An International Best Practice Review of the ANC Mining Policy Proposals

t h o u g h t f u l • u n e q u i v o c a l • p r o g r e s s i v e

Private and Confidential

The ANC SIMS Report

An international best practice perspective

June 2012

Eunomix is a UK registered company | Please direct your queries to [email protected] • www.eunomix.com


June 2012

Dear Madams, Sirs

The present report was commissioned by Eunomix to provide a contribution to the debate on the ANC SIMS report and its policy proposals.

It analyses the proposed policy mix and compare it to international best practice for mining regimes. It examines the impact of the proposals were they adopted, and what the resulting international comparative position of South Africa would be. It makes proposals to mitigate some of the negative implications of the proposals while serving the stated goals of the SIMS report.

The views contained in this report do not necessarily represent those of Eunomix.

We hope, however, than the report makes a useful contribution to the policy debates that have surrounded the South African mining industry, and can participate in the search for a sustainable path for the industry.

Yours sincerely,

Private & Confidential

This document was prepared by Eunomix at the request of the client to whom it is furnished. The client agrees that proposals, reports and information received from Eunomix, its representatives or associates, are strictly confidential and are intended solely for the private and exclusive use of the client. Any change and any other use and communication, publication or reproduction of the report or any portion of its contents without the written consent of Eunomix is strictly forbidden. The client agrees to indemnify and hold harmless Eunomix, its representatives or associates, against any damages or claims resulting from such unauthorised use.

Contents Executive Summary ....................................................................................................................................................................... 1

1. SIMS report’s objective ...................................................................................................................................................... 5

2. Success factors in best practice countries ................................................................................................................. 6

1.2. Technical success factors ....................................................................................................................................... 6

2.2. Non-technical success factors .............................................................................................................................. 7

3. Technical and non-technical issues in the SIMS report ....................................................................................... 9

1.3. Success factor: Political stability ......................................................................................................................... 9

2.3. Success factor: Good governance and transparency ............................................................................... 11

3.3. Success factor: Publicly available geological information ..................................................................... 14

4.3. Success factor: Availability of infrastructure .............................................................................................. 15

5.3. Success factor: Availability of labor and skills ........................................................................................... 17

6.3. Success factor: Policy aimed at attracting FDI ........................................................................................... 19

7.3. Success factor: System of mineral rights and regulations ..................................................................... 22

4. State participation in the mining sector .................................................................................................................. 27

1.4. Governance ............................................................................................................................................................... 27

2.4. Macro-economic management ......................................................................................................................... 30

3.4. Financing ................................................................................................................................................................... 31

4.4. Achieving commercial efficiency ..................................................................................................................... 32

5.4. Conflicts of interest ............................................................................................................................................... 33

6. The Proposed Sovereign Wealth Fund .......................................................................................................................... 34

6.1. Transparency and Accountability ................................................................................................................... 36

6.2. Structure and Fiscal Treatment ........................................................................................................................ 37

6.3. Financial Management ......................................................................................................................................... 39

6.4. Payments and Withdrawals, and Fund Management .............................................................................. 40

7. Conclusion ........................................................................................................................................................................... 41

References ...................................................................................................................................................................................... 44

An international best practice perspective into the SIMS report

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© EUNOMIX. ALL RIGHTS RESERVED.

Executive Summary

1. The aim of the ANC is to increase the developmental impact of mining and enhance its contribution to poverty eradication and improvement of the lives of South Africans. Therefore, according to the SIMS report, minerals should not be extracted solely for profit maximization.

2. The SIMS report’s policy proposals are aimed at capturing resource rents and to use those to invest in knowledge and physical infrastructure, thereby industrialising, diversifying, and creating jobs. This way, the mineral sector is intended to be a catalyst to create a competitive economy, which will survive after depletion of the mineral assets.

3. This has been a strategy of many of the best practice countries that now have strong economies and high levels of development. The SIMS report should be commended for acknowledging the fact that the minerals sector does not solely have to be a revenue source, but that it can be used to support broader development goals as well.

4. There are certain technical factors that make best practice countries like Chile, Canada and Norway stand out in the way in which they have managed to use the extractive industries sectors for sustainable development.

5. For example, the countries have good infrastructure, they have a high availability of labor and skills, they have policies in place aimed at attracting foreign direct investment, information on the geology and deposits within a country are easily accessible and publicly available, and the licensing procedure is transparent, predictable and fair.

6. In bad practice countries like the Democratic Republic of Congo and Bolivia, these features are largely missing.

7. When measuring South Africa against these requirements, we see that it often falls in the middle section, somewhere between the best practice and the bad practice countries.

8. When comparing the technical factors needed to harness the mining sector for development against the policy proposal of the SIMS report, we see that all of these features are addressed. The SIMS report proposes to increase infrastructure, invest in labor and skills, attract foreign direct investment, increase information on South Africa’s geology, and it proposes a restructuring of the current licensing process.

9. However, making sure that South Africa can be called a good practice country in the future will require more than just putting in place technical solutions. The two most important determinants of best practice countries are political stability and good governance, referring to transparency, participation, accountability and low levels of corruption. On these non-technical success factors South Africa scores in the middle section again, in between the good and the bad practice countries.

10. Making sure that the mining sector contributes to development, employment and economic growth cannot be achieved by solely focusing on technical issues.


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Applying good practice policies in a country with bad governance will not make a difference, unless the policies address the weaknesses in the political economy itself. For example, creating a sovereign wealth fund with exactly the same regulation and structures as the Norwegian fund in the DRC will not generate the same outcomes in the DRC, simply because the institutions and quality of governance is significantly and inherently different between the two countries.

11. Where governments have a serious commitment to reform and development, policy responses to the challenges of state participation have been positive. The Norwegian political, social and economic contexts stems from a long tradition of transparency and public debate.

12. Therefore, the current political context is critical in determining future outcomes of state participation in the mining sector, and whether or not a state mining company or any changes in the mining regime will contribute to a genuine commitment to reform, development and transparency, or if it will be used to worsen and intensify structures of bad governance already in place.

13. The same is true for signing up to EITI. The majority of countries that participate in EITI are those that value the reputational gains that it brings. In countries with a lack of genuine commitment to transparency and good governance the commitment to the EITI process should be looked at as a reputational issue, and it has not lead to any tangible reforms or policy outcomes. That is not to say that South Africa should not sign up to the EITI, as it will mean that data that has never been in the public domain before will become available for the first time. It should be kept in mind, however, that the results of EITI in terms of broader transparency and good governance will be minimal, and should not replace regular audits, reporting requirements, and oversight of the state mining company.

14. Again, we see the same phenomenon with Sovereign Wealth Funds. SWFs that are owned by democratic governments featuring stable institutions, pluralism, political participation, and a liberal political culture show higher commitment to and implementation of the Santiago Principles. Again, technical solutions such as the setting of resource-based funds will not work unless supportive constituencies will be developed in support of these measure, and the political economy contexts is based on the premises of good governance.

15. The current political economy context in South Africa will influence the outcomes of the proposed policies. The level of good governance, transparency, accountability and participation play a major role in determining the effect of the implementation of the proposed policies.

16. Policies focused on enhanced governance are central to the process. For each of the technical policy proposals of the ANC research team it is key that some non-technical issues are addressed, such as transparency and the availability of information to the public, capacity levels and incentives at the implementing agencies, conflict of interest, and clarity and transparency of decision-making processes.

17. In order to stimulate good governance, the ANC should allow for third-party, parliamentary and judiciary oversight of the mining sector, giving other stakeholders a say in how the mining sector and its benefits should be managed.


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Without a strong commitment to good governance, and a clear outline of ways in which good governance and non-technical issues will be addressed, the SIMS reports are likely to fail in practice.

18. Finally, there are several issues that deserve special attention:

a. Competitiveness of South African companies: Best practice countries have deliberately aimed at making their economy competitive. They have set up a national resource company and have implemented local content policies in order to make these companies and therefore the overall economy competitive in the long run. Such an aim is lacking from the SIMS report. The danger is therefore that a rent-seeking, inefficient public and local private sector is created, protected by disincentivising policies and legislation.

b. Government capacity and coordination: The government will play a key role in the policy packages proposed in the SIMS report. Capacity to administer these new policies is key to their success. Taxation and the specific, predetermined use of revenues, the implementation of local content policies, and the new licensing procedure will require skilled and resourced governmental departments. With a state mining company in place as well, the government might have to put in place extra measures to attract the best qualified and motivated staff, a problem often seen in other countries as well. The ANC’s aim should be to create an efficient, effective, well-resourced and capacitated bureaucracy. Institutional responsibilities amongst the agencies and departments need to be well defined, clearly separated and enforced in practice. Overlapping or conflicting roles, and regulatory gaps, need to be avoided.

c. Diversification and sharing benefits with the broader population: The SIMS report states that its aim is to generate resource rents and ‘capture these for social and economic development’. International best practice shows that, in order to stimulate long term growth and development, revenues are best invested in sectors like infrastructure, education, health, manufacturing, agriculture, etc., i.e. sectors not related to the mining sector. This way, the broader economy can benefit from the revenues generated from mining and they will be invested for long term sustainable development. Additionally, investing in non-resource sectors will simulate diversification of the economy and will contribute to the competitiveness of non-resource sectors. Best practice countries are known for having competitive economies outside of the resource sector, and worst practice countries depend solely on a non-competitive natural resource sector. In the DRC, for example, infrastructure is built only to facilitate export of natural resources, rather with the aim of facilitating in-country connectivity and trade. Much of the SIMS reports are aimed at building capacities in the mining sector, increasing funding for the mining sector, and strengthening the mining sector in general. Even though one of the goals of the ANC research team is to diversify the economy, this will not be reached if the mining rents are re-invested mainly in the mining sector. Best practice countries have managed to diversify away from the natural resource sector, while worst practice countries are overly dependent on the volatile and finite extractive industries sector. In order for the mining


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sector to benefit all South Africans, more attention needs to be paid as to how the resource rents are invested in projects that stimulate long term sustainable development for the whole population, not just a selected few and those employed in the mining sector. For example, investment in infrastructure, health, education, and government finances are ways in which best practice countries have managed to diversify their economy away from the resource sector so that the whole population can benefit from the resource endowments indirectly. The SIMS report states that funds will be spend on education and regional infrastructure, but with the intention of serving the mining sector in the long run. Questions should be raised as to whether or not, and how, this might lead to long-term social and economic development, as the strategy for spending mineral proceeds seems to be overly focused on the mining sector itself, losing sight of the aim stated by the SIMS report to diversify the economy away from the natural resource sector.


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1. SIMS report’s objective

The aim of the report is to increase the developmental impact of mining and enhance its contribution to poverty eradication and improvement of the lives of South Africans. Its goal is to leverage South Africa’s mineral wealth to achieve job growth and a more equitable growth path. Therefore, according to the report, minerals should not be extracted solely for profit maximization.

The sense that mineral-rich countries have not gained enough from their mineral assets is widespread. This doesn’t just refer to collected taxes and other forms of monetary compensation. Countries are increasingly realising that the minerals sector can be used to kick-start an economy. In order to achieve this, developing linkages with the rest of the economy is central, and it is exactly what best practice countries like Norway, Chile, Botswana and Canada have managed to achieve.

Extractive industries have historically been enclave industries, most often characterized by investment decisions that neither sustain broader economic development and diversification over time, nor reduce vulnerability to commodity price volatility. To leverage the development of a nation’s mineral resources towards broader national development strategy, policies and actions are needed in order to enable nations to leverage natural resource sector investments towards broader growth objectives.

