20 Feb 2014
Talking about the nationalisation debate in relation to the mining industry in South Africa, black economic empowerment (BEE) expert Duma Gqubule explains that the value of untapped mineral resources in South Africa’s is US$4.7 trillion. Put differently, the value of these mineral resources is worth one million Rand per South African citizen. Gqubule argues that the mistake our country made in relation to BEE was to set a target of 25% for black people. By definition, a black empowerment transaction will only benefit a few black people. There has to be more that you take from this industry for the country as a whole, he contends.
Duma Gqubule is founder of KIO Advisory Services. He is interviewed by Fazila Farouk of SACSIS.
Transcript of Interview
FAZILA FAROUK: Welcome to the South African Civil Society Information Service, I’m Fazila Farouk in Johannesburg.
The issue of nationalisation has surfaced again in mainstream debates in South Africa in the run-up to South Africa’s 2014 general elections. Now much of that debate is being driven by the media’s reaction to Julius Malema’s new political party, the Economic Freedom Fighters. The Economic Freedom Fighters are calling for the nationalisation of South Africa’s mines and banks.
Now the nationalization debate is not a new debate here in South Africa. While nationalization is not a policy of the ruling party in South Africa, it certainly was something that the ANC called for way back in 1955 when it drafted its Freedom Charter.
And, despite the troubles currently being faced by trade union federation COSATU, nationalization of the mines is also something that COSATU has been talking about for the last few years -- showing support for it. More recently metal workers’ union NUMSA - very much in the contested alliance politics spotlight - has also become more vocal about nationalizing South Africa’s mines.
Why is nationalisation such a perennial topic for discussion in South Africa?
Well if the Marikana massacre has shown us anything it’s that the mining sector remains largely untransformed. Despite our government’s policy of Black Economic Empowerment, ownership of South Africa’s mines is still very concentrated in a few hands and the model for extracting natural resources is still very much based on Apartheid era labour practices where huge numbers of poor black men are still engaged in a migrant labour system in the mining industry where they earn very poor wages.
So how can we turn this situation around? What can we do in South Africa such that we arrive at a situation that the extraction of mineral resources in this country actually benefits the widest (majority) of South Africans in the country?
To help us answer this question we’re talking to Duma Gqubule.
Duma is a Black Economic Empowerment expert in South Africa. He knows a lot about the mining industry and he’s going to bring his formidable knowledge to bear on this debate on nationalisation in South Africa.
Thanks so much for joining us today Duma.
What I wanted you to sketch for us first is, kind of give us a sense of the mining sector in South Africa -- what is the status of it at the moment? What are the kinds of key natural resources that South Africa has? Which are the mining companies operating in the country and you know, what are the mining ownership patterns in the country?
DUMA GQUBULE: Thank you.
The starting point about the mining industry as to why the debate on nationalisation will never go away is that mining is an industry like no other industry.
I will explain what I mean.
The value of the mineral resources in the ground is US$4.7 trillion. It was valued two years ago by a company called Eco Partners. Now that figure is almost double the previous estimate that was done by Citi Bank of 2.5 trillion. Now Eco Partners has criticized that valuation as very conservative and they’ve come up with a figure of US$4.7 trillion. Now what that means is that the value of these mineral sources is R1 million per citizen of South Africa.
Now the most important thing in this debate we should remember is that the mineral resources under the ground do not belong to the companies that mine it, they belong to South African people. In most countries in the world the fact that you have a mineral resource under your garden does not mean that you own it. So that is in the custody of the state.
So because it is publicly owned, unlike a restaurant or a construction company or any other industry, it must generate additional returns for us as a country in addition to normal tax resources. So let me just explain this a bit more.
Our mining industry - when you extract minerals from the ground you’re making all of as South Africans poorer. So the companies that extract the minerals must compensate us as a country for making us poorer. So that’s why we have other systems of taxes in the mining industry that you don’t find in other industries. So that is for me - is a key issue that people should remember that the mineral resources do not belong to the multinationals that mine it. It belongs to us as South Africans and it is our right to get a fair share of returns from the mining.
You asked a question, just summarise our industry. We’ve got platinum, we’ve got coal and I think those…and iron ore. Those are the three major minerals that we have in South Africa. Coal, platinum -- sometimes coal is bigger than platinum and depending on the year, but those are the three main minerals.
Now in terms of the companies; there’s about twenty large companies that account for 90% of production. In iron ore there is one company that accounts for 40% of production. So it’s a very monopolised industry amongst very few players. In platinum, there’s three players that we all know about in South Africa right now.
So there’s about twenty companies that extract the majority of our mineral resources. On the Johannesburg Stock Exchange the value of these companies, I think is about R2 trillion and these are multinational companies and that have assets throughout the world, in Africa and the rest of the world.
So the portion of the market capitalisation that refers to South African assets roughly a half of that R2 trillion relates to South African assets. So we might be talking about a R1 trillion depending on the value of the stock exchange.
