Department of Mineral Resources (DMR) budget, spending patterns, and Financial and Fiscal Commission (FFC) recommendations: FFC briefing

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Mineral Resources and Energy

10 October 2012
Chairperson: Ms F Bikani (ANC) (Acting, in the absence of Mr F Gona (ANC))
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Meeting Summary

The Financial Fiscal Commission (FFC) provided a brief history and mandate of the Commission, explaining the reporting process of recommendations to Parliament and the expansion of briefings to Portfolio Committees.  The FFC explained that the recommendations made to the Medium Term Expenditure Frameworks, the Medium Term Budget Policy Statements and the Division of Revenue Bill were not binding, but that Government would need to report to Parliament on responses to them. The FFC's recommendations were not binding, as these were the remit of Parliament. 

The current and historic budgets of the Department of Mineral Resources were presented in two ways to demonstrate areas expenditure by four programmes (administration (R238 million); promotion of mine safety and health (R154 million); mineral regulation (R180 million) and mineral policy and promotion (R595 million) and by economic classification (transfers and subsidies at 48 per cent; compensation of employees at 34 per cent; goods and services at 17 per cent and payments for capital assets at 1 per cent).  Trends were presented to show the growth of these budget areas in real and nominal terms.  It was noted that mineral policy and promotion comprised the largest area of expenditure, reflecting the indirect regulatory role of the DMR in economic development through mineral resources.  By economic classification it was highlighted that compensation of employees was 3 per cent higher that the average Government department.

The FFC highlighted a number of issues impacting on the mining industry in South Africa, including the global recession and recent industrial unrest.  It was explained that as expected for a developing economy the mining sector share of gross domestic product (GDP), currently at 8.6 per cent, had been steadily declining over the last century as manufacturing and services increased share.  Despite this mining remained a key driver of the South African economy, stabilising it during the recession and representing 30 per cent of investments on the Johannesburg Stock Exchange.  Within the National Development Plan employment growth in the mining sector was targeted to achieve 140 000 additional jobs by 2020, whilst recognising that increased mechanisation and development would probably lead to fewer mining jobs and that 40 000 had been lost through the financial crisis already.  The challenge therefore was to identify other areas of growth within the mining value chain to achieve these growth targets.

The FFC presented three key approaches to achieving this growth:

- Capturing more value in existing industries such as by developing forward and backward linkages in the mining value chain.

- Upgrading emerging and potential industries such as increased beneficiation, increased regional activity and investigation of global production chains for gas and energy.
- Developing long term latent comparative advantage through education, information technology (IT) software, regional and global heavy industry and sustainable energy.

The FFC presented three key areas in which these approaches could be supported:

- Capital accumulation.  In particular increasing savings for investment and increasing the share of domestic capital for investment.

- Knowledge accumulation. Critical to capturing latent comparative advantages to enable South Africa to transition from a low value-added economy to more knowledge intensive industries. Therefore a funding framework was recommended based on a policy of institutional differentiation to meet the FFC's concerns for dividing revenue between higher education, further education and research.

- Macro and goods and services.  Pursuit by Government of investment in public infrastructure that had a positive impact on factor productivity. Rewarding job-creating businesses. Demand stimulation through Government procurement policy. Development of job plans for all spheres of the employment market.

Members asked questions on Parliamentary responses to FFC recommendations and the powers of the FFC to impose sanctions following departmental audits.  Some Members questioned the higher than average compensation rate for employees of the DMR.  They asked about the decline of the sector, potential areas of competitive advantage for South Africa and the impact of sustainable sources of energy on mining. They asked how savings rates could be improved for investment, how private businesses could be rewarded for successful job creation and whether the FFC had a view on the debate over nationalisation versus privatisation of mining companies.

Meeting report

DMR budget and spending patterns: FFC recommendations – FFC briefing
Mr Bongani Khumalo, FFC Acting Chairperson and CEO, advised that the FFC was formed in 1994 as an independent, statutory body according to Section 221 of Chapter 13 of the Constitution.  The FFC reported to Parliament as mandated in Chapter 13, which included tabling recommendations on the Division of Revenue (DoR) every May (10 months prior to the tabling of the DoR Bill by the Minister of Finance) for the following fiscal year and for the Medium Term Expenditure Framework (MTEF). The FFC then submitted responses to the Medium Term Budget Policy Statements (MTBPS) and the DoR Bill.  The FFC also provided ad hoc reports on request to state organisations. 

FFC recommendations were made to Parliament, not Government, and were not binding.  However, Government must advise Parliament how it dealt with the FFC recommendations in setting the DoR as part of the DoR Bill submission.

Mr Khumalo advised that the on-going recovery of the South African economy from the recession, uncertainties within the minerals industry, internal, disruptive events in the South African mining industry, and a general global economic slowdown made it very important to review how the Department of Mineral Resources (DMR) spent the budget. 