For example, best practice countries like Norway, Sweden, Chile and Canada have invested heavily in human resource development to increase employment in the mining sector and to increase competitiveness. Worst practice countries are known for solely being interested in the rent-seeking aspect of the resource sector, i.e. generating maximum revenues to the state only. This is not necessarily a bad thing, as a wise use of taxes generated by the resource sector can be used to kick-start broad-based development as well. However, the political economy in bad practice countries allows for the elite in charge to capture the resource rents for private gain, so there is no incentive to focus on anything else than maximising resource rents.

The SIMS report should be commended for acknowledging the fact that minerals do not solely have to be a revenue source, but that the minerals sector should be at the ‘heart of SAs national development strategy’. Rather than being an isolated, stand-alone sector, it is critical that the minerals sector is integrated into existing long-term development strategies so that its development is planned in a way consistent with long-term interests and national priorities. As for now, the SIMS reports do not seem to be linked to existing long-term strategies and priorities. The ANC’s policy statement is a good start of formulating such a strategy, which has generated much needed debate and discussion on what the best way forward will be for South Africa.


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2. Success factors in best practice countries

The literature and documented experiences of successful countries like Norway, Botswana, Chile and Canada, and of less successful countries like the DRC, Nigeria and Venezuela, offer insights into the reasons behind success. Success is defined in terms of being able to attract investors and use the minerals sector to create long-term economic growth and competitiveness for all inhabitants. Not just one factor is solely responsible for success. Rather, a combination of political, social, and economic (in the form of attracting investors) aspects together provides the right ingredients for sustainable development. For the purpose of this paper the success factors will be divided into technical, and non-technical aspects. Technical success factors refer to geological information, the mining license and taxation system in place, and the availability of skills and infrastructure. Non-technical aspects refer to the way in which decisions are made, discretionary powers, transparency of information and decision-making, accountability of decision-makers to the wider public, the inclusion of citizens in decision making processes and oversight of the implementation of those decisions. Each of the technical factors has elements of non-technical factors.

1.2. Technical success factors

The availability of geological information and sector-specific regulation, including the system for allocating mineral rights, are two factors specific to the mining sector that determine success. In best practice countries the government invests actively in enhancing the geological potential by funding geological studies and mapping, as well as storage and dissemination of geological data to mining investors. The clearer the picture of the geological potential to the investor, the lower the risk of investment and the higher the chances that investment will take place. In bad practice countries the geological potential is often unexplored and therefore unknown, and/or existing information is difficult to access. In addition to geological information, the system for allocating mineral rights in best practice countries is clear, efficient and predictable. Discretion and decision making time is kept to a minimum, which minimizes risk to investors as the allocation process is straight forward and efficient. In bad practice countries, however, getting a mining permit and/or license can be cumbersome and long. The outcomes are often difficult to predict and the process of obtaining a license is unclear and sometimes even different for each license. Obviously this makes investing expensive and risky.

Other technical best practice factors are somewhat specific to the mining sector but are a reflection of the wider policy-spectrum of the country as well. For example, best practice countries invest heavily in general and sector-specific education and therefore have a significant amount of in-country labor and skills available for foreign investors to employ. This reduces both risk and costs to mining companies as they don’t have to invest in educational development of their staff, and don’t have to employ expensive expat workers. In addition, in best practice countries the local private sector is often well equipped to work together with the foreign investor in the form of goods or service provision, for example. This is attractive because it saves the investor time and money compared to importing from abroad. Bad practice countries often have low levels of primary, secondary and especially tertiary education as well as sector-specific training, and investors are unable to buy from local suppliers as their products are often below the required quality, if existent at all.


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Another factor contributing to sustainable development is the ability for a country to attract foreign direct investment (FDI). FDI can provide great economic benefit in the form of government tax revenues, employment, general competitiveness (see the paragraph on creating linkages above) and a contribution to broader economic development through business opportunities for the local private sector. Best practice countries (whether developed or less developed) aim to attract foreign direct investment by offering an attractive fiscal regime, usually through tax advantages. This is especially relevant in the mining sector where investments cover a much longer time horizon compared to other sectors, and where it can take a significant amount of time before a project becomes profitable. Especially in countries where factors such as political instability and corruption contribute to a higher perception of risk for investors an attractive fiscal regime is offered as a compensation for the higher risk of investment. Bad practice countries often do not offer any ‘carrots’ for stimulating foreign direct investment, or worse, the tax rates are changed during a project’s lifetime, thereby changing the projects rates of return and profit margins.

Available infrastructure is also a contributing factor to determining success. Best practice countries have high-quality roads and railway networks covering substantial parts of the country, and power is widely available at attractive rates. This makes it less expensive for a mining company to invest, as the companies will not have to build their own roads, railways and power stations. In bad practice countries these infrastructure requirements are often absent or very costly to use, and mining companies will have to invest in building the necessary infrastructure themselves.

2.2. Non-technical success factors

It is not only technical factors that separate good practice countries from bad ones. In fact, it is mainly the non-technical factors that make good practice countries so attractive for investment. Non-technical factors refer to political economy aspects apparent in resource-rich economies.

The development community has recognized that when the underlying political economy aspects of a country are understood, policy interventions will be more successful. A certain policy intervention can be technically the most preferable, but if it is not compatible with the political economy realities and incentives, it will fail in practice.

Recent political economy research shows that whether a country falls prey to the resource curse depends on a number of structural factors. Analyses show that the quality of existing institutions is perhaps the key factor that determines a resource rich country’s economic outcomes.

With extraordinary rents accumulating to the state, being in public office or having access to those in public office becomes one of the most valuable commodities in a resource-rich nation. Resource rents provoke patronage behaviour, or the seeking of public influence for private economic gain. In many resource-rich countries the ruling elite consists of groups and individuals within and outside of the government, who together assert control of the resource wealth. Sometimes business elites are interwoven in capture of resource rents by the state. The extractive industries provide a number of different ways to channel rents in such a way that strengthens the position of those in power: through licensing and contracts, through the fiscal regime, and through budgetary allocations.


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Best practice countries have a particular political economy context and governing regime. For example, the credibility of intertemporal commitment from governments to natural resources companies and to its citizens is strong and enforced over time. Additionally, political inclusiveness, or the extent of incorporating diverse social, economic and political viewpoints into the decision-making process is high. The sense of collectivist welfare prevails over elite interest, so that governments turn resource rents into public goods. A critical factor in success is about political stability and a high level of good governance and transparency. So-called best practice countries stand out in being stable and inclusive democracies, while in bad practice countries democracy is often not as widespread and a change in government sometimes comes about with violence. This creates huge risks for investors in the mining sector, who want to make sure their assets are continuously protected and guaranteed by whomever is in power.

Corruption is more widespread in bad practice countries compared to good practice countries. One reason for this is that in the democratic systems of good practice countries discretionary powers are limited and the executive power is scrutinized not only by a functioning parliament but also by its citizens and the media. Bad practice countries often have a complex system of laws and institutions, and those in power frequently try to game the system.

Capacity is another determining factor for success. In bad practice countries the proposed reforms are often not compatible with existing capacities at the executive level. Often, the lack of capacity at the government level is simply a reflection of incentives and absence of willingness to implement existing policies.

Solutions to non-technical issues are not as clear-cut and easy to implement compared to technical issues. If policy reforms are to be successfully implemented, they will need to work within the constraints of the underlying political and institutional dynamics inherent to resource-rich countries. In order for bad practice countries to move more towards best practice, time horizons of the government need to be extended and intertemporal credibility needs to be enhanced. This can be done by creating a simple, non-discretionary legal and regulatory framework. Initiating a rule-based process for granting resource licenses can minimize investor uncertainty and enhances predictability (for example by automatising license allocation process to minimize discretionary powers). Additionally, in order to broaden political inclusiveness, stakeholders need to be mobilized to engage with and influence natural resource management by disclosing information about social and environmental impacts per project, working with model contracts, and by making public information about financial contributions of the extractive industries sectors to the government coffers. This information availability will empower third-party oversight. Independent audit agencies, and an active and empowered legislative and judicial branch of government, can also impose the necessary checks and balances in decision making and policy implementation. Mechanisms that ensure that rents are shared broadly and do not only serve the elite should be built in, for example by distributing rents through the provision of public goods. Lastly, interventions need to address institutional capacity through capacity-building initiatives in key government agencies, emphasising the strengthening of core technical skills.


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3. Technical and non-technical issues in the SIMS report

The following section lists some of the most important key technical and non-technical elements of success as determined by international research, and uses available data to compare best practice and bad practice countries. South Africa is positioned amongst them. Per issues, the SIMS report measures and their intention are discussed, what the outcomes of the proposed policy measures could be, and what could be a more effective approach. The proposed technical policies are judged against their potential non-technical implications and pitfalls, thereby focusing on the political economy issues discussed in the previous section. Before conclusions are drawn, two policy proposals are discussed in more detail: state participation and the sovereign wealth fund.

1.3. Success factor: Political stability

Political stability is defined as the perception of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, which poses a significant risk to long-term mining investments (see the figures below for a ranking). Its inverse, the Political Instability Index (see the figure below) calculates the level of threat posed to governments by social protest.

Best practice countries show a very high level of political stability, i.e. a very low level of political instability. Worst practice countries like Nigeria, Angola, and Venezuela show high or very high levels of political instability. All indices classify South Africa as having a low level of political stability and thus a high level of political instability.

SIMS report

Obviously, the SIMS report does not explicitly discuss political stability. Political stability is closely linked to stability of policies and rules and regulations. The SIMS report does mention that if changes were to be made to the existing mining regime, no more changes should be made over the coming decades, as more uncertainty about future changes to the mining regime will likely deter investments.

Potential issues with the policy approach:

The issue of political instability is not specific to the mining sector, but to the political economy context in general. It has been reported that South African citizens do not feel that they have benefited from the country’s mining sector. Mining-affected communities complain about social and environmental impacts left unaddressed. These feelings of resent and injustice can feed social protest and violent means.

Alternative approach

In order to address this political economy deeper context, the ANC can propose to make the policy process more inclusive by opening up the discussion to companies, non-governmental organizations and citizens. Making sure that the broader citizenry benefits from the mining sector can be done by providing public goods paid for from revenues from the mining sector, an issue that is not explicitly discussed in the SIMS report document. The SIMS report does discuss the fact that social and environmental issues are project-specific and will need to be addressed as such. In order to make sure that communities will not oppose the mining activities, clear processes for community


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engagement, transparency and monitoring will need to be set in place. There are several international standards that can guide companies and the government on processes for community engagement, strategic community investment, and local sourcing. The document should specify better the ways in which the broader citizenry, including project-affected communities, will benefit from the mining sector.

Source: Fraser Institute (2012)

Source: Economist Intelligence Unit


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Source: Behre Dolbear (2012)

Source: World Bank Governance Indicators (2011)

2.3. Success factor: Good governance and transparency

A high quality of governance in the form of transparency, minimum levels of corruption and accountable and participatory decision-making are aspects present in good practice countries, and absent in bad practice countries as shown in the figures below. Transparency, by promoting accountability, minimising waste and corruption, and fostering democratic debate, is fundamental to good governance in the extractive industries sector. There is a growing international consensus on the importance of transparency in promoting accountability and good governance, and of its particular relevance to the extractive industries. Transparency can limit the opportunities for misuse of power and corruption, while accountability can ensure that those entrusted with the management of public resources are held accountable for their actions and/or inactions.


