Dig a Little Deeper

Israel L. Noko (LL.B, PGCert) is the Founder and CEO of NPI Governance

Consulting, a leading B-BBEE Advisory and ISO9001 accredited

consultancy. He passionately supports B-BBEE and social entrepreneurship

as he believes it is the cornerstone of economic transformation in South

Africa. His focus is on developing and executing ‘business sense’

transformation strategies that lay the foundation for organisations to

transform organically. Over the past decade, Israel has built a wealth of

knowledge across most business sectors in South Africa and has a solid

reputation as an accomplished professional in the B-BBEE Arena

The Mining Charter III

It was inevitable, following democracy in 1994, that the South African Government would endeavour to redistribute the wealth and ownership of the

Mining Sector. In an effort to pave the way for economic transformation, the Mineral and Petroleum Resources Development Act 2002 (MPRDA) was

promulgated on 10th October 2002. However, it only became effective on 1st May 2004, with much resistance from both local and international

investors. In September 2010, the MPRDA was amended by the then Minister of Mineral Resources, who published a document entitled the

Amendment to the Broad-Based Socio-Economic Empowerment Charter for the South African Mining and Mineral Industry. These documents, read

together, are referred to as ‘The Mining Charter.’ The first version of The Mining Charter (The Charter) followed on 13th August 2004 as set out in

section 100(2)(a) of the MPRDA.

Renewed world economic growth following the global economic crisis just over a decade ago has resulted in higher demand for commodities,

indicating that, over the long-term, the Mining Sector will recover. In the latter part of 2017, uncertain policies resulted in a loss of investor

confidence in the sector, causing costs to rise dramatically, and a loss of global competitiveness. In September 2018, the Minerals Council of South

Africa estimated that the mining sector’s share in the South African economy stood at 6.8%, marginally down from the 7% of overall gross domestic

product (GDP) recorded in 2016. Growth resumed from the dismal decline of -4.3% in 2016 to an expansion of about 4.6% in 2017, contributing

R335 billion to GDP.

Due to higher mining production, it is estimated that employment increased by 1.6% to 464,667 during 2017. This increase finally arrested the rate

of job losses, which stood at 30,000 jobs between 2014 and 2017. Mine employment represents 6.1% of private non-agricultural employment and

4.8% of total non-agricultural employment. The sector contributed R80.9 billion to fixed investment in 2017, which constituted DRDGOLD – Gold

pour 18.2% of private-sector fixed investment and 10.8% of the country’s total fixed investment for the year. In the decade between 2007 and 2017,

the sector’s fixed investment had a downward trajectory.

The recovery in fixed investment is a sign of better prospects for the sector, but it still hung in the balance at the end of 2017. The sector exported

R307 billion worth of produce, which is 27% of the country’s R1.1 trillion export book. The 10% strengthening of the Rand against the US Dollar in

2017 adversely affected the Rand receipts for exports. On a US Dollar equivalent basis, exports increased by 16.1%, but only by 7% in Rand terms.

In the 2016/17 fiscal year, the sector paid R5.8 billion in royalties, representing a 56% increase on the previous year. The sector paid R16 billion in

taxes over the same period1

.

President Ramaphosa’s cabinet reshuffle in early 2018 saw Gwede Mantashe appointed as Mineral Resources Minister, which was seen as a ‘first’

as he is the only minister since 1994 who worked in a mine. This new appointment followed delays in finalising The Mining Charter III (The Charter

III) and the MPRDA during Mosebenzi Zwane’s tenure as Minister, which resulted in a breakdown in communication and legal intervention with the

sector councils. Therefore, the mandate of Minister Mantashe to finalise The Charter III, as well as restore confidence and create certainty in the

sector, was no mean feat.

The Charter III was gazetted on 27th September 2018. At a media briefing, prior to the Gazette, Minister Mantashe revealed that The Charter III

would not please all stakeholders, but in its current form would be a foundation for transformation and growth, taking into account that the sector is

a national economic imperative. The quick turnaround between the appointment of Minister Mantashe and the Gazette is evidence that part of the

Minister’s mandate was to get The Charter III in motion in an effort to get the mining sector on track, create regulatory certainty and get investments

flowing into the sector.

