The South African Civil Society Information Service

The Missing Dimension in the Fracking Debate: How We Are Not Dealing with Greed and Shady Deals

By Saliem Fakir · 11 Jun 2012

Fracking has become so fractious that our Minister of Energy, Dipuo Peters, has even resorted to religious metaphors to sell the idea to the South African public.

She is reported to have said in parliament that she prays daily that the cabinet decision on shale gas exploration is positive. In a desperate attempt to create a saintly feel for fracking, she remarked:

"It would be wrong for us to not use the resources that God left us with. This is a blessing that God gives us, and we need to exploit for the benefit of the people.”

Piety rules the day over astuteness and prudence.

The thing is if one considers gold and platinum, South Africa already has bountiful blessings. However, we don’t seem to be exploiting these very well at all for the benefit of ordinary South Africans. So why would things be any different with shale-gas, if there was any to be found under the Karoo?

Turning this issue into a feel good phenomenon doesn’t help tame un-Godly greed that lurks in the shadows. Resources are only a gift, if they are not squandered. Citizens must feel confident that their government is up to the challenge of managing resources in the best interests of the populace.

One of the key challenges for all governments sitting with resource endowments is the distribution of resource rents to the populace who rightfully feel that what is of their soil also belongs to them.

Our rich endowment of minerals has largely been a one-sided affair. A minority has prospered from these riches and the pattern seems set to continue.

The exploration of shale-gas in South Africa must also be viewed against a larger backdrop: The lack of a sound resource-use and beneficiation system and a history, which has been littered with misappropriations and the exploitation of labour.

In sub-Saharan Africa alone – based on a sample of 40 countries – capital flight, mainly from the extractive industries, was estimated to be about $420 billion between 1970-2004. Some put the figure higher. Perhaps the UN High-Level Panel on Illicit Financial Flows from Africa, which former President Thabo Mbeki is chairing, will put better figures on the table.

Irrespective, Africa, as a result, is shown to have the highest proportion of liquid assets held abroad compared to other regions, little of which is used to develop the continent.

In a paper co-authored by Ben Fine, Sam Ashman and Susan Newman titled, "Amnesty International? The Nature, Scale and Impact of Capital Flight from South Africa", the authors argue that during the post-apartheid era, capital flight has increased for South Africa, peaking at around 20% of GDP in 2007. The majority in the form of transfer pricing mechanisms mainly between multinational mining companies and their subsidiaries overseas.

Transfer pricing is illegal, as it involves a strategy of “mis-invoicing” and tax evasion in order to increase the profitability of corporations. In Africa, it is made all the easier because of weak institutions and poor tax enforcement. Despite South Africa having a strong taxman, transfer-pricing practices are still rife, especially in the mining sector.

The push for fracking in the midst of suspicious behaviour, if media reports are true, makes opening up shale-gas for exploration all the more premature. Media reports contend that an ANC trust - the Batho Batho Trust - could be a significant beneficiary of shale-gas proceeds.

All this lobbying behind the scenes of key decision-makers has the hallmarks of a Gautrain like ‘capture plan’ being set in motion for shale-gas exploration where certain companies and individuals will benefit.

The intersection between politics and business is common in South Africa and has been for a long time.

One just has to look at how the politically connected Imperial Crown Holdings, using insider knowledge, was able to sneakily secure Kumba Iron Ore’s unconverted mining rights for itself, which it subsequently tried to sell off to Arcelor Mittal for billions, with little effort, but the deal eventually fell through.

Securing resource rents partly for the state and partly for a political party thus becomes an exercise in raw power rather than one in popular welfare. Distrust between government, labour and business also ensures that there is no national accord on the governance of our natural wealth.

If anything, a culture of corrosive short-termism prevails.

Low social solidarity itself not only promotes domestic rent seeking, but also capital flight from investors seeking quick returns with no long-term obligation towards building a sustainable national economy.

Other countries are managing their natural resources more prudently than South Africa.

Chile, for instance, has established a stabilization fund to take advantage of its mineral wealth. The fund earns proceeds when copper prices are doing well and stabilizes government revenues and expenditure when copper prices are low.

In Norway, a more conservative rule called the Bird in Hand (BIH) rule is applied. All returns on oil and gas revenue go into a fund. The real rate of return to the fund, based on annuity income, sets the upper limit in which a fiscal deficit can be set. If the real rate of return is 4% of GDP, the fiscal budget deficit is aligned with the real rate of return from the fund.

In Bolivia, hydrocarbon endowments are shared with citizens through a scheme called the Renta Dignidad, which is a universal pension derived from a Direct Hydrocarbon Tax raised from the export of gas. Renta Dignidad is paid to all Bolivians over the age of 60.

Here in South Africa, judicious and transparent management of our natural wealth is the missing picture in the fracking debate. Thus far we have had few guarantees that proper oversight will prevail. This is evident in the way prospecting rights have been granted.

In many countries hydrocarbon rights are a subject of public tender. But in South Africa, despite mineral rights being firmly in the hands of the state, we are still governed by “free mining” principles, which promote a first-come first-serve approach versus a price discovery and auction approach.

With respect to new gas deposits, multinationals are more likely to have an information advantage over the state. Tendering or price discovery would allow the state to rectify some of information asymmetry – although not entirely.

The tender process itself should set strong safeguard criteria. Companies should not be vetted on promises, but their historical track record. These records should be subjected to proper due diligence. None of this is currently the case with shale-gas.

The government’s negotiating position is further weakened by the fact that it has no clear strategy on how to deal with the exploitation of strategic minerals and hydrocarbons. Any threat of foreign disinvestment or playing the “jobs” card forces it to buckle under pressure.

Having a resource that is already owned by the state gives it negotiating power, but our government seems incapable of using it for our collective advantage.

The rush and frenzy for resource exploitation creates a paradoxical situation: blessings can turn into curses.

Prayer and flirtations with religious metaphors are mere devices of hyperbole and do nothing to instil confidence that we are at the top of our game. Rent seeking and private manipulation must be controlled. To achieve this and ultimately to protect our national welfare, we need sound political systems and state institutions as well as certainty in policy decision-making. South Africa would do well to learn from the examples of Norway, Chile and Bolivia.

Editor's Note: This article was corrected at 12h50 on 14 June 2012. It had originally incorrectly stated that the deal between Imperial Crown Holdings and Arcelor Mittal was successful. However, negotiations between the two companies failed.

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