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In Norway, Canada and Chile all major policies affecting the state’s role in the resource sector were subject to inclusive public discussions and debate with key stakeholders and citizens. Best practice countries have a long history of good governance, transparency and public debate. The opposite is true for bad practice countries, where corruption levels are high and transparency is low.

South Africa scores somewhere in lower parts of the middle section (see the figures below. The World Audit Index shows the same results: http://www.worldaudit.org/corruption.htm). With respect to South Africa’s mining sector it is often said that attempts to access information such community agreements and labor plans, through the existing Access To Information Law fail. Additionally, South Africa has not signed on to the Extractive Industries Transparency Initiative and revenue and expenditure data regarding the mining sector are not publicly accessible.

SIMS report

The literature review section of the SIMS report discusses transparency and accountability some extent, for example regarding the management of the state mining company, and joining the Extractive Industries Transparency Initiative (see below for an in-depth discussion of these two topics).

Potential issues with the policy approach

Good governance and transparency issues are not specific to the mining sector, but refer to the political economy culture in general. A lack of good governance and transparency issues can exacerbate pathologies in the extractive industries sector. Good governance and transparency issues are not prominently featured in the SIMS report, and are only discussed in the literature review section (referring mainly to international lessons learned about the management and governance of the state mining company). They are not repeated in the section of the policy document proposing concrete measures for the management of the mining sector, which makes is unclear as to which extent the report proposes adopting some of the transparency and accountability approaches discussed in the literature review. The importance of public access to information regarding the mining sector is not discussed at all.


In general, the report needs to make clear if the issues discussed under the literature review section apply to the proposed policy as well. A clearer standpoint on promoting transparency and accountability in the sector is needed. For example, discretionary power and decision-making should be minimized, and information about social and environmental impacts should be provided to the wider public, including the financial contributions of the mining sector to the economy. Information about the bidding process for licenses should be made public, including the motivation for the awarding the licenses to the selected company, and third-party oversight, citizen-oversight and parliamentary oversight of the mining sector should be encouraged to stimulate good governance. For some of the technical policy proposals, such as the state mining company, the sovereign wealth fund, and the licensing regime, the report should include specific measures aimed at increasing transparency, accountability and good governance.

Corruption Perception Index 2011

http://www.worldaudit.org/corruption.htm


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Source: Transparency International




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3.3. Success factor: Publicly available geological information

In best practice countries the government invests actively in enhancing the geological potential by funding geological studies and mapping, as well as storage and dissemination of geological data to mining investors by making them publicly available. In Canada and Chile, these tasks have been assigned to specialized government agencies. Private sector exploration has also been used in both countries to maintain the overall competitiveness of the mining industry. The figure below shows that South Africa scores a bit above the middle category in this area.

SIMS report

To improve the level of publicly available geological information, the SIMS report proposes to fund the geological survey department to uncover unknown mineral assets and for the categorization of the country into areas of known resources and unknown resources. The SIMS report proposes to mandate and resource the Council for Geo-Sciences to be able to execute its mandate of determining the geological potential of vacant areas.

Potential issues regarding the policy proposal

The issues that can hinder the effective implementation of the SIMS report and that are often an issue in bad practice countries are the availability of skills and funding. An effective geological survey department is well staffed and well-funded. It is doubtful that the required skills for geological exploration can be found within the South African work force, and the SIMS report should take this into account. The SIMS report proposes to fund the Council for Geo-Sciences with revenues from the newly proposed tax measures. These tax revenues are dependent on company profits, which are high at the moment due to high commodity prices. It is not clear what the consequences for funding will be if commodity prices, and therefore company profits and RRT, fall. In addition, the SIMS report does not address the issue of making the geological information available to the public at low or no cost.


To be able to better and more efficiently implement the policy proposal in practice private sector involvement in determining the geological potential could be considered. Other countries have relied on the help of multilateral and/or bilateral donors to complete this task. As for the funding of the Council for Geo-Sciences, it is key not to rely solely on RRT funding as this funding follow the volatility of commodity prices. Lastly, the Council for Geo-Sciences should commit to making the collected data publicly available at low or no cost and invest in the dissemination of geological knowledge in the form of qualitative maps.


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4.3. Success factor: Availability of infrastructure

With good access to roads and power mining exploration and production can be conducted more efficiently. The size of the country often plays a role here as well. Best practice countries have invested heavily in developing the necessary infrastructure to facilitate the development of the mining sector and the economy in general. Therefore best practice countries score high in terms of availability of infrastructure, and bad practice countries score particularly low (see the figure below). News reports in South Africa have often referred to the structural problems of power shortage and lack of railway capacity, so it’s not surprising to see that South Africa falls into the middle section again in the international ranking.

SIMS report

The SIMS report addresses the problem regarding power generation by exploring options for alternative sources for power generation and making coal a strategic mineral, which means that the state company holds exclusive rights to develop it. Coal will first be used to supply South Africa at production costs plus a ‘reasonable return’. Once the domestic market has been satisfied, a license will be given to each producer allowing the coal to be exported and sold abroad. This is effectively a form of export restriction on coal.

Regarding infrastructure in the form of railways and roads, the SIMS report proposes to fund regional projects to increase trade within the SADC community.


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Potential issues with the SIMS report

The SIMS report addresses the infrastructure issue by proposing to fund regional infrastructure projects to facilitate trade amongst SADC countries. However, this does not address the lack of domestic infrastructure within South Africa.

Export restrictions for minerals are common all over the world, and all sort of restrictions exist amongst major metals and minerals exporters. Export restrictions are not necessarily a bad thing, but much depends on the nature and the implementation of the restrictions. In South Africa, it is proposed that export licenses will be made conditional on first satisfying the domestic market at cost price plus a reasonable return, and only if domestic demand is satisfied will export be allowed. Because under this system companies can supply coal to the domestic market at a predetermined ‘reasonable return’ this will likely affect their profitability. Therefore, the question is whether this structure will be applied to mining projects currently already in place, or only to future ones. Such changed conditions can potentially deter existing investments as company profits are based on forecasted international export and sales prices. In the case where export licensing requirements are particularly stringent, procedures are often complex and/or costly. It also adds another layer of bureaucracy, influence and discretionary powers when determining at what point domestic supply has been fulfilled. If the political economy context allows for it, this can create space for corruption and inefficiencies. For example, who determines what a “reasonable return” on investment is? Who will give out the export licenses, and what is the exact process by which the licenses will be granted?

Additionally, in the case of South Africa, the competitiveness of Eskom needs to be guarded as price controls and quota distort the economy and can make state enterprises more inefficient. International best practices state that a state company should not be tasked to supply goods and/or services at non-competitive rates, i.e. subsidize the supply of minerals. In the past, some governments in oil producing countries (like Nigeria and Indonesia) have required sale of at least part of crude oil production to domestic market refiners at discounted, below-market prices. The discounts can be expected to distort domestic investment and consumption decisions with resulting economic losses. These measures have failed in countries like Nigeria and Indonesia, resulting in corruption and other inefficiencies that serve the ruling elite. The practice of discounted sales at the level of upstream production is now very rare.


It is key for the report to not only focus on developing roads and railways only for regional transportation, but to address the lack of domestic infrastructure as well. The ANC could propose to build new railways and roads to deal with the overcapacity of existing ones, and it should make sure that this new infrastructure is accessible to the general public in the form of a public good as well. A combination between private and public use is often adopted in best practice countries. This is one way of integrating the mining sector into the broader economy and a way in which the general public can benefit from the mining sector through the provision of public goods.

The proposals will need to clarify who determines what a ‘reasonable return’ is, avoiding any potential conflict of interests of decision-makers. The process for determining what constitutes a ‘reasonable return’ needs to be specified as well. South Africa could follow the example of countries like Canada and Chile, where any major changes in policy are extensively discussed and agreed upon together with foreign industry (for example, in this


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case discussion with coal production license holders could take place for agreeing on what a “reasonable return” on investment is). Transparency in the export licensing process needs to be guaranteed.

Regarding the SIMS report for coal to be exclusively mined by the state mining company and sold to the domestic market at below market rates, the competitiveness of the state mining company requires caution. Incentives need to be put in place for the state mining company to mine coal cost-efficiently, and it should shy away from providing coal to the domestic market in the form of subsidized supply. Partnering with the private sector could be a good way of ensuring competitiveness in the mining of coal.


5.3. Success factor: Availability of labor and skills

In best practice countries, government policy is focused on skills development, innovation and R&D. Training of specialized engineers and mine technicians are encouraged through the creation of domestic training institutions and/or training local workers abroad. In the figure below the supply of qualified labor is high in best practice countries, and low in bad practice countries. Again, South Africa scores in the middle range, reflecting the on lack of skills in the existing work force (see the figure below). At the moment, several international mining companies are sponsoring the education of young and promising South African pupils so that they can reap the benefits in terms of employment in a decade or two. Another dimension to the labor availability problem in South Africa is the high inflation of labor costs.


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SIMS report

The SIMS report proposes to address the labor shortage issue through backward linkages, human resource development and R&D. The SIMS report proposes to use a percentage from the resource rent tax for investment in the development of technical skills in the form of training and grants/loans for students. In addition, the SIMS report discusses local content requirements for domestic sourcing of goods, services and labor, and the participation of the state mining company in BBBEE-owned mines to facilitate skill transfer. Additionally, the SIMS report proposes to create beneficiation hubs as a test model, as per example of China.

Potential issues with the proposed policy

Firstly, the figure below shows the lack of skilled employment is not specific to the mining sector, but a structural problem of the South African economy. Policies regarding employment agreements and labor regulations are central to this (see the figure below), raising the cost of labor. This structural issue is not addressed in this document, but it needs to be addressed in the SIMS reports regarding education and the labor market more broadly.

Secondly, one way of stimulating local employment and the use of local goods and services in the mining sector is by setting requirements for local content. Through its BBBEE requirements, South Africa has been applying a local content policy for several years. Local content can be seen as a form of protectionism, as in practice it sometimes means that the private sector is forced to work with local companies (or employees) that are either more expensive, less efficient, and in the case of companies do not always adhere to required international safety standards, for example. This can lead to project delays, or a decrease in profitability of a project. The idea behind stimulating local content is that, over time, a learning curve takes place because of the on the job experience gained, making local companies more capable, efficient, and internationally competitive in the long run. Implementing a national local content strategy requires continuous support and planning on the government’s side. For example, the government sometimes helps with capacity building and skills development for SMEs. In other cases access to finance is a real problem for local SMEs growth, an area where governments can assist as well. The SIMS report does talk about the state mining company engaging with BBBEE-owned mining companies to facilitate skills transfer. But increasing local skills and qualified local labor will require more than adjusting legislation to incorporate an increased percentage of required local content. Again, the aim of local content policies and strengthening local skills and labor should be to reach international competitiveness in the long run. This goal is not clearly stated in the SIMS report. If this goal is not kept in mind it can lead to inefficient local companies and corruption, if the political economy permits it. In Nigeria, for example, the requirement for local contracting has led to a massive scale of corruption and the funding of shell-companies serving the elite. Therefore, if the political economy of a country allows it, local content can stimulate rent seeking.

Lastly, the SIMS report to set up beneficiation hubs will take extensive planning and project management from the government. Provided that manpower and sufficient resources exist in the first place, it takes years to build a resource corridor and government capacity is a prerequisite.


