played a strategic role in the economy. It is not well known that Anglo American gave Eskom the capital it needed to buy out the Victoria Falls Power Company, the dominant private electricity company who was inhibiting growth by charging monopoly prices for power. Similarly, Anglo American supported Iscor with capital and off-take agreements to enable the establishment of the first vertically integrated steel-mill in Van Der Bijl Park so as to break a European steel cartel that was similarly charging the mining sector monopoly rents. 

On the other hand, the social history of the mining sector before and during Apartheid had dire consequences for the many black South Africans. Mining entrenched the dispossession of land to ensure a steady flow of cheap labour to mines. The mining sector entrenched the migrant labour system which became the corner-stone of Apartheid policy. 

Wage rates were very low and working conditions on the mines were exceptionally dangerous and resulted in both a high level of fatalities during operations and a legacy of debilitating and fatal mining related illnesses. Communities were forcibly removed to make way for mines whilst mining operations were associated with high levels of environmental degradation which particularly impacted adjacent communities who had no compensation for the pollution they were exposed to on a daily basis.

It is this dual legacy of the mining sector that the post-Apartheid government inherited and has tried to address through establishing a comprehensive policy and regulatory environment that seeks to encourage investment in the industry, address the negative legacies of the industry whilst leveraging areas where the sector can have a broader positive impact.

In the context of managing these complex challenges, there is no doubt that mining remains extremely strategic to the South African economy. 

The sector’s total contribution to GDP is 17% when induced impacts on the economy (through for example upstream procurement and downstream beneficiation) are taken into account. 

In 2013, mining helped create employment for 1.4 million South Africans throughout the economy. The industry employed 520 000 people directly, but jobs created in associated industries and through the induced effects of mining added another 880 000 jobs. 

The sector is responsible for over 50% of exports and almost 20% of private sector gross fixed capital formation.  Consequently, the growth of the sector can unlock a much broader development process whilst its decline will be nothing short of catastrophic.

As with the electricity sector, the mining sector is characterised by large capital intensive projects with long lead times and very long mine life spans.  In order for the sector to sustain and grow there needs to be a continuous process of investment in exploration - to replace mines whose resources are nearing exhaustion - and for brown-field investment - to replace shafts that are reaching exhaustion. 

However, in the period since leading up to 2015, there has been a pro-longed and synchronised decline in commodity prices across South African export commodities.  At current prices more than 40% of the SA platinum mining industry and 31% of the gold mining industry is loss making. The bulk sectors such as coal, iron ore and manganese ore have on average 50% of its operations break-even to loss making.  This has led to a dramatic decline in investment.

The impact of lower commodity prices and declining investment in the mining sector has had a severe effect on the rest of the economy. Mining equipment manufacturers have been particularly badly hit. 

In our case, when mining sneezes the entire economy catches a cold.

If the sector is to move onto a sustainable growth path, it is critical that investments in exploration and expansion are rapidly enabled. 

The development of a more sustainable growth path in mining also requires addressing many of the critical transformation challenges that continue to replicate itself across the industry.

Estimates in the mining sector suggest that at least R120 billion in assets have been transferred to black ownership since 2004, with the Reserve Bank indicating that the mining industry currently has around R650bn in fixed assets in 2014 Rand.

Transformation in the industry as reflected in the recent Mining Charter Assessment report for 2015 provides a number of interesting trends and concerns.

For instance, Historically Disadvantaged South Africans (HDSA) ownership as percentage of value only reached 33% but when looking at the number of companies with 26% HDSA ownership as stipulated in the Charter, the assessment indicates that the 90% of companies have achieved this target. On the other hand only 20% of broad-based ownership targets have been met, according to the Charter assessment report.

The report also seems to suggest that the mining industry exceeded the 40% target set for employment equity and skills representation across a number of employment categories.

Similarly, the percentage of companies achieving procurement targets indicates that 82% in the capital goods, 65% in services and 85% for consumable goods have been reached.

While the Mining Charter Assessment provides an important glimpse of changes in the sector, we cannot ignore that there are disagreements on the reporting of targets, which has led to squabbles that many targets are perhaps imprecise and contested, and where there are disagreements the only dispute settlement process is through the courts. This creates uncertainty and inherent risks for many in the sector and must be addressed.

As government we have fulfilled the commitment in the Freedom Charter by transferring the mineral wealth of our country into the hands of the people. We are building on the Freedom Charter by implementing our programme of Radical Economic Transformation, with the National Development Plan as our vision. 

This has been cascaded into the Medium Term Strategic Framework (MTSF), as Government’s strategic plan for the 2014-2019. It reflects the commitments made in the election manifesto of the governing party, including the commitment to implement the National Development Plan (NDP) and sets out the actions Government will take and targets to be achieved. 

The mining Phakisa is just one set of actions to achieve the objectives of a programme of Radical Economic Transformation.

This mining Phakisa has the holistic objective of unlocking investment in exploration and mining activities whilst optimising the developmental impact on the sector on the economy, the work-force and on surrounding communities. 