The long-awaited Charter III Implementation Guidelines were gazetted on 19th December 2018, when most companies had closed down for

the festive season holidays. The September 2018 Broad-Based Socio-Economic Empowerment Charter stipulates it must be read together with

Implementation Guidelines.

The highly anticipated Implementation Guidelines were finalised and published under Government Notice 1399 as Gazette #42122 - Implementation

Guidelines. The 54-page document outlines the formulas and tables, as well as the requirements for mineral rights holders. The Charter III compels

the mining sector to implement the following elements:

> Ownership;

> Mineral beneficiation;

> Procurement;

> Supplier and enterprise development;

> Human resources development;

> Mine community development;

> Employment equity; and

> Principles for housing and living conditions standards

Mine Communities

The Charter III was welcomed as a ‘consensual’ step forward in

creating certainty in the sector. However, it has left gaps in the

interpretation of the inner workings of mine communities. At a time

when community protests around mining operations are regular and

subsequently impact mining activities, the issue of mine communities

needs to be clarified. The Bench Marks Foundation lead researcher,

David van Wyk, stated that out of 14,740 crowd-related incidents

taking place annually in South Africa, approximately 35 of these

protests take place in mine communities monthly. This outcome

means that 2.8% of all service delivery protests are mining-related.

Furthermore, data compiled by Anglo American Platinum and

reviewed by Reuters reveals that from the beginning of 2016 until April

2018, the eastern limb of the platinum belt in the South African mining

sector was hit by more than 400 incidents of social unrest.

In 2018, Statistics South Africa (Stats SA) reported that the second

quarter employment figures in the sector declined by 69,000 jobs, a

staggering 35,000 more than for the same period in the previous year.

The sector continued to shed jobs over four consecutive quarters with

2,000 jobs lost. These protests are, more often than not, linked to

community protests against mining companies for not improving the

quality of life of communities where they operate.

Investment in Mining

In the latter part of 2018, President Ramaphosa was working tirelessly

to stimulate economic growth. He announced a stimulus package,

chaired a Presidential Jobs Summit where 275,000 jobs were

pledged, and hosted an Investment Conference which yielded R290

billion in investment commitments. These collectively bring South

Africa one step closer to achieving its target of securing $100 billion in

investment over the next five years.

These efforts resulted in investment announcements from

companies representing sectors such as forestry, manufacturing,

telecommunications, transport, energy, agro-processing, consumer

goods, pharmaceuticals, infrastructure, financial services, energy, ICT

and water. Mining companies Anglo American, Bushveld Minerals,

Vedanta Resources and Ivan Plats, further committed billions of Rands

for investment in the local mining sector.

Therefore, the gazetting of The Charter III couldn’t have come at a

more appropriate time to create certainty in the sector. Besides, the

MPRDA Bill, which has been subject to legislative processes since

2013, has been withdrawn – much to the delight of the mining sector.

Mine Community Development

Despite Social Labour Plans and Corporate Social Investment

(Community Development Plans), many in the sector merely

tick-the-box and do not follow through on the overall impact of their

community involvement. A requirement in The Charter III is that a

minimum of 5% non-transferable carried interest or a minimum 5%

equity equivalent benefit must be made available to host communities

from the effective date of a mining right.

Mantashe stated that the non-transferable carried interest, referred to as

a free carried interest in the previous draft of The Charter, was not free,

but carried by the empowering partners who would be financed by the

development of assets over time.

This interpretation is probably a relief for the sector, as the free carry

concept was heavily criticised by the sector at large, as it would have

translated into free-carried shares that would consequently make new

projects much tougher to finance.

However, the meaning of non-transferable carried interest needs

to be clarified. While the minister endeavoured to clarify the

non-transferable carried interest for communities, it remains unclear

how this will complement or be an additional obligation to mining

companies. One must bear in mind that such investment was already

made to Community Development by adherence to the Social Labour

Plans for communities, which is an obligation under the MPRDA.