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As for local content, instead of solely relying on set targets for local content, best practice countries have used a more hands-on engagement of the government to stimulate the use of local companies and labor, by looking at what skills and services companies need, comparing that with skills available in the country’s context, and putting in place capacity building projects to minimize the gap between demand and supply. An analysis of SMEs in South Africa is needed, giving an overview of existing skills and services, and potential obstacles for SMEs to work with the mining sector. Based on that analysis, the government can give better targeted and more hands-on support to local SMEs. In addition, in order to create linkages to the rest of the economy and to avoid dependence on the mining sector, it is important to stimulate employment, services, and goods provided by local SMEs that are transferrable to other sectors than the mining sector. This is useful as the resource sectors do no generate much employment relative to other sectors, and it will generate more broad-based and diversified development, which is important when the finite resources run out.


6.3. Success factor: Policy aimed at attracting FDI

All best practice countries have an attractive fiscal regime for foreign investors. Competitive taxation rates are applied, as well as tax deductions and a quick recuperation of capital costs. The figure below shows that best practice countries score high in having a taxation regime attractive for foreign investors, and bad practice countries score low. South Africa scores a bit below the average. Recent news articles report that the


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nationalization debate has already affected foreign direct investment negatively because of the uncertainty it creates for investors.

International good practice suggests that fiscal objectives should safeguard incentives to efficiency and investment. For example, a tax system should be neutral as far as possible. In the absence of any taxes, competitive companies are assumed to make efficient decisions. Where tax incentives or penalties are imposed, this will distort the allocation of resources by influencing investor decisions. Tax neutrality refers to the minimization of tax incentives to deviate from the decision that would be made without the tax being in place. Neutrality suggests that the tax imposed does not alter the investment decision. A tax system should be clear and transparent as well. It should encourage efficient and non-arbitrary administrative rules and regulations that are clearly understood by taxpayers and the government. Ambiguity in the system leads to an increased perception of risk for investors. A tax system should also be stable. A stable fiscal regime is characterized by the security that governments will not change the taxes arbitrarily. It is also important for the fiscal regime to be adaptable to changing circumstances due to uncertainty associated with exploration and mining activities. A stable regime is therefore designed to cope with and be able to retain investors when commodity prices and profits are at their extreme highs and lows, without the government having to change the fiscal regime when these circumstances apply. It is widely accepted that when underlying project profitability increases so should the state’s percentage share in rents. On the other hand, when price fall, the government should share this risk as well. A fiscal system that produces these results is called progressive.

From an investor's perspective, profit or income-based taxes are preferable, since they are based on a company's ability to pay, ensuring that tax liabilities are reduced when company profits are low. They may also allow the company to limit tax payments until it has recovered part or all of its up-front costs. In contrast, production-based taxes can require the company to make payments to the government even if the mining project is making a loss, which can result in decreased mine production or even premature closure. Over the past decades, many countries have shifted away from production-based taxes and royalties towards a taxation based on the level of company income or profits.

SIMS report

The SIMS report proposes to make some changes to the fiscal regime as it claims that South Africa has not been receiving a fair share of the resource rents. The policy document states that, compared to other countries, South Africa’s tax rates are low. For instance, mining companies are eligible for an upfront deduction of all capital expenditures. The deduction can be claimed when the company reaches production stage and is subject to taxable income. Assessed losses can be carried forward indefinitely. In order to keep attracting foreign investment in the mining sector, it is key to keep this relatively generous fiscal system. From the SIMS report this largely seems to be the intention, with the exception of the proposed Resource Rent Tax. The ANC research team proposes a Resource Rent Tax (RRT) of 50%, applied to the profit of a project or a company. Some in the mining investment community oppose RRTs, but it is generally recognized that an RRT has the advantage of being neutral in its impact on investment and causes no distortion to incentives. In return for the 50% RRT the SIMS report proposes to lower the royalty rate to 1%. Royalty tax is considered to be distortionary by nature. The fact that the report wants to remove the tax formula used for gold is commendable, as it will simplify the system and makes it clearer and more transparent.


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Potential issues with the proposed policy

As mentioned earlier, best practice countries like Chile and Canada purposely keep their taxes low in order to attract foreign direct investment. On top of that, the level of taxes in a country should reflect the level of risk to an investor for investing in the country, i.e. the higher the risk to investment, the lower the tax rates should be. Considering the fact that South Africa is a riskier investment than Chile or Canada, this might be naturally reflected in lower tax rates in South Africa. Therefore, increasing tax rates could therefore deter investment. If any changes to the fiscal regime are made in countries like Chile or Canada, the private sector is extensively consulted to make sure that continued investment is guaranteed. South Africa will want to make sure that the proposed tax rate is not too high, and consultations with investors could help determine this.

Even though an RRT will not distort investment as much as royalties, an RRT system is more difficult to administer and it will take a longer time before the RRT can be collected as a company will first have to be profitable. The South African government needs to be aware of this, and it will need to increase capacity in its tax administration system.


Before imposing the RRT and making additional changes to the tax regime, the ANC could consult and dialogue with investors about the proposed measures and the potential effects on companies’ finances, and if necessary, reach a compromise so that investment is sustained. As for stability of the tax regime, the current deliberations about changing the conditions and increasing taxes effect investors negatively because it creates uncertainty and thus risk. It is imperative that the new fiscal regime, once imposed, is not altered over the short to medium term in order to restore investor confidence. Lastly, the ANC needs to be aware of capacity needs at the tax and revenue administration level regarding the collection and redistribution of RRT taxes.



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7.3. Success factor: System of mineral rights and regulations

In order to attract investment and minimize risk, the system of allocating mineral rights and regulations needs to be clear, efficient, and predictable. The “first-come first-served” (FIFA) principle is the most frequently adopted and is applied in all countries where the mining sector is well developed. Some mining countries use a tendering principle if geological knowledge about deposits is strong.

The first-come first-served method, which has been predominant in the granting of mineral rights for centuries, has its pros and cons. The removal of any discretion or subjectivity makes cadastral procedures transparent and unbiased (although with paper-based systems there have been cases of corruption where an application has been put on top of the processing pile in order to be allocated the license). In addition, the rule is easily applicable and controllable. On the other hand, some governments feel that the application of this method can lead to the granting of licenses to “incompetent” holders, for instance, those that may not have the technical or economic capacity to appropriately develop the mineral resources. In these cases, governments may prefer the selection of the “best” holder.

Competition among potential investors can result in the best outcome for the state. Investors are very often better informed than their government counterparts about the geological potential of an area. While problematic in the case of one-on-one bilateral negotiations over contract awards, this informational disadvantage is annulled when investors are made to compete against each other through a tendering system. This method can also guarantee transparency in the granting of licenses if some minimal conditions are respected, it can eliminate speculators from a transaction, and it can ensure the selection of a titleholder with sufficient experience and operational capacity by imposing certain requirements as a condition for participating in the bidding process.

International organizations have developed a decision-making process to determine which mining rights allocation method to use in a certain situation. Where geological information is limited, governments may decide to adopt a first-come-first-served licensing procedure, or to negotiate directly with a limited number of pre-qualified companies. Where significant geological data is available and investor interest is high, a competitive auction is generally considered the best option. While open access will continue to be appropriate for areas that are largely unexplored, in situations where good geological data is available and where there are strong indications of interest from more than one potential applicant, governments should instead offer licenses on a competitive bidding basis.

SIMS report

The SIMS report proposes to restructure the current licensing process to a process much along the lines as suggested by international best practice. The SIMS report proposes to auction all known minerals so that bidders can push up bidding variables such as the tax rate, knowledge transfers, local content and other investments. It is proposed that the MPRDA be amended to include these categories and milestones. In areas where the geological potential is only partly known, the state mining company and the Council for Geoscience (CGS) will further explore the potential so that it can be prepared for auction or for the state mining company. The state mining company will hold the exploration rights to strategic minerals through a first-sight of all new state financed geo-data through the CGS. Lastly, a FIFA procedure will be applied to areas of unknown mineral potential,


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where general tax and Mining Charter conditions apply to the license holder. The SIMS report proposes that oversight of competitive tenders is done by the existing PPP unit in the national treasury, together with the newly proposed Minerals Commission. Its mandate should be transformed to make it a dedicated national concessions and compliance commission (CCC) to oversee the licensing of all state assets, not just minerals, under the Ministry of Finance. The Ministry of Finance would serve as the regulatory and consulting body for concessions carried out by the line departments. For the minerals sector that would be the Ministry of Mineral Resources. Mineral Concessions should come under the Mineral Commission with support from the CCC. The CCC would assist the Minerals Commission to prepare the state asset for concession, for example by helping with bid documents and carry out monitoring and evaluation of the concession conditions.

The SIMS report proposes that a Minerals Commission is established to grant, monitor, and evaluate mineral concessions. The Minerals Commission should be capacitated and resourced, and will be a separate agency under the Ministry of Mineral Resources or the proposed Super Ministry. The SIMS report states that the Mineral Commission should be set up along the lines of the comparable Commissions in Ghana and Botswana, although it is not explained what that means in practice. The governance of the Commission should include input from the Ministries of Trade & Industry, Energy, and Economic Development. The proposal is to reconfigure the Mining Development Board into an independent agency. The current objectives of the Mining Development Board include advising the Minister on any matter referred to it in terms of MPRDA, including the sustainable development of South Africa's mineral resources, the transformation and downscaling of the mining and minerals industry and dispute resolution. It is proposed that while the independent commission is established, the current Mining Development Board will be charged with the Commission’s tasks.

As discussed before, the SIMS report proposes to mandate and resource the Council for Geo-Sciences to be able to execute its mandate of determining the geological potential of vacant areas. The Council will also be tasked with effectively monitoring all existing exploration licenses to ensure that the concessionaires comply with the newly imposed minimum work and investment programs as proposed by the research team as well. A similar process is applied in Botswana.

Lastly, the SIMS report advises that the President establishes a Presidential Mineral Rights Audit Commission to carry out an audit on the granting of all new order rights, and suspend all rights that have not been awarded correctly.

Potential issues with SIMS report

Although the exploration phase generates valuable information for the host government and investors, nonetheless it is financially a high-risk undertaking. Thus, the question about whether or not the government should assume this risk is an important policy issue.

Despite the potential advantages mentioned above, the tender bid methodology may imply important risks for discrimination and subjective evaluations (and consequently also for corruption) if some minimal required conditions, such as transparency throughout the tendering process, are not fulfilled.

As always, a condition critical to success is institutional capacity. Properly preparing a licensing round, and evaluating potential investors and their contract proposals are activities that require advanced professional technical, legal and commercial skills.


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Therefore, a dedicated unit as the CCC should have sufficient capacity and expertise to deal with the contract award process.

The SIMS report refers to the licensing system in Botswana and Ghana as a model. What does the licensing process in these countries look like? Botswana, with its long history of political stability, transparency and democratic processes, is a best practice example of approving mining licenses. Its system is predictable, clear, transparent, and, moreover, it is automatic so any risk of corruption and discretionary powers is annulled. The Minister of Minerals grants mining licenses according to the Mines and Minerals Act, but has no discretionary powers in doing so. The conditions imposed on the holder of the mining license are legislated.

As for Ghana, the Minerals Commission receives submissions from applicants for mining rights and processes them. It then negotiates with the companies, and it advises the Minister on renewing, suspending and revoking mineral rights. The Minister must act on the recommendations of the Commission. The Commission also checks on the compliance with regulation and advises the Minister on national mining policy. However, the President appoints the members of the Minerals Commission, and, unlike Botswana, democracy in Ghana faces a number of critical challenges, the main ones being the power of the executive (i.e. the power of the President), corruption and political patronage. As a result, there have been several complaints of corruption within the Minerals Commission regarding the allocation of mining rights. In addition, the Minerals Commission does not have adequate capacity to exert its mandate to both award licenses and monitor compliance, which in practice means that monitoring compliance is insufficiently done. This example shows again that policies, legislation and regulations on paper can look perfect, but the success of implementation will depend on the political economy in a country.