Now within that, as South Africa we came up with a new Mineral Resources Development Act in 2002. Now what the states did is to say that we will cancel all the licences that you previously had. We’re going to start new rules. Now the new rules was that we will give you the licences of you can prove that you can do XYZ in terms of empowering South Africans -- black South Africans, historically disadvantaged South Africans in the case of the mining industry.
Now the headline demand was for 25% ownership by black people and by the year 2014, which is this year and quite sadly we have not receive…we have not reached anywhere near that figure. Now just to unpack…
FAZILA FAROUK: What have we reached?
DUMA GQUBULE: Okay, in broad terms what I’ll say is that the figure that we did a few years ago hasn’t really changed.
The value of the assets I think is about 5…Of the 1.8 trillion it’s about 5% of the JSE’s market capitalisation is owned by those…by the black companies. But if you strip out the foreign assets, you come to a figure of about 8% of the JSE is black…of South African mining assets are black owned.
Now of that 8% or the 5% whichever way you want to look at it, 66% is owned by three companies. The three companies are African Rainbow Minerals with roughly - give or take - R20 billion, second is Impala Platinum. It’s owned by the Bafokeng tribe and they…they…it’s a long story of a vision of an African leader, chief a 100 years ago who…it took a long time for them to earn this ownership. Its got nothing to do, very little to do with the government’s policy. And the third one is Exxaro, which was a company that was set up by Anglo American to escape competitive issues. So they are mostly in coal, African Rainbow Minerals is a diversified company and Exxaro is a…I’m sorry the Bafokeng are in platinum mostly. So those are…that is the situation.
Now what I argue about is that…let’s start…is that enough? What we’ve learnt now is what we’ve done in terms of our mineral policy - I do not believe enough. There are huge gaps in terms of the policy that we have, the Mineral Resources Development Act.
The first thing is that - let’s start with the whole issue of tax. The industry paid about, I think in the State of the Nation address, Jacob (Zuma), the president said it was about R20 billion in taxes. That is 0.1% of total state revenue.
Now if you look at the mineral endowment, which is R4.7 trillion and then you look at the taxes that are paid - R20 billion - I would argue it’s a pittance in terms of the return that we’re getting as a country. And you shouldn’t really count that tax because this industry should be generating, in addition to normal tax revenue that applies to other industries.
So what the situation is, we also have royalties, which I think they generate about R5 billion and I would argue that we still have to do more.
What you’re seeing in local communities is many local communities are complaining about the lack of benefit of this industry for the local people and also the employees are complaining about the lack of benefit for employees.
So my argument is that we have to tear up this Mineral Resources Development Act. It’s under review currently and there’s a few principles that we have to put into this new Act as we review this charter in 2014.
So this discussion is very timely. I think we made a wrong decision to make the only requirement black empowerment because black empowerment is a policy that applies to all companies in South Africa. It shouldn’t be anything specific to the mining industry. So, I would argue that the mining industry must do more than black empowerment.
Now, so what I’m trying to say is that the other thing is that the benchmark for black empowerment in the mining industry is much, much lower than the rest of the economy for reasons that I won’t even explain. But the mining industry has achieved very little in terms of black empowerment.
For example, if you look at employment equity, we’ve done an analysis of all sectors of the economy. In fact it’s done by the Employment Equity Commission and it shows that mining is consistently the worst performer in terms of employment equity. And most companies in South Africa even the ones that are not transformed manage to achieve a lot in terms of black representation in junior management. The mining industry can’t even achieve that.
I looked at the figures on ABET, Adult Basic Education and Training. About half of the industry, of the people in the industry, they are functionally illiterate.
FAZILA FAROUK: In the mining industry?
DUMA GQUBULE: In the mining industry. They’re below ABET level four. But the industry the last time we looked, they’d only trained about 6000 people to the level of ABET level four.
FAZILA FAROUK: And how many people roughly are employed in the mining sector?
DUMA GQUBULE: In the mining sector it’s about…I think it’s about 400 000 people. About half of them don’t..half of them are functionally illiterate, they haven’t reached ABET level four, and only 6000 of them have been trained by the industry that was when we did our research a few years ago.
So those are the figures that when you see Marikana, you begin to understand why the people are…the majority of the workers in Marikana will never ever be in junior management.
So that has just given me….so the main thing …
The mistake about the black empowerment policy that we made is to say it is enough to just give 25% to black people and I argue that is not enough. And the reason I say it’s not enough is this is a publicly owned asset. It should benefit everyone.
By definition a black empowerment transaction or whatever, however you say it, will benefit a few black people. So there has to be more that you take from this industry for the country as a whole.
So I would argue, in terms of what we’ve learnt over the last 10 years of this Mining Resource Development Act, as we tear it up, as we should do, is that there are certain things that we should do. In that 25% black ownership portion, we should stipulate targets for employees and targets for communities.
So, what I’d say is that 10% must be for employees. Or a certain percentage, a fixed percent, must be for employees and a certain fixed percent must be for communities. That’s number one. So it can’t be just amongst the black business consortium, it must benefit the local communities as well.
