Broadening transformation efforts in the mining sector

May 7, 2019

MINING REVIEW / 06 MAY 2019 - 15.11 /  SELINA ZHUWARARA

 

 

Every mineral rich country seeks to maximize the value and benefits from the exploitation of its resources.

 

There are various measures that can be utilized to ensure that governments model mineral resource policies to their best advantage and one such popular measure is stipulating mandatory local equity allocations on mining projects.

 

 

 

 

Governments usually request investors to reserve a specified quota of shares for government shareholding or to be reserved for local uptake. This requirement has raised significant debate, more so when the condition is stipulated as a free carry interest.

 

The reasoning behind the requirement is that mineral rich countries want their governments or citizens to have space in large scale mining projects which are normally dominated by foreign investors and to also partake in the share of revenues and profits generated by such projects.

 

The condition is also widely used as a mechanism for oversight, influence and control over minerals which are considered strategic.

 

However, the question that come to mind is how effective is this measure faring in improving the integration, influence and participation of locals in large mining projects in mineral rich developing countries?

 

In previously colonized countries the equity participation quota also has a unique role; it is used as a critical tool in achieving inclusive participation and wealth distribution to formerly marginalized groups and segregated sub-economies.

 

However, it is clear that most developing countries are still working out the right balance concerning local equity participation and it is likely that we will continue to see changes to policies in coming years.

 

Many lessons have been learnt and are being learnt by mineral rich developing countries as they try to enforce and implement this measure.

 

The unintended result in some instances has been to deter new investment, shrink the appetite for expansion and slow down exploration projects. For example, Zimbabwe and Namibia recently reversed their indigenous quota requirements in a bid to drive more foreign investment to their mining sectors.

 

South Africa on the other hand is determined to make progress on this issue through intensive negotiations and ongoing consultations with stakeholders on the implementation measures surrounding the 2018 Mining Charter’s increase of its Broad-Based Economic Empowerment (BEE) equity requirements from 26% to 30%.

 

The Democratic Republic of Congo also raised its free carry state equity requirement in 2018 from 5% to 10% in mining projects and stipulated a further 10% shareholding reservation for local equity uptake.

 

The measure is common place in many mineral rich nations.

 

As stated above, the intention of the measure is to increase mining returns and revenues to the host country through the receipt of dividends and sharing of profits.

 

It is also a measure of oversight and institutionalization of local interests through ownership structures in these projects. Whilst these goals are achievable, it is also important to examine whether mining industries are being sustainably transformed or becoming integrated through these measures.

 

The current efforts being made to reserve mandatory equity quotas are well meaning but it is important to accept that they will not be sufficient in themselves to wholly drive the agenda of full transformation and inclusivity in the mining sector.

 

The current strategy concentrates more on grafting local equity participation in large mining projects and ensuring that these projects also utilize as much local content as possible without also complementing this effort by creating viable and sustainable structures that maximize the feasibility and growth of artisanal, small and medium scale miners.

 

Therefore, the current approach is a limited application of how indigenization or local participation initiatives can be implemented.

 

A wider approach is required to ensure that integration is occurring at both ends of the economic spectrum, at the top where mega projects are taking off and at the bottom where lower and middle class citizens and businesses can legitimately enter and be successful in the mining sector.

In order to achieve transformation and inclusiveness the discussion of participation should go beyond integration of local equity on large scale projects.

 

The discussion should include the appropriateness of current fiscal, governance and legislative systems in accommodating growth from the sectors grassroots.

 

The benefits of mining should not be narrowed to mean that success and development are only achieved through big mining projects.

 

It should be recognized that as long as the benefits of mining are tied to the existence and viability of foreign investors, then the strategy is not sustainable.

 

Whilst it provides immediate returns and support, there is always the risk that the investor can shelve or terminate the funding in which case all the backward and forward linkages that the project sustained are immediately affected or even extinguished.

 

Significant broad based development can also be achieved by enabling and promoting smaller local enterprises and individuals to find space in the commercial mining spectrum.

 

Mineral policy systems should be able to accommodate and harness the potential of both large and small players effectively.

 

In practice this means that mineral rich developing counties have to formally recognize all the different classes of players that exist in the mining sector and tailor regulation and support structures in accordance to their unique needs.