Best practice shows that administrative discretion should be minimized, and the systems for license application should be efficient and clear. If the ANC follows through with a tendering process for license allocation, it will need to make the whole licensing process transparent to the public. It will need to publish all available information about the geological area, the requirements companies have to fulfill in order to be able to bid, the number of companies that applied and their names, and the winning bid including an explanation of why the license has been granted to a specific company. The legal framework should determine the guidelines for the evaluation criteria. The announcement for each individual bidding process should give all required information for tender far enough in advance for interested parties to prepare their offers, as well as details about deadlines and documents to be presented, precise information on the particular scoring and evaluation criteria to be applied, and a minimum score needed. The process of granting mineral rights needs to be transparent, no matter what method for license allocation is used. Preferably, the system for license allocation is automatized so that discretion in decision-making is minimized.

Setting up a separate entity like the Minerals Commission can be problematic as it creates another layer of bureaucracy. The relationship between the Ministries, governmental departments and agencies needs to be made clear, and conflicts of interest should be minimized. The concentration of decision-making power inside a single ministry should be avoided. In addition, new and existing departments and agencies need to be capacitated,


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and it is not clear if the necessary skills are currently available in South Africa to make sure that the proposed policies can be implemented correctly.

The primary function of the Minerals Commission as proposed under the SIMS report would be to regulate the granting and administration of mineral rights. It would also be tasked with the assessment of which minerals should be strategic, which then has to be approved by the Minister and Cabinet. The Commission should then ensure that strategic minerals are exploited in an orderly and optimal manner to satisfy national requirements, demand and pricing. Recent research has shown that if an entity is tasked with both granting and monitoring mineral rights, the incentives to conduct the monitoring task is often neglected. Therefore it would be more effective to split up the proposed monitoring tasks of the Commission and reallocate this task to another independent agency.

Considering the relationship between the Ministry of Mines and the Mining Development Board, the independent commission should be set up as soon as possible and the interim powers of the Board to execute the Commission’s tasks should be limited.

The current political economy factors will determine the effectiveness of the proposed policies of the research team regarding the allocation of mining rights. Considering the figure below, which indicates perceptions about the fairness, transparency and timely administration of legal processes, that could be a challenge.



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4. State participation in the mining sector

State participation in the form of a national resource company has been extensively discussed in the literature. The SIMS report acknowledges that experience with state participation in other countries has identified a number of challenges, which best practice countries like Norway and Chile have managed to avoid. Even though the SIMS report lists these challenges in the literature review section, it is not clear if and how it is going to address these challenges regarding the proposed state mining company. The challenges as listed by the SIMS report (based on McPherson, 2004), as well as best practice responses and the SIMS report response to tackle the challenges are discussed below.

1.4. Governance

One of the most important issues posed by state participation at the economy-wide level relates to governance. The SIMS report lists the example of ‘Norway versus Nigeria’ to illustrate the governance challenges, leaving a discussion about the differences in governance between the two countries unaddressed. Governance refers to clarity of roles and responsibilities, transparency, accountability, and the active scrutiny, participation and support of all stakeholders. The differences in governance style between Norway and Nigeria might seem intuitive. It is critical, however, to better understand the underlying causes of differences in governance styles if these best practices are to be adopted by South Africa.

In its various forms, state participation has raised serious issues and has too often been abused. Where these issues persist, as states the literature, they are mainly due to a political economy that tolerates, or even encourages them. In many countries, Nigeria being one of them, resource-wealth has undermined governance and exacerbated pre-existing weaknesses in governance. With access to significant financial resources and exercising influence over economic activity both inside and outside the resource sectors, the national resource companies can be and have in many cases been natural targets for control by elites interested in pursuing their own private political and economic agendas. These elites in have an interest in making sure that the operations of the natural resource companies are non-transparent, in politicising their management, and in promoting a lack of clarity with respect to the roles and responsibilities of the company and related ministries and agencies.

On the positive side, where governments have a serious commitment to reform and development, policy responses to the challenges of state participation have been positive. Policies focused on enhancing governance are central to the process. The Norwegian political, social and economic contexts stems from a long tradition of transparency and public debate, which means that this experience is not easily transferable to other countries and a technical solution to deeper political economy issues is likely to fail. Therefore, the current political context is critical in determining future outcomes of state participation in the mining sector, and whether or not a state mining company will contribute to a genuine commitment to reform, development and transparency, or if it will be used to worsen and intensify structures of bad governance already in place.

The literature states that transparency can be facilitated by having the national company organized as a separate legal entity with clearly established authorities and objectives, and by having governing and management boards separate from the government. Additionally, public oversight and control can be enhanced by:


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Having public accounts maintained in accordance with international standards and subject to independent audit;

Clearly identifying any private ownership interests and transactions with such interest holders;

Having the national company make the same disclosures required as publicly held companies;

Conducting regular and systematic oversight through parliament or other entities;

Structuring companies so that decisions are transparent and subject to market tests;

Clearly defining and limiting in time any protection of national companies so that the risk of abuses from the privileged position is reduced.

Copying McPherson (2004), the SIMS report in its literature review section lists full transparency, credible audits and regular public reporting, and adherence to EITI to provide evidence of accountability as technical ‘solutions’ to the governance challenges identified in the literature. It remains unclear, however, whether or not that means that the SIMS report is proposing to put these measures in place as they are not repeated in the section covering the research team’s concrete policy suggestions. It is debatable what ‘full transparency’ as stated by the team means in practice. Will it include same disclosure requirements of the national company as publicly held companies? Will it include transparency in the decision-making process and governance structure? What does ‘regular’ public reporting mean? What information needs to be reported? What is a ‘credible’ audit? Does that refer to full audits conducted by internationally accredited agencies? These important nuances and a clear commitment to good governance are currently insufficiently addressed.

There seems to be some misunderstanding regarding the Extractive Industries Transparency Initiative. The Extractive Industries Transparency Initiative was established in 2002 and has quickly grown out to a globally known transparency standard in the oil, gas and mining sectors. Currently more than 30 resource-rich countries have signed up to EITI. It is stated in the SIMS report that adherence to EITI shows evidence of accountability (again, it remains unclear if this statement actually means that the research team is proposing to sign up to EITI). However, the impacts of EITI are not yet clear and even though adherence to EITI criteria has some positive impacts, linking EITI compliance to good governance, policy reform and increased accountability is debatable.

The EITI refers to a process whereby public, private and civil society sectors in a resource-rich country work together in a multi-stakeholder group and agree upon a work plan for publishing the amounts of money the government has received from extractive industries companies and comparing that to the amounts of money companies have paid to the government, making any discrepancies visible. The EITI criteria, where each country that signs up will have to adhere to, states that a regular publication of such data to a wide audience in a publicly accessible and comprehensive manner is needed. Participation of civil society is meant to contribute towards public debate. There are two stages to the process: once a country has committed to start the EITI process, it is called a ‘candidate’ country, and once it has completed the validation process and published the necessary data within a time frame of 2.5 years it transfers to a ‘compliant’ country.


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There are currently 13 compliant countries, and 20 candidate countries. Nigeria and Norway are both compliant countries, and Nigeria is one of the two countries in the world that has legislated the EITI process. Norway is the only ‘developed’ country in the EITI list, although the United States has recently committed to join the process as well.

Since its launch in 2002, EITI has quickly grown into a globally recognized standard for transparency in the natural resource sector. A wealth of data on government revenues and company payments is now available to the public. It is widely told that the EITI process has contributed to greater interaction and dialogue in implementing countries, increasing trust and improving relations between stakeholders.

At the same time though, questions about the effectiveness and impact of EITI have been rising. Of the 22 countries whose original validation deadline was in 2010, only three completed the process on time, 16 got extensions two were delisted and one was suspended. While more and more candidate countries reach compliant status, few have done so before the first validation deadline of 2.5 years.

The quality of EITI reports vary widely, and a high percentage of EITI countries did not agree on reporting templates, not all companies have reported, making sure that company and reports are based on audited accounts based on international standards, and not all payments to the government, and received by the government have been disclosed. The EITI reports value as a source of information has been compromised on many occasions as they are produced irregularly, and do not contain comprehensive and reliable data. Yet countries with strong reports receive the same level of credit as those with weak reports.

While the initiative is obviously supportive to transparency, the link to accountability is less clear. The accountability function of the EITI process is the multi-stakeholder group in which representatives from public, private and civil society sectors participate. The main contribution of EITI has so far said to be its contribution to dialogue and increased trust amongst stakeholders. However, this does not necessarily lead to accountability, in part because necessary political, legal and institutional improvements have in most cases not been put in place. It has been proposed that, to meet the objective of accountability, the EITI needs to be more integrated with oversight mechanisms such as parliament and the supreme audit institutions, and government regulations.

Despite the widespread support for transparency initiatives, assessments to date suggest that EITI has not triggered major economic or development transformations or any significant reductions to corruption. Heuty (2011) claims that this is due to the fact that EITI is mainly externally driven. The majority of countries that participate in EITI are those that value the reputational gains that it brings, and many rely on international aid and lending from EITI’s main donors. Norway has only signed up to and validated EITI last year, as it already had the transparency standards in place anyway (and even went beyond that). It eventually signed up as the first developed country to show that the initiative is not just meant for developing countries. The political economy aspects where the initiatives operate in have not been looked at either. The EITI may not lead to policy improvements, especially in difficult country contexts. In a corrupt and autocratic country, greater transparency is not likely to prevent officials from engaging in self-serving behaviours. Heuty (2011) explains that transparency would increase the costs and risks associated with the decision to indulge in corrupt behaviour, but in some countries the benefits associated with patronage are too large. For example, EITI in Nigeria, even though it’s legislated, has altered incentives without altering behaviour. Nigeria published its first report in 2006, revealing weaknesses in the oil industry regulator in assessing revenues.


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As a response, several government and donor initiatives focused on increasing the capacity of the regulator to be able to perform its tasks effectively, but without much success.

One of the requirements for EITI is that reported payments need to be subject to a credible and independent audit, applying international auditing standards. This approach is extended to all companies, including state-owned ones. In practice, however, the quality of reported data and their verification have been much debated. Some companies (including national resource companies) that need to submit data to EITI are not regularly subject to an international independent audit anyway, posing additional challenges for validating EITI data. The verification of reported data needs to be carried out by the EITI Administrator. The Administrator checks whether or not the amount companies have reportedly paid, and the amount governments claim to have received is the same. There is currently a debate about what happens in case any discrepancies exist. For example, it is not clear if and how a detailed follow-up and verification of discrepancies needs to take place, as this adds significantly to the burden of the administrator or to the program’s costs if an accounting firm needs to be hired to check the data. In any case, an EITI audit will focus on verifying the amount reported by the companies, and the amount reported by the government. It will not be a comprehensive audit of the company and government accounts, as it does not include a compliance audit with company, contractual and governmental requirements, or a review of contracts, process handling agreements, tariffs, equipment standards and maintenance requirements. It is not clear if it involves determining data accuracy by comparing meter volumes and ore/liquid quality and prices, and so on.

Therefore, even though complying with the EITI process in South Africa will publish data that have never been in the public domain before, and it has the potential to start a discussion between private, public and civil society sectors, complying with EITI is not sufficient to indicate a general commitment to transparency in the resource sector more broadly, nor should it substitute any comprehensive audits and other reporting requirements of the national mining company in South Africa.