Mining companies should note that The Charter III stipulates that a

mining right holder shall ensure that any reduction in the shareholding of

existing shareholders through the issue of new shares shall not reduce

qualifying employees or host communities’ carried interest or equity

equivalent benefit.

Another interesting aspect in this area is how the 5% non-transferable

carried interest must be managed on behalf of communities. The

Charter III states:

> The equity equivalent benefit of 5% shall be housed in a Trust or

similar vehicle for the benefit of the host community at no cost. It

must be administered in line with applicable legislation for the

duration of the mining right.

> The Trust or similar vehicle shall consist of representation from

host communities in the form of community-based organisations

and traditional authorities, to name but a few, as well as mining

companies;

However, care must be taken that Trusts are created in line with the

obligations and responsibilities outlined in The Charter III:

> Municipalities, host communities, traditional authorities and

affected stakeholders, identify host community development needs

and fund distribution and governance of the equivalent equity benefit;

> A host Community Development Programme approved under this

element shall not replace Social and Labour Plan commitments as

contemplated in the MPRDA or the quality of life of communities

where they operate.

The consequence of a Trust created outside proper corporate

governance requirements may result in community mistrust, which

may give rise to protest action. With The Charter III introducing equity

equivalent for community participation, such protests would be directed

at mining companies and government alike.

Another unhappy stakeholder may be community organisations, in that

they were not sufficiently consulted during the revision process of The

Charter III. It remains to be seen how mining companies will respond

to the amendments. Only time will tell the actual role played by tribal

authorities and municipalities, especially the smaller ones.

The implementation of and adherence to The Charter III is not only the

responsibility of the sector, but the Department of Minerals Resources

officials who must be fully versed on the new requirements. All being

well, this could lead to addressing the corruption challenges surrounding

the sector.

Localisation and Procurement

Local content can trigger and bolster home-grown Enterprise and

Supplier Development. The issue at hand is whether we have reached a

stage in South Africa where we are comfortable with our local

home-grown suppliers. Are we able to replace or reduce foreign

suppliers to create local jobs and business opportunities?

The government, through The Charter III, outlines the reason for the

procurement of South African manufactured products and services,

highlighting that it provides opportunities for expanding economic

growth, job creation and an opportunity to increase market access for

home-grown products or services.

According to The Charter III, a minimum of 70% of the total mining

goods procurement spend - excluding non-discretionary expenditure -

must be allocated to South African manufactured goods.

> 21% spend on South African manufactured goods produced by

‘Black’-owned and/or controlled suppliers;

> 5% spend on South African manufactured goods produced by

‘Black’ Women or Youth owned and/or controlled suppliers; and

> 44% spend on South African manufactured goods produced by

B-BBEE compliant suppliers.

Compliance with procurement targets must be achieved progressively

over a five-year period, as outlined in the transitional arrangements.

Mining companies have six months from the date The Charter III was

published to submit this five-year plan, indicating the progressive

implementation of the procurement targets. Although meeting these

targets will benefit home-grown suppliers, it begs the question as

to whether this a realistic timeframe and whether the Department of

Mineral Resources can monitor the process.

The procurement challenges in the mining sector are that it is a highly

regulated sector. Due diligence on new suppliers comes at an enormous

capital cost, for example, environmental assessments, exploration,

heavy mining equipment and mining infrastructure development.

Will the home-grown supplier have the capacity, infrastructure or capital

to become a preferred supplier to a mining company?

The Government and the mining companies will have to collaborate and

determine how the procurement targets can be practically implemented

and the challenges ironed out. However, two solutions were put forward.

1 What the Department of Mineral Resources has come up with

is for mining companies to promote economic growth through

the development or nurturing of small, medium and micro-enterprise

suppliers of mining goods and services. In instances where a mining

right holder procures products and services from a contractor

to undertake extraction or processing - crushing and concentration

- of minerals on their behalf, such goods and services will be

deemed to have been procured by the mining right holder.

Although this will help in achieving procurement targets, reviewing

all existing contracts will be time-consuming and require extra

resources to execute the process adequately.