 

This spectrum of players encompasses large companies, small and medium scale companies and artisanal miners. Each player has its own set of strengths and limitations and therefore all players should be performing at their optimum in order to overcome the limitations of the others. As a first measure, clear legal and regulatory recognition should be given to artisanal miners.

 

The formalization of the artisanal sector is important in fighting poverty and curbing illicit trade of minerals. There is a need for decisive political and legislative commitment to finalize policy and regulatory reform on the formalization of artisanal mining.

 

Uganda recently took a positive step by engaging the services of the African Center for Energy and Mineral Policy to do the mapping, biometric registration of artisanal, small scale miners, laborers, dealers and agents and thereafter to model a sector specific management strategy.

 

In 2017, in a bid to also co-opt artisanal miners in formal structures Nigeria launched a N5 Billion Fund for artisanal and small scale miners that can be accessed by artisanal miners if they register as co-operatives and make applications for funding.

 

The potential of the artisanal sector is continuing to gain recognition and more international standards are being introduced in recognition of the part artisanal miner’s play in the mining industry.

 

The Diamond Development Initiative recently launched the Maendeleo Diamond Standards which is a certification standard for artisanal diamond miners.

 

These initiatives need to be complemented by mineral rich countries through comprehensive sector specific legislation and regulatory measures that define, cushion and promote sustainable growth to artisans.

 

The integration and support of smaller players in the mining sector has a stronger and direct economic feedback to local economies and communities and also results in better distribution of the benefits of mineral wealth.

 

Various measures can also be implemented to support small and medium scale players. These entities are the large players of tomorrow. In order to improve their capacity and access to markets, developing countries have to be prepared to capacitate the sector and break down barriers that limit access to alternative markets.

 

Promoting access to international commodities markets breaks the limitations of the local market and ensures the receipt of competitive returns thus spurring growth.

 

In most cases the cost of accessing and facilitating international trading is prohibitive and renders this sub-sector vulnerable to the local predatory trade dynamics which has been noted to be the case in the small scale chrome sector in Zimbabwe.

 

The adoption and promotion of advanced technological solutions, use of sustainable energy sources and the availability of solid financial support structures can also play a significant role in improving operational capacity and revenue realization from small and medium scale miners.

 

The support structures should not be sporadic or piecemeal; all efforts in growing this sub-sector need to form the core of the transformative efforts in the mining sector.

 

An additional issue that’s needs to be considered is that mineral rich developing countries have remained largely reliant on foreign capital for the exploitation and development of its mineral resources.

 

Relying on foreign capital has resulted in developing countries struggling to develop mature mining industries beyond the extraction and export of raw materials.

 

It has also perpetuated a situation where a significant portion of the profits generated by extraction are outward bound to the proprietors of the capital. It is very difficult to drive core issues and the trajectory of development in the mining sector when you do not own the capital that is being utilized.

As a result mining industries in developing countries have remained limited to the areas that encompass the investor’s scope of interest.

 

Developing countries need to lean into their internal capacity to also raise a significant portion of capital employed in the mining sector. This will enable the industry to readily deal with issues of transformation and drive the interests and goals of the nation in question.

 

Capital can be directed towards those areas that investors shun but are critical to the industry growth such as extensive exploration, promotion of smaller enterprises and beneficiation.

 

This approach will reinforce long term sustainability of the industry and create a stable and predictable platform for sustainable broad based development and diversification of economies.

It will also result in the attainment of transformation and inclusiveness sought in most developing host nations.

 

The intention of indigenization and transformation should not end at attaining equity in mining companies or ensuring that multinationals use goods and services in host nations.

 

The ultimate intention of indigenization should be reaching a point of self actualization, self sufficiency and the distinctive ability to meaningfully drive the sector in direction that meets a nation’s needs and objectives. In order to achieve this mineral rich countries need to participate more in providing capital for developing their mining industries and not only wait on foreign investment.

 

Participation and inclusiveness in the mining sector should also encompass the ability of small and individual enterprises to flourish and contribute to the greater national fiscus. Growth should be fostered from both ends, at the top and at the bottom.

 

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LINK : https://www.miningreview.com/gold/transformation-mining-sector/

 

Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER

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