2.4. Macro-economic management

Closely related to the issue of governance is the issue of macroeconomic management in a resource-rich country, both on the expenditure side and the revenue side. On the expenditure side, the assignment of a long list of non-sector specific tasks raises serious risks to national resource companies. National resource companies do not have real comparative strengths in addressing these issues. Additionally, many of these tasks are conducted off-budget. Quasi-fiscal activities, especially when they are as significant as those sometimes assigned to national resource companies, bias effective macroeconomic and budget management and make planning difficult. On the revenue side, the substitution of revenue shares from equity participation for tax revenue and/or assignment of fiscal agency roles to the national resource company can be particularly harmful, resulting in weakened accountability and revenue losses. Whether or not the funds attributable to state participation actually go to the budget will depend upon the fiscal regime applied to the NRC, and on the clear definition and enforcement of any fiscal roles.

The SIMS reports lists this challenge in its literature review section, and, following the conclusions in the literature, advises to acknowledge the resource sector in state budgets and planning documents, and to recognize financial and fiscal costs associated with state participation. Again, these findings are listed as conclusions of the literature review in


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general, and it is not clear if the SIMS report recommends to adopt this and apply it to the state mining company. The solutions to the macro-economic management issue are not repeated in the policy proposal section of the SIMS report. It is commendable that the SIMS report does not recommend allocating any non-sector specific tasks such as healthcare and infrastructure development to the national mining company and, as it appears from the document, it also intends to leave fiscal responsibilities at the government and separate it from the national mining company. However, the link between the state mining company and the state budget, as well as the fiscal regime applied to the national mining company remain to be discussed further in more detail.

3.4. Financing

Closely linked to the issue of macro-economic management is the financing of state participation. The resource sectors generate a lot of cash, but they also consume a lot of cash. In some cases, national resource companies do not have sufficient cash flow to provide upfront financing of large investments. The mining sector is highly capital intensive and the budgetary demands can be high, especially relative to other government programs such as health, education, and transport. Funding of the state mining company can draw resources away from other urgent budget priorities. In Nigeria, budget allocations for education, health and infrastructure are minimal next to the budget allocations to fund NNPC’s operations. Operational flexibility of Chile’s Codelco is hindered at times by the required transfer of close to all of its income to the state in the form of taxes, royalties and dividends. Codelco is now under discussion because it cannot afford the heavy investments needed in the sector. As a solution, it has adopted a law to professionalize its management. There is also a tension with its social development objectives and spending. International best practice shows that national resource companies should avoid engaging in governmental activities, including social functions such as distributing subsidized output. In case such programs are assigned to the national resource company anyway, government and legislative control and oversight can be improved by having the national company report separately and in detail the costs of the social programs that the company undertakes, including the equivalent budgetary cost of such items. These costs should also be explicitly recognized in the budget and national accounts. The SIMS report states that the state mining company’s mandate should include the development of strategic minerals, in order to supply them into the domestic market at competitive or utility prices. Supplying to the market at competitive prices would not affect the financing of the company as long as it manages to profitably extract minerals against competitive sales prices. A second major element of the mandate of the state mining company is to invest in technical human resource development and R&D. These spending categories should not be classified as a non-resource budget allocation as they are of a different category as spending on healthcare or education. All mining companies invest in human resource development and R&D, but when allocating budget to these spending categories the state mining company will need to keep an eye on costs and profitability.

Related to the macro-economic management challenge, the level of budgetary and financial autonomy of a national resource company can have important consequences for its efficiency and market strategy. The lack of autonomy tends to negatively impact the timeliness and effectiveness of investment decisions, and may increase the cost of doing business and political interference in the management and operations of the national resource company. On the other hand, too much autonomy may reduce the fiscal revenue of the state, and could diminish incentives for cost reduction and efficiency improvements. Financing arrangements can be broadly categorized as follows: with a low level of


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budgetary and financial autonomy the national resource company transfers all revenue or margin from operations to the state and it needs to present requests for financing in order to fund its investment programs. With some budgetary and financial autonomy the national resource company has the right to reinvest part of its profits. In that case, investment and borrowing decisions beyond a certain amount are authorized by the government body that exercises the ownership rights of the state. At a high level of budgetary and financial autonomy the national resource company has the right to reinvest all or part of its profits. In this case, its board of directors authorizes investment and borrowing decisions. Under appropriate fiscal and legal conditions, resource–rich countries should be able to replace state funding with private sector investment. This would not only relieve tensions over budget allocations, but also avoid putting public funds at risk.

Again, in its literature review section the SIMS report states these best practices and notes that the company should not be part of the treasury. However, a concrete discussion of what the link between the state mining company, the treasury and the fiscal regime will look like in South Africa is lacking.

4.4. Achieving commercial efficiency

Again closely linked to the previous topics is the challenge of attaining commercial efficiency. Competition is considered a major driver of efficiency. The most efficient natural resource companies are those who have been subject to full market competition, have had no advantageous treatment by their own governments compared with privately owned companies, and have been subject to the same fiscal regime, tax assessment, audit procedures and tax payments like a private company. With few exceptions, such as Statoil in Norway, national resource companies to date have not scored well on commercial efficiency or profitability. A context of weak governance, pervasive government interference, lack of transparency and accountability, and the extensive assignment of non-commercial tasks are systemic factors. Under-funding or irregular funding also plays a role. Limiting competition will likely adversely affect performance as well. Norway, for example, always consciously encouraged participation by the foreign private sector, benefitting from competition, risk sharing and the transfer of technology and management skills. In its very early days, Statoil was granted preferential status in the sector and increased interest to 51 percent on a commercial discovery and was carried through the exploration phase by the private partners. Commercial efficiency being its primary objective from the outset, Statoil developed rapidly as a commercial enterprise. Commercial performance has been enhanced in various countries by the introduction of competition, by partnering with international companies, and by privatization in varying degrees, i.e. by partial listing on stock exchanges. Beyond corporatization, a partial stock listing (where the state maintains majority control) can bring the added discipline of meeting stock market listing and reporting requirements.

Attention needs to be paid to the role of sector or financial ministries in exercising the shareholder role on behalf of the nation. A strong commercially based shareholder role can be found in successful companies such as CODELCO in Chile, Petronas in Malaysia and CVRD and Petrobras in Brazil, which can lead to companies that compete strongly in the international market place. Codelco has benefited from the policies applied in general to Chile’s state-owned enterprises. These include limited government interference, and a high degree of transparency. A misguided or a corrupt shareholder role, combined with inadequate or corrupt management and large noncommercial roles can lead to companies


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that are now producing only a small fraction of their peak production in the past (like Gecamines in the DRC, ZCCM in Zambia and Comibol in Bolivia).

This could also mean that the national resource company should apply for and obtain licenses in the same manner as other companies and should be subject to the same licensing conditions as other companies with all regulatory activities being undertaken by government regulatory offices. The SIMS report, however, states that the state mining company should hold the exclusive exploration rights to strategic minerals through a first-sigh of all new state financed geo data, which can easily lead to inefficiencies. This process is applied in Chile as well, where the best areas with known reserves are reserved for CODELCO.

Again, the SIMS report outlines these challenge associated with achieving commercial efficiency in the literature review. A stock-exchange listing of state-owned enterprises is mentioned as a best practice. The policy documents also acknowledges the tension between commercial and development goals of a state resource company, and states having clear and transparency development goals for the state company as a solution to this tension. It does not, however, state the goal of commercial efficiency when discussing the concrete policy proposals for the state mining company. The document states that it is the SMCs mandate to develop strategic minerals “in partnership with other investors if necessary”, thereby not eluding to the situations in which this competition will be necessary and the desired purpose behind the participation of other investors. It could be helpful to set a time table for listing of the company. A transfer of ownership from the state to private national entities is also not discussed in the document.

5.4. Conflicts of interest

Closely related to the issues discussed above is the conflict of interest issue that arises if the natural resource company is assigned commercial and regulatory/fiscal roles at the same time. Wearing its commercial hat the natural resource company may take positions that are opposite to those expected of a protector of the state’s interest. In Norway, the institutional structure of the sector has always been very clear. The sector ministry was in charge of policy, reporting to the Parliament, the Norwegian Petroleum Directorate was established to provide technical and regulatory oversight, while Statoil occupied itself with commercial operations. In the previous section it has been discussed that commercial efficiency of a natural resource company can be achieved if government interference (and thus conflict of interest) is absent. Best practices show that there are several aspects to a strong commercial shareholder role:

1) Shareholding needs to be held in the name of one or more government officials, e.g., the Minister of Finance or the Minister of Mines/Energy who will appoint the Board of Directors who are the shareholders representatives who govern the natural resource company. The directors should be selected and appointed on the basis that they are knowledgeable about the business and that each has the time available to be informed about the company’s activities and ensure that the shareholder’s interest are well served. The directors should be fully independent of management and management influence.

2) The appointment of management should be made on the basis of professional qualifications and experience, not according to political or family affiliations.


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3) The board should provide the management with a clearly stated mission related to resource development.

4) The board should ensure that the management then focuses on its core business and does not expand its activities into other non-core business areas. In this regard, the board should only approve company business and investment plans that consistent with the shareholder objectives. Another important aspect is the employment policy of the company regarding workforce productivity and wages, which should be competitive.

5) Oversight of the sources and uses of funds with regard to the NRC should be done so as to raise commercial borrowing of needed debt, meeting the listing requirements of stock markets and the shareholder.

6) The natural resource company, its managers and directors should be excluded from any regulatory roles or activities.

These aspects should not only be true on paper, but also in practice. Too often natural resource companies have absorbed the authority of the government ministry over time. It’s often also a challenge for government agencies to attract and retain talent, compared to the national resource company, which usually offers higher salaries and access to greater influence.

The SIMS report describes the challenges in case of a conflict of interest regarding a national resource company in its literature review section. It lists that there needs to be clarity on the roles and responsibilities of governmental agencies, and that non-commercial and regulatory functions should be held by the ministry and not the state company. The long version of the policy document states that an independent board of directors consisting of members with sufficient experience and knowledge of the mining sector is a prerequisite for a successful company, and the day-to-day management should be placed in the hands of professional managers. In the proposed policy section the document states that initially, its board would be nominated by the IDC in consultation with the Ministries of Mineral Resources, of Energy, of Economic Development, of Public Enterprises and of Trade & Industry. Its Act should then make provisions for the nomination of board members by the Ministries to ensure alignment with national economic development, industrial and energy strategies and policies through its annual corporate mandate. There is no explicit mentioning of the way in which the company’s management will be selected. Alignment with national strategies and policies does not necessarily represent a conflict of interest but can create tension with commercial activities as discussed in previous paragraphs. Additionally, the board members should be selected on their merit, not their political connections. Whether or not it will have fiscal and/or regulatory functions as well is not explicitly stated, although it seems from the mission statement of the state mining company that such functions are not included in its mandate and will therefore remain at the state. Lastly, the Bill should be drafted as soon as possible, and it should generate broad support from South African stakeholders before it is passed into law.

6. The Proposed Sovereign Wealth Fund

Besides establishing a state mining company, the SIMS report proposes to set up a sovereign wealth fund. The SIMS report elaborately describes lessons learned regarding national resource companies. However, except for a quick reference to the models of


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Norway and Chile, no such lessons learned are discussed for sovereign wealth funds, even though the proposed fund would contain billions and billions of dollars.

The presence of SWFs poses great policy, political and economic challenges. Among others these are related to the prudent mobilization of the revenues, to the fair allocation of the resources between generations, to the identification of the best investment alternatives, to the temptations to use the funds for political as opposed to economic purposes, and to the favoring of specific social or economic groups against other groups. Many of the challenges are similar to the challenges discussed regarding the state mining company, and best practices mainly concern transparency and a broader commitment to good governance, as the following section will discuss.