As per the President’s directive, an intrinsic part of this objective is that it should be achieved through structuring win-win relationships between stakeholders.  It is critical that the Phakisa explores a number of areas associated with its broad objective. These include:

  • How investment in exploration and extraction can be systematically increased so as to place the sector on a growth path and a more sustainable footing.
  • How the growth and modernisation of the sector can be associated with the development of South African capital equipment manufacturers to the point where they become export competitive.
  • How new forms of beneficiation can be promoted whilst existing processing industries are put on a more sustainable footing. The potential to shift from a mining export country to using and growing our manufacturing capabilities in beneficiating key minerals is crucial. Our beneficiation strategy must take into account our current electricity constraints, actual available demand and the need for deeper industrialisation and job creation.
  • How the mining related research and development cluster can be revitalised to support the competitiveness of mining, equipment manufacturing and beneficiation.
  • How government can start collaborating with mining companies to develop new models to fast track housing developments and other community development initiatives.
  • How we can pragmatically address both the historical and current environmental impacts of mining through establishing collaborative programs and projects that will not just address these issues, but contribute to employment creation and rural development.

A core element of a developmental state is the ability to partner business so as to unlock the growth of the private sector on the basis that this growth will be accompanied by the achievement of the state’s developmental priorities.  

The Phakisa is a process designed to deepen this partnership through collaboratively designing initiatives that will positively catalyse the growth and developmental impact of the sector.  We hope that this collaboration will result in higher levels of trust in the sector so that we can build a culture of pragmatism and progress.

We also cannot ignore that there are huge transformational and legacy challenges but this should not stop us from developing a better mining sector. It is foolish to suggest that because mining companies have charter obligations we should not provide support and be responsive to their concerns so that they can over-deliver on their commitments. 

Before the main Phakisa Lab in October this year, we must develop a precise scope for the four week Lab.  If the scope is too ambitious and broad, we may end up achieving nothing as we try to bite off more than we can chew.  However, if the scope is too narrow and unambitious we need to ask why we are investing so many resources to achieve so little. 

It is up to you and our stakeholder partners to find the right balance.   

Partnership is a two way street.  We cannot expect the private sector to deliver on their obligations, if the state does not deliver on its part of the deal.  While there is clearly some controversy around the extent to which the mining sector is delivering on its charter and other obligations, we need to reflect on the extent to which the government is providing a policy and regulatory environment which enables the growth of the sector and the delivery of these obligations.

The purpose of this workshop is to reflect on government’s role in supporting or inhibiting the achievement of the state’s economic and developmental objectives.  If government does not deliver on those obligations that are entirely in government’s control, how can we point at the private sector for not delivering on their commitments? This is going to require special reflection on the following areas;

Firstly, is our policy and regulatory environment coherent?  In other words, is there a clear understanding of government’s priorities and objectives for the mining sector across different government departments and agencies and does the policy and regulatory environment reflect these priorities? To what extent are the policies and regulations across different departments in conflict with one another?  While it may appear that different policies when viewed in isolation are appropriate, does the agglomeration of policies and regulations in the sector create a paralysing morass?  What political decisions need to be taken to enable greater alignment?

Secondly, is our regulatory oversight of the sector being efficiently administered?  In other words, we need to identify areas of administrative inefficiency in the regulatory over-sight of the mining sector that is inhibiting investment in exploration and mining and reducing the ability of the sector to deliver on government’s developmental objectives. 

Are we providing an efficient and effective regulatory regime?  To what extent have certain departments or regulators become the weak link in the chain through delaying the provision of licenses as a result of internal inefficiencies?  Are we responding timeously to stakeholders when they report problems in the administrative process? And finally, what political decisions need to be taken to enable greater administrative efficiency?   

Thirdly, what are our key priorities for transformation of the sector and how do we achieve this is a pragmatic fashion that takes into consideration the constraints and challenges faced? Transformation is not only about changing ownership but about changing the way industrial relations work in sector for instance – the 2014 platinum strike action was felt many months after it had ended – we cannot continue industrial relations in an extreme adversarial fashion.

Is transformation not about creating sustainable communities and working together to ensure we grow and not prohibit mining? Is transformation not about ensuring better health and safety for workers and communities, for example?

Today, we have asked stakeholders from industry, labour and civil society to present later to this workshop. Sometimes stakeholders provide inputs that are hard for some amongst us to hear and it is only human to develop defences so that these stakeholders are not heard.

It is critical that you listen carefully to them and do not dismiss some of their perspectives because “all they want to do is make money – they don’t care about anything else”. This attitude makes the listener feel safe and morally smug whilst in reality the listener is in a cocoon of denial. 

If they do not make profits we will not achieve our investment and employment objectives. Similarly we should not be dismissive, if labour for example says that we need to see more radical changes to the industrial relations environment.

All the stakeholders that present during the workshop are our partners – we need to hear their concerns and seriously engage with the substance of what they are saying.

Einstein observed that the definition of insanity is doing the same thing over and over again, but expecting different results.  The purpose of this workshop is to identify those areas where we need to change so as to get different results. 

I wish you the best of luck in your deliberations.

Thank you.

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