So the second thing I’d say is that we have to have a state portion of that as well in addition to the 25%. So I’d argue that it should be about 25% as well - the state portion - what you take back on behalf of the people of South Africa. And that is what I’m arguing at the moment.
FAZILA FAROUK: And what about people that work in the mining sector themselves? I mean post-Marikana there’s been lots of industrial action in the mining industry -- people demanding higher wages. What are your views on that?
DUMA GQUBULE: Okay.
What I’ve just said is that I think that a portion should be kept for the employees, as share ownership schemes, but it’s not a solution. But the thing when I looked into the whole issue of the mining industry is that wages count for about 18% of the total industry costs. So I think it’s a bit simplistic when you want to cut costs, to just look at wages when there’s another 82 - is it 82% - that has got nothing to do with wages, the cost structures.
I think as a country, as a resource country, we have to have a view on the exchange rate because a resource country has to have a weaker exchange rate. And generally what happens in resource countries is that there’s a lot of capital that comes into the country, into the resource sector, and it results in an overvalued exchange rate.
So what we need to do -- I think our system of monetary policy, as a country is archaic. We have one tool, which is the interest rate and one target, which is the inflation rate. But the best practice amongst developing countries is to use multiple tools and multiple targets for monetary policy.
So I think that we have to have a discussion because the wage…when you say something is not affordable, you are talking about…at a particular exchange rate. And what we’ve seen recently is that the exchange rate is depreciated, so it should have, in theory, made things a bit easier for people to bear the costs that they’re having but the Reserve Bank has now started to increase the interest rate, which is another effect. Without justification I may add.
FAZILA FAROUK: So you’ve talked about what you think we should be doing here in South Africa, but can you talk to us a little bit about international experiences? What’s best practice in other parts of the world where countries have formidable natural resources?
DUMA GQUBULE: Okay, I would say I’ve done a lot of case studies, I think about 12 countries throughout the world over the past few years.
And I think that the South African situation is really -- let me just put it this way: Outside of the Anglo-Saxon countries, England, United States, Australia and Canada, state ownership is the norm.
Eighty-eight percent of oil is owned by national oil companies; it is not owned by Shell and BP. It’s owned by the national oil companies in Mexico, in Saudi Arabia, in Venezuela and so on. So it is, I would say in mining, the figure is about - I can’t remember – it’s about 30% in mining or less than 30%, in terms of state ownership.
So I would argue that state ownership outside of the Anglo-Saxon world is the norm throughout the world and we should start talking about it.
Now in terms of getting the benefits for the people, there are many models okay. There are royalties, there are production sharing contracts, there are state ownership. And what I would like say is that what we did in South Africa, you can’t put state ownership off the table, as a mean of extracting rent from the industry - off the table - because state ownership is more effective than taxes in terms of extracting rent for the people.
And there are examples of that. For example in Chile they have a mixed model where the state copper company Codelco owns 30% of the copper industry and all the multinationals own 70% of the industry. But Codelco with 30% of the industry generates far more in terms of resources than the 70…the 10 leading companies, 70% of production put together.
And that is just an example of how efficient state ownership -- so Chile in a way is getting the best of both worlds in terms of how their model of state ownership. And if you had to ask me, I would think that for South Africa we should be following a similar model.
But there are extremes. There is Mexico where 100% of every oil…there is no…for 75 years since 1938 when they nationalised their oil industry until December last year, for 75 years, there was no foreign participation anywhere in the oil industry. So Mexico is an extreme example of 100% state ownership and everything flows to the people of Mexico.
So, there’s different models in between the extremes of Mexico and we should talk about countries like Venezuela.
In Venezuela, there’s still quite a bit of public participation and there’s a big myth about Venezuela that it was nationalised by Mr. Hugo Chavez but that is not the case. It was nationalised in 1971, the industry, and it is very popular in terms of state ownership.
So there are various models in many countries around this here.
FAZILA FAROUK: But nationalisation is not a policy of our ruling government and going forward, what are your views in terms of what you think their position would be?
DUMA GQUBULE: I think the current review of the mining charter is an opportune moment to revisit this debate.
And I have to say this to you - the whole issue of state ownership of natural resources; it will never ever go away.
Many of these countries that I did case studies on -- for example, Venezuela discovered oil in 1917. I can guarantee you every year for the past 100 years it is a major issue in their national election and throughout the 100 years of having oil, they went from one extreme of free enterprise…towards state ownership and something in between.
And in all the countries with natural resources, it’s a debate that happens in every single election in these countries. So I don’t think that the debate has happened in the ANC at Mangaung - was it in Bloemfontein - it’s the end of the matter. I do think South Africans from all walks of life must be demanding public benefit for this mineral resource…from this mining industry.
FAZILA FAROUK: Duma Gqubule, thank you very much for joining us at SACSIS.
DUMA GQUBULE: Thank you for inviting me.
FAZILA FAROUK: And thank you to our viewers and listeners for joining us at SACSIS. And remember if want more social justice news and analysis, you can get that at sacsis.org.za.