As a result of a growing recognition of the challenges resource wealth can present to macroeconomic management, many policy statements spell out government intentions with respect to the saving and investment of resource revenues, and to their expenditure. Evidence and economic argument suggest that to get maximum benefit from their resources, countries should use the revenue generated by the natural resource sector to achieve sustained economic growth. The revenue volatility characteristic of the extractive industries sectors is of major concern as it translates into volatility in public consumption and investment spending. High revenues encourage many governments to step up spending, based on a mistaken belief that the revenue windfall will be permanent. This gives rise to unsustainable spending levels, with painful adjustments when revenues fall.

Interest in resource funds for setting aside a portion of resource revenues has grown significantly over the past several years. There are now more than 20 oil funds in existence, and a growing number of mineral funds are under discussion. The most commonly used reasons for the creation of such funds are that they provide a place to save funds to generate financial revenue for the future, and to protect against major negative shocks. It is sometimes argued that resource funds can act as a brake on reckless spending and as a model for broader fiscal discipline.

There are two main types of funds: Stabilization Funds are designed to address expenditure smoothing and precautionary objectives. When revenues or prices are high, payments are made into the fund and diverted from expenditures; when revenues are unusually low payments are made out of the fund to the budget, avoiding a collapse in expenditures. Given the objective of stabilization funds the assets they contain are normally short term, highly liquid, low risk and foreign, to avoid putting pressure on the domestic economy. Savings Funds focus on the accumulation of financial assets and the generation of financial returns to replace resource revenues as they decline. The asset mix in a savings fund is typically longer term and higher risk than might be found in a stabilization fund. Some countries operate single funds with dual objectives, stabilization and saving, while others maintain two funds with clearly separate roles. Both fund types serve useful purposes. The share of revenues between them is dependent on national circumstances and to some degree a political question.

The SIMS report states that the sovereign wealth fund should be kept offshore to ameliorate the strengthening of the Rand during commodity booms, attributing a function of stabilization to the fund. The proposed fund is different in the sense that all RRT revenues will be kept in the fund, irrespective of price levels, making the fund itself vulnerable to price fluctuations as RRT will depend on the profitability of mining companies. 30% of expenditures from the fund will feed into the budget when commodity prices fall. Over time, however, the fund will be used to invest in long-term projects that


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will ensure prosperity when the minerals are depleted, giving the fund a savings function as well.

The experience with sovereign wealth funds in good and bad practice regarding their management are similar to those discussed regarding the state mining company. History provides us with many examples of “problematic” funds, like those of Nigeria or Venezuela. With the exception of Norway, with its strong government institutions and healthy democracy, the experiences with resource-based funds have not been encouraging. Part of the explanation for Norway’s success with its SWF lies in the country’s historical strengths of a well-established institutional framework and a long tradition of fiscal and central banking transparency.

The reason for the inefficiency of most funds has been attributed to the lack of clear rules and operations, which should be transparent, with stringent mechanisms to ensure accountability and prevent resource misuses. The experience of unsuccessful funds has indicated an even more complicated problem: the quest for rigorous governance, adequate transparency and accountability. Governance regards the role of the government, of the governing bodies and of the managers of the SWFs in the decision taking process regarding the flows into and out of the funds, the investments made and the diversion of the accumulated assets to economic ends.

6.1. Transparency and Accountability

Past experience with resource funds has underscored the critical importance of oversight and governance features, which, ideally, are spelled out in legislation. Transparency with respect to all aspects of und operation and performance is generally regarded as indispensable to achieving good governance. Transparency is related with the adequate, full and timely provision of information to the public regarding the operations of the funds as well as with the clear communication of the role of the funds to the broader public. In all cases, the law governing fund spending should clearly specify the purpose and encourage parliamentary scrutiny. The fund revenues, expenses, and balance sheet should be presented to the legislature and the public together with the annual budget, including a consolidated account. Fund activities should be regularly reported to the legislature and the public and externally audited by an independent auditor; and reports and audit results should be published. An independent supervisory board should be appointed to give assurance of good governance. Accountability regards the multilevel oversight of the SWFs and the degree to which the government, the governing bodies and the fund managers are held responsible for their decisions.

Where SWFs assets are used to favour the ruling elite, to keep the inefficient public sector running or so as to promote political goals, the successful performance might not be the case. In the presence of strong governance and adequate mechanisms that can guarantee the transparent and accountable management and operation of the funds the latter temptations or distortions of SWFs’ operations may be prevented safeguarding the performance of the funds.

Following the growing international demand for SWFs’ governance, transparency and accountability the “Santiago Principles” have been developed. The principles have been a reflection of the increasing demand for clear governance, adequate transparency and accountability, and integration of the SWFs with the international financial markets. The purpose of the principles is to identify a set of generally accepted practices that can reflect appropriate governance, transparency and accountability arrangements as well as to


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promote SWFs investments based upon prudent and sound economic basis. The 24 individual principles are divided into three parts. The first part requests SWFs to disclose their legal framework and define and disclose their policy purpose. SWFs also are asked to publicly disclose their funding and withdrawal arrangements. The second part covers SWFs’ institutional frameworks and governance structures. At its core rests the idea of distancing the political aspirations of the owner, that is, the government on the one side, and its operational management on the other. The provisions of the Santiago Principles imply that any narrowing of this distance compromises the funds’ financial return objectives. The third part requests that SWFs employ appropriate investment and risk management frameworks. It asks funds to disclose their investment policies, including information about investment themes, investment objectives and horizons, and strategic asset allocation.

However, the Santiago Principles are to Sovereign Wealth Funds what EITI is to government finances: SWFs that are owned by democratic governments featuring stable institutions, pluralism, political participation, and a liberal political culture show higher commitment to and implementation of the Santiago Principles. The literature shows that technical solutions such as the setting of resource-based funds will not work unless supportive constituencies will be developed in support of these measure, and the political economy contexts is based on the premises of good governance. The SIMS report does not discuss any measures it would take to make the fund as transparent and accountable as possible.

6.2. Structure and Fiscal Treatment

Experience to date with stabilization and savings funds has been mixed. One best practice example that is also referred to in the SIMS report is the fund of Norway. The Norwegian Pension Fund-Global (NPFG) can be considered as best practice for a resource-related fund because it forms part of a coherent fiscal policy strategy. First, it aims at smoothing public spending over time and decoupling it from volatile oil revenue; second, it seeks to replace oil wealth with financial assets, which are expected to grow in value over time. Norway’s fiscal policy drives the operation of NPFG. NPFG accumulates all oil revenue and returns on financial investments, and it makes transfers to the budget only to the extent necessary to finance the non-oil deficit, which is determined by annual, medium-term, and long-term fiscal policy objectives. NPFG is thus characterized as a financing fund; stabilization and sustainability objectives are achieved by fiscal policy, not by NPFG.

Another best practice example is the case of Chile, also mentioned by the report for following its example regarding stabilising revenues. This fund is designed to smooth the impact of copper price fluctuations on the economy, particularly on the real exchange rate and on government revenues. Again, a link to short, medium and long-term fiscal goals has made the fund successful. Windfall gains were successfully saved for leaner periods and to reduce public debt and the fund has ensured that government expenditure is de-linked from fluctuations in copper prices. The CSF was used during periods when copper prices decline and to reduce foreign debt. The Copper Stabilization Fund was created in 1985 and in 2006 Chile passed the Fiscal Responsibility Law which involved the creation of two new sovereign wealth funds. The first of these is the Pension Reserve Fund (PRF) which is essentially a Savings Fund (no withdrawals are allowed to be made from the fund for a minimum of ten years). The aim of the Pension Reserve Fund is to address an expected future government pension liability shortfall. As a Savings Fund, it takes a longer-term view and has the responsibility of enabling a transfer of wealth from one generation to the next for the purpose of future sustainability.


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In 2007, the Chilean Government created the second fund, the Economic and Social Stabilization Fund (ESSF). This fund replaced the original Copper Stabilization Fund. It receives fiscal surpluses which are above 1% of GDP and came into existence with a one-off payment of approximately $5 billion (as a result of the closure of the original Copper Stabilization Fund). The Economic and Social Stabilization Fund, on the other hand, has macroeconomic stabilization objectives. It has the aim of accumulating excess copper revenues when the price of copper is high in order to channel revenues into the budget when the price of copper is low, thereby smoothing out government expenditure.

Best practice shows that resource revenues should not be earmarked for specific expenditures, there should be genuine competition for fiscal resources to avoid separate oil fund institutional frameworks. A sovereign wealth fund requires explicit procedural and operational rules. Operational rules for resource funds should facilitate the process of meeting basic fiscal policy objectives through the budget. Aligning resource funds with general budgetary practices will reduce the risks of creating a dual budget through direct spending from a resource-related fund or undermining the transparency or efficiency of budgetary spending by earmarking revenues for specific purposes.

Rigid operational rules-such as a requirement that a predetermined share of specified resource revenues be deposited in the fund or that deposits or withdrawals be linked to the level of prices or revenues can complicate or conflict with fiscal policy. No money should be spent directly from the fund, and any use of the fund should be through the government budget and subject to normal budget appropriation processes. The investment policies for assets accumulated through resource revenue savings should be clearly stated, including through a statement in the annual budget documents.

The SIMS report proposes to follow the Norwegian model for its inter-generational component but does not go into much detail as to what that means in practice. It also states that it will look at the model of Chile for ways to stabilize the budget in case mineral prices fall, but again without much further detail. Worrisomely, the link with the budget and fiscal policy is not discussed in the SIMS report, but it does become clear that the proposed structure of the SWF differs from Norway’s SWF. For example, contrary to the Norwegian model and contrary to best practice, the SIMS report proposes to earmark the resource revenues: 30% of SWF expenditures will go into the budget when commodity prices fall, 30% of the SWF will go to regional development, and 40% will go to a minerals development fund (with 6 earmarked spending categories within the minerals development fund).

The minerals development fund seems to be based on the dedicated fund created by Chile to invest revenues from a specific R&D mining tax on mining R&D. In Chile this is, however, a separate fund from the SWF. In South Africa it seems that the minerals development fund is subdivided into 3 separate funds, of which the mineral development fund is one. The 30% of the SWF that will go into the budget when commodity prices fall is tricky. Again, withdrawals linked to the level of prices or revenues can complicate or conflict with fiscal policy, so clear procedural and operational rules will need to be agreed upon and will have to be in line with fiscal policy. The ANC research team also proposes to keep all RRT revenues in the fund, while best practice state that a requirement for a predetermined share of specified resource revenues to be deposited in the fund can again conflict or complicate fiscal policy. However, assuming that RRT proceeds increase when prices increase, this would mean that only excess revenues would be saved in the fund, which will indeed reduce the volatility of the state budget. The SIMS report does not mention however that the goal of the SWF is to protect the budget from swings in


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revenues due to mineral price fluctuations. Rather, the goal of the proposed SWF is to fund the budget when prices fall, which is clearly different from expenditure smoothing. The success of the two best practice models has been that the funds have ensured that government expenditure is de-linked from fluctuations in resource prices. With the current proposed model, the ANC will not achieve this. A discussion should take place about what happens if commodity prices are higher than estimated (would revenues stay in the budget or be accumulated into the fund?), and it needs to be made more clear which aspects of the Norwegian and Chilean model will be followed and why. The solution will be in developing clear operational and procedural rules and explaining in more detail how the SWF is linked to the budget and fiscal policy, keeping the Chile and Norway examples in mind. What could be proposed, for example, is to keep all mining revenues in the SWF instead of just the proceeds from the RRT, and link the spending of the SWF to the non-minerals state budget like in Norway.

