AMN - Mining investment needs to be made more attractive - comment by Yolanda Torrisi

In this week’s editorial comment I am going to use a speech presented by Leon Louw, executive director of the Free Market Foundation, at a hearing in Pretoria mid this year to the Minerals Board, which is investigating job losses in the mining industry.

Louw said that a sector may decline for various reasons, most of which cannot and should not be avoided by policy interventions. For example, when ox wagons were replaced by superior forms of transport the ox wagon industry declined and 100% of jobs rightly disappeared.

Louw rejects the idea of beneficiation as dangerous and nonsensical and suggests that the only way to avoid job losses in the sector is to make investment in mining attractive. This can be done by liberalising labour law, lowering taxes, removing threats of nationalisation, and reforming mining laws so as to replace discretionary power with objective criteria and long-term certainty that the ‘rules of the game’ will not be continuously revised. 

In mining, the decline in jobs can be because of resource depletion, giving the example that the UK government wasted absurd sums of money trying to prevent the decline of its coal mining industry when rich deposits had been exhausted. 

Counter-productive government policies, which may cause sectoral or ‘structural’ decline can be avoided. Examples in South Africa are the excessive cost raising impacts of energy policy, transport policy, labour policy and mining regulation. 

The catastrophic failure to implement electricity reforms in terms of the energy White Paper and the National Development Plan has meant that one of the highest costs of mining has risen excessively, making marginal mines unviable. 

The failure of South African railways to transport mining equipment and output efficiently forces mines to use costly road transportation and imposes billions of rands of damage on South Africa’s road infrastructure. 

The nationalisation of mineral rights confiscated a substantial proportion of mining company assets worth tens of billions of rands. This deprived mines of capital with which to invest and create or sustain jobs. Labour policy has raised the cost of mining significantly thereby also causing marginal mines and jobs to be lost.

Leon Louw was questioned about the claim that mining companies do not pay decent wages while CEOs are paid large sums of money. His reply was: “Just as workers do not work for any reason other than income, investors do not invest for any reason other than profit. Their motives and morals are irrelevant.”

In reference to the CEO pay he said that if South Africa wanted the world’s best CEOs to run our mines thereby ensuring we have the world’s best mining sector, creating the most jobs, we should offer to pay more not less.

In relation to mining regulations, he highlighted the fact that discretionary powers make certainty and stability difficult to achieve. He said virtually every provision entailed arbitrary discretion by officialdom, which created so much uncertainty and unpredictability in investment decisions. Even if regulations were bad, investors could cope if there was stability and certainty. 

There is policy schizophrenia towards productivity improvements and job losses. On one hand government wants higher productivity, which in the mining sector means greater tonnages processed per worker or similar which mining has achieved with output per worker rising hundreds of per cent during recent decades. This is not because of better management or harder work. On the contrary, workers work fewer hours under improved conditions. Spectacular productivity gains are due to technology improvements or ‘capital-labour substitution’. Machines have replaced people – higher productivity means more output per person and less employment. 

Conversely, more jobs can be achieved by lowering the cost of labour though less favourable employment conditions and wages. He cited the example of an American engineer who, on a visit to China, encountered a crew of men building a dam with picks and shovels. Pointing out that using earthmoving equipment, would take less time, the response was that using equipment would destroy jobs.

He said, “If job creation rather than dam building is your goal, why not employ additional men and let them dig with spoons” 

One of the most dangerous and nonsensical ideas is that ‘beneficiation’ can create jobs in the mining sector. The first part of this myth is that beneficiation is neither mining nor in the mining sector. There is no rational reason for believing that it is economically sensible to process minerals simply because they happen to be in a country. If you are efficient at processing copper then you should do so regardless of where copper is mined.

The governor of the reserve bank Lesetja Kganyago said recently, all raw materials are available to all manufacturers in countries at precisely the same price everywhere and where a particular material is produced is completely irrelevant.

- Yolanda Torrisi is Chairperson of The African Mining Network and comments on African mining issues and the growing global interest in the African continent. Contact:yolanda@yolandatorrisi.com