Although The Charter III is not applicable to suppliers outside the

mining sector, it will have an impact on purchasing decisions

throughout the supply chain of mining companies.

Essentially, all existing supplier contracts would need to be

re-evaluated. However, it must be taken into account that some

suppliers have long-term contracts which do not meet the

requirements of The Charter III. These requirements could lead to

contractual disputes with penalties applicable due to early

cancellation, possible litigation and the probability of disruptions in

productivity.

2 Mining companies could develop home-grown suppliers

through Original Equipment Manufacturers (OEMs) as prescribed

in the Implementation Guidelines. Currently the government,

through the Department of Trade and Industry, introduced the

‘Black’ Industrialist Incentive Programme aimed at unlocking the

potential of ‘Black’ Industrialists operating in strategic and productive

sectors of the economy through deliberate, targeted, well-defined

financial and non-financial interventions.

The ‘Black’ Industrialist Incentive Programme thus far has had an

investment of R11.1 billion in 128 projects. Hopefully, with The

Charter III procurement targets, this will encourage the development

of more home-grown suppliers that meet the sector’s needs. The

South African Capital Export Council (SACEC) and South African

Minerals Processing Equipment Cluster (SAMPEC) are other

platforms that could assist in promoting and boosting local

manufacturing interests.

Global Trading Regulations

The Charter III contains local content requirements for Enterprise

Development, Supplier Development and Preferential Procurement.

However, in obtaining them, one cannot overlook the possibility that

South Africa may be contravening the World Trade Organisation (WTO)

Rules

In the multilateral trading system under the WTO, the most relevant

agreements on the compliance with Local Content Requirements

(LCR) are the General Agreement on Tariffs and Trade (GATT) and the

Agreement on Trade-Related Investment Measures (TRIMs).

The TRIMs agreement prohibits the use of LCRs that require a

specific percentage or quantitative target of local goods purchased

by organisations. It has trade-balancing requirements that restrict the

volume or value that an organisation can import to an amount related to

the level of products it exports.

According to the WTO, by their nature, local content requirements

emphasize preferential treatments for local suppliers vis-à-vis foreign

goods and services providers. Therefore, this may be viewed by many

countries as protectionist measures.

Members of the WTO, which include South Africa, are therefore

required to adhere to the rules under GATT and TRIMs. Not doing

so may well subject them to a challenge - through domestic court

processes or international dispute resolution systems - for failing to

comply with international investment and trade law obligations. If these

local production targets are contested under the international dispute

resolution systems, South Africa will not be the first to be brought under

such scrutiny.

Many developing countries, including Tanzania, India, Nigeria, Indonesia

and Brazil have implemented legislation and guidelines that provide

preference to local suppliers. The Tanzanian government recently

enacted the Local Content Regulations GN 3 of 2018 to address its

challenges in their mining sector. Not only does it force licensees and

contractors to use indigenous Tanzanian companies for the procurement

of goods and services, but it requires a physical presence in Tanzania.

In 2016, a WTO panel ruled on a US dispute against India concerning

the use of local content requirements in the context of the Jawaharlal

Nehru National Solar Mission (JNNSM) energy scheme. In the initial

phases, solar power developers were required to use certain types of

solar cells and modules manufactured in India for power generation

projects to ultimately sell that electricity to government agencies under

a long-term agreement at a guaranteed rate. The US complained that

these domestic (local) content requirements violated India’s national

treatment obligations under GATT and the TRIMs Agreement. The WTO

panel found that India’s local content requirements are trade-related

investment measures that violate the national treatment obligations

under the TRIMs Agreement and the GATT.

Promoting the use of more efficient, best price available intermediate

goods in global markets for a country’s manufacturing needs, is the

economic assumption underlying this WTO obligation.

In conclusion, following President Ramaphosa’s drive to attract

investments, we as a nation need to be circumspect about how these

investments will flow into the economy to bring us out of recession.

However, Government will have to concurrently ensure that all mining

companies comply with South Africa’s regulations that govern how they

operate in this country