6.3. Financial Management

Financial management of resource funds requires decisions on asset classes in which funds will be invested and on asset management. Decisions on asset classes will depend to a large extent on attitudes towards risk and time horizon and will differ between stabilization and savings funds like in the case of Chile. Additional considerations such as portfolio diversification and avoidance of Dutch Disease argue for investing in assets outside the resource sector and outside the domestic economy. Therefore, the SIMS report states that RRT revenues should be kept in an offshore sovereign wealth fund to ‘ameliorate the strengthening of the Rand during commodity booms’, which is called ‘Dutch Disease’.

Dutch Disease in the literature is referred to as the phenomenon that takes away activity from the non-resource sector towards the resource-sector because currencies of resource-rich economies will appreciate because of resource exports. The rise in the exchange rate makes non-resource tradable goods and services more expensive, and thus their competitiveness decreases. The economy will shift more towards the resource sector, thereby crowding out the non-resource sectors. Decoupling fiscal policy from revenue fluctuations works to minimize the Dutch Disease through the containment of fiscal spending and the sterilization of some proportion of the revenue windfall. This will contain the increase in domestic absorption, and to a certain extent the nominal exchange rate appreciation. Besides the accumulation of savings, an alternative way to sterilize windfall and take the pressure from the real exchange rate is to use profits to repay public debt. This can strengthen the fiscal position and give the government room for manoeuvre during revenue downfalls. Government investment and incentives directed towards the resource-rich sector, however, can exacerbate “Dutch disease” effects. On the other hand, directing government spending and subsidies towards infrastructure, capital deepening, and adoption of new technologies in non-natural-resource traded sectors can help maintain a diversified export base. Fiscal policy can also contribute to minimize Dutch disease effects by limiting expenditure directed at the natural resource sector and at non-tradables. Instead, expenditure aimed at supporting the tradable non-natural resource sector and non-tradable sectors would be beneficial for diversifying the export base, and containing the rise in the price of non-tradables relative to tradables. Careful macroeconomic management and prudent fiscal policy can mitigate the impact of this phenomenon, and a transparent approach to fiscal policy will provide a sound basis for securing public support for the difficult policy and spending choices that are sometimes required over the longer term.


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40% of the SWF proposed by the research team will be spend on the minerals development fund, which will be invested in South Africa. Therefore, this will not contribute in countering the effects of Dutch Disease. Adding to that is the fact that this 40% will be used to invest in the resource sector, thereby lacking to attempt to diversify the economy away from the natural resource sector to minimize Dutch Disease effects. Lastly, again, there is no discussion about the link to fiscal policy, i.e. reducing debt or investing in the non-resource sector to reduce Dutch Disease effects. Therefore, the effects of the ANC research team proposals on Dutch Disease effects are questionable.

6.4. Payments and Withdrawals, and Fund Management

Procedures for payments into and withdrawals from funds may differ depending on the type of fund. For stabilization funds, good practice would link these to the annual budget process and near term revenue forecasting since the intent is to allow expenditure smoothing. For savings funds the focus when considering deposits and withdrawals is on the long-term sustainability of spending out of resource wealth. Parliamentary or presidential approval may be required to authorize such transfers to and from the fund. In many countries, however, rules have been introduced to make amounts added to or withdrawn from the fund automatic. Rules have the perceived advantage of reducing discretion, but may themselves create serious tensions when their operation proves inappropriate to actual country circumstances or developmental priorities. Agreeing on guidelines rather than fixed rules may be helpful in addressing this issue, provided fund administrators are obliged to publicize and defend any deviation from the adopted guidelines. For the proposed SWF there should be a clear specification of operational rules and responsibilities over spending and borrowing by resource funds.

Lastly, fund management in most of the best practice cases is assigned to the central bank, which typically engages third-party custodians and specialist asset managers for safekeeping and investment of the assets. A set of asset management mandates based on risk and return objectives provide benchmarks for the assessment of performance by government-selected fund trustees or their delegates. The investment policies for assets accumulated through resource revenue savings should be clearly stated, including through a statement in the annual budget documents. It is critical that such policies be developed for the proposed SWF.


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7. Conclusion

The aim of the ANC is to increase the developmental impact of mining and enhance its contribution to poverty eradication and improvement of the lives of South Africans. Therefore, according to the SIMS report, minerals should not be extracted solely for profit maximization. The SIMS report’s policy proposals are aimed at capturing resource rents and to use those to invest in knowledge and physical infrastructure, thereby industrialising, diversifying, and creating jobs. This way, the mineral sector is intended to be a catalyst to create a competitive economy, which will survive after depletion of the mineral assets. This has been a strategy of many of the best practice countries that now have strong economies and high levels of development. The SIMS report should be commended for acknowledging the fact that the minerals sector does not solely have to be a revenue source, but that it can be used to support broader development goals as well.

There are certain technical factors that make best practice countries like Chile, Canada and Norway stand out in the way in which they have managed to use the extractive industries sectors for sustainable development. For example, the countries have good infrastructure, they have a high availability of labor and skills, they have policies in place aimed at attracting foreign direct investment, information on the geology and deposits within a country are easily accessible and publicly available, and the licensing procedure is transparent, predictable and fair. In bad practice countries like the Democratic Republic of Congo and Bolivia, these features are largely missing. When measuring South Africa against these requirements, we see that it often falls in the middle section, somewhere between the best practice and the bad practice countries.

When comparing the technical factors needed to harness the mining sector for development against the policy proposal of the SIMS report, we see that all of these features are addressed. The SIMS report proposes to increase infrastructure, invest in labor and skills, attract foreign direct investment, increase information on South Africa’s geology, and it proposes a restructuring of the current licensing process.

However, making sure that South Africa can be called a good practice country in the future will require more than just putting in place technical solutions. The two most important determinants of best practice countries are political stability and good governance, referring to transparency, participation, accountability and low levels of corruption. On these non-technical success factors South Africa scores in the middle section again, in between the good and the bad practice countries.

Making sure that the mining sector contributes to development, employment and economic growth cannot be achieved by solely focusing on technical issues. Applying good practice policies in a country with bad governance will not make a difference, unless the policies address the weaknesses in the political economy itself. For example, creating a sovereign wealth fund with exactly the same regulation and structures as the Norwegian fund in the DRC will not generate the same outcomes in the DRC, simply because the institutions and quality of governance is significantly and inherently different between the two countries.

Where governments have a serious commitment to reform and development, policy responses to the challenges of state participation have been positive. The Norwegian political, social and economic contexts stems from a long tradition of transparency and public debate. Therefore, the current political context is critical in determining future


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outcomes of state participation in the mining sector, and whether or not a state mining company or any changes in the mining regime will contribute to a genuine commitment to reform, development and transparency, or if it will be used to worsen and intensify structures of bad governance already in place. The same is true for signing up to EITI. The majority of countries that participate in EITI are those that value the reputational gains that it brings. In countries with a lack of genuine commitment to transparency and good governance the commitment to the EITI process should be looked at as a reputational issue, and it has not lead to any tangible reforms or policy outcomes. That is not to say that South Africa should not sign up to the EITI, as it will mean that data that has never been in the public domain before will become available for the first time. It should be kept in mind, however, that the results of EITI in terms of broader transparency and good governance will be minimal, and should not replace regular audits, reporting requirements, and oversight of the state mining company. Again, we see the same phenomenon with Sovereign Wealth Funds. SWFs that are owned by democratic governments featuring stable institutions, pluralism, political participation, and a liberal political culture show higher commitment to and implementation of the Santiago Principles. Again, technical solutions such as the setting of resource-based funds will not work unless supportive constituencies will be developed in support of these measure, and the political economy contexts is based on the premises of good governance.

The current political economy context in South Africa will influence the outcomes of the proposed policies. The level of good governance, transparency, accountability and participation play a major role in determining the effect of the implementation of the proposed policies. Policies focused on enhanced governance are central to the process. For each of the technical policy proposals of the ANC research team it is key that some non-technical issues are addressed, such as transparency and the availability of information to the public, capacity levels and incentives at the implementing agencies, conflict of interest, and clarity and transparency of decision-making processes. In order to stimulate good governance, the ANC should allow for third-party, parliamentary and judiciary oversight of the mining sector, giving other stakeholders a say in how the mining sector and its benefits should be managed. Without a strong commitment to good governance, and a clear outline of ways in which good governance and non-technical issues will be addressed, the SIMS reports are likely to fail in practice.

Finally, there are several issues that deserve special attention:

1) Competitiveness of South African companies: Best practice countries have deliberately aimed at making their economy competitive. They have set up a national resource company and have implemented local content policies in order to make these companies and therefore the overall economy competitive in the long run. Such an aim is lacking from the SIMS report. The danger is therefore that a rent-seeking, inefficient public and local private sector is created, protected by disincentivising policies and legislation.

2) Government capacity and coordination: The government will play a key role in the policy packages proposed in the SIMS report. Capacity to administer these new policies is key to their success. Taxation and the specific, predetermined use of revenues, the implementation of local content policies, and the new licensing procedure will require skilled and resourced governmental departments. With a state mining company in place as well, the government might have to put in place extra measures to attract the best qualified and motivated staff, a problem often seen in other countries as well. The ANC’s aim should be to create an efficient,


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effective, well-resourced and capacitated bureaucracy. Institutional responsibilities amongst the agencies and departments need to be well defined, clearly separated and enforced in practice. Overlapping or conflicting roles, and regulatory gaps, need to be avoided.

3) Diversification and sharing benefits with the broader population: The SIMS report states that its aim is to generate resource rents and ‘capture these for social and economic development’. International best practice shows that, in order to stimulate long term growth and development, revenues are best invested in sectors like infrastructure, education, health, manufacturing, agriculture, etc., i.e. sectors not related to the mining sector. This way, the broader economy can benefit from the revenues generated from mining and they will be invested for long term sustainable development. Additionally, investing in non-resource sectors will simulate diversification of the economy and will contribute to the competitiveness of non-resource sectors. Best practice countries are known for having competitive economies outside of the resource sector, and worst practice countries depend solely on a non-competitive natural resource sector. In the DRC, for example, infrastructure is built only to facilitate export of natural resources, rather with the aim of facilitating in-country connectivity and trade. Much of the SIMS reports are aimed at building capacities in the mining sector, increasing funding for the mining sector, and strengthening the mining sector in general. Even though one of the goals of the ANC research team is to diversify the economy, this will not be reached if the mining rents are re-invested mainly in the mining sector. Best practice countries have managed to diversify away from the natural resource sector, while worst practice countries are overly dependent on the volatile and finite extractive industries sector. In order for the mining sector to benefit all South Africans, more attention needs to be paid as to how the resource rents are invested in projects that stimulate long term sustainable development for the whole population, not just a selected few and those employed in the mining sector. For example, investment in infrastructure, health, education, and government finances are ways in which best practice countries have managed to diversify their economy away from the resource sector so that the whole population can benefit from the resource endowments indirectly. The SIMS report states that funds will be spend on education and regional infrastructure, but with the intention of serving the mining sector in the long run. Questions should be raised as to whether or not, and how, this might lead to long-term social and economic development, as the strategy for spending mineral proceeds seems to be overly focused on the mining sector itself, losing sight of the aim stated by the SIMS report to diversify the economy away from the natural resource sector.


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