Dr Ramos Mabugu, FFC Head of Research and Policy, advised that South Africa had experienced its first recession in 20 years, which reversed the robust economic growth experienced between 1992 and 2008. Dr Mabugu advised that mining contributed 8.6 per cent of the South African GDP, and had remained robust from the external shocks of the recession whilst other industrial sectors had contracted.  Although the mining sector appeared small, it had played a stabilising effect to support the economy.  However, subsequent internal unrest had destabilised the mining sector.  South Africa had abundant natural resources, including global reserves of 90 per cent of platinum metals, 80 per cent of manganese, 73 per cent of chrome, 43 per cent of vanadium and 41 per cent of gold.  The 8.6 per cent share of GDP mining contributed to the economy had been declining due to expected structural changes in the economy as first manufacturing and then service industries grew and the economy moved from a dependence on resources.  8.6 per cent was only the direct contribution of mining to GDP, indirectly it contributed around 19 per cent.  Mining represented 30 per cent of the Johannesburg Stock Exchange (JSE) market value, making it a key sector for investment and critical for future economic prosperity.  The mining of coal accounted for 93 per cent of domestic electricity production and 30 per cent of liquid fuels through Sasol.  The indirect impact of mining included remittances, clinics, schools and nearly 400 000 jobs around the mining centres and industries, which also highlighted the contribution of mining to rural development.

Mr Mabugu outlined the key challenges for the sector including the global economic outlook; public spending cuts; changes within the industry, such as ownership, beneficiation and state mining companies; the impact of mining strikes on the economic growth and investment; uncertainties around nationalisation and confusion between municipalities and traditional leaders.

Mr Jugal Mahabir, FFC Researcher, presented the DMR budget analysis.  The total budget for 2012/13 was R1.1 billion, which had been allocated in four programmes; administration (R238 million); promotion of mine safety and health (R154 million); mineral regulation (R180 million) and mineral policy and promotion (R595 million).  At 51 per cent of the budget, mineral policy and promotion was the largest expenditure area, which reflected the indirect regulatory role of the DMR in economic development through mineral resources.

Broken down by economic classification, the budget comprised; transfers and subsidies to DMR agencies, public and private enterprises and households at 48 per cent; compensation of employees at 34 per cent, which was higher than the national Government average of 31 per cent; goods and services at 17 per cent and payments for capital assets at only 1 per cent.

The budget for the DMR had grown in both nominal and real terms (15 per cent nominal growth in 2010/11), but the recession had suppressed growth a little. The DMR was relatively new, formed by the splitting of the Department of Minerals and Energy in 2009, so budgets should be viewed in this light and they reflected adjustments in the Estimates of National Expenditure (ENE).  The 2011/12 budget declined in real terms due to the decline in national revenues and a tight fiscal framework.  The MTEF for 2012 allowed for no real budget growth.

Nominal and real growth of the budgets by programme showed the largest increase in mineral policy and promotion at 11 per cent (nominal) and 5 per cent (real) over the period presented, and it remained the fastest growing programme in the 2012 MTEF. However, since 2006, administration had been the fastest growing programme at 12 per cent in nominal terms. 

By economic classification grants and subsidies accounted for the largest expenditure share at 50 per cent, whilst the highest growth at 11 per cent was in compensation of employees.  Increases in employee costs appeared to have been managed by reductions in transfers and subsidies, which had experienced negative real growth over the period.  Growth rates for goods and services had been erratic.

The first audit of the newly formed DMR was undertaken in 2010/11 and was qualified due to non-compliance with laws and regulations in areas of current assets, liabilities and revenue, and unauthorised, irregular, fruitless and wasteful expenditure.  There were five entities and agencies reporting to the DMR. The Mine Health and Safety Council and the South African Diamond and Precious Metals Regulator both received financially unqualified audits with findings, which related to non-compliance with laws and regulations.  The Council for Minerals Technology, the Council for Geoscience and the State Diamond Trader all received clean, unqualified audits with no findings.  The entities and agencies performed effectively financially, which indicated that the DMR monitored them well.  The FFC suggested that the poorer performance of the DMR might have been due to its newer administration.

Dr Mabugu presented the recommendations the FFC had made to the Minister in May 2012.  These were based on an acknowledgement of the following issues; the social hazard of high unemployment; poverty; worsening inequality and climate change.  The Government New Development Plan (NDP) called for 5 million new jobs by 2020, of which the mining sector was to deliver 140 000 by 2020 and 200 000 by 2030, despite mining losing 40 000 jobs during the recession.  In addition the mine disturbances had strangled jobs growth and caused threats of retrenchment in the sector.

In developing the recommendations, the FFC considered those market sectors with diversification and growth potential that could contribute to the NDP and identified the market failures, in which Government could intervene to foster industrial development.  The FFC reviewed the South African factor endowments of land, manpower and minerals.  Agriculture, construction, labour-intensive manufacturing and mineral mining dominated investment in South Africa.  Analysis of South African exports demonstrated the dominance of raw mined resources, but also a comparative advantage in manufactured goods.  South Africa had a short to medium term comparative advantage in resource based and labour intensive activities.  There was a need to sustain the ‘take-off’ stage of industrialisation to avoid a reversal of the structural decline of mining in favour of manufacturing growth.  The FFC defined finding sources for investment and growth as a key challenge and highlighted the need to capture more value in existing industries. 

The FFC identified three approaches to achieve this growth.  Firstly, through capturing more value in existing industries such as by developing forward and backward linkages in the mining value chain; secondly through upgrading emerging and potential industries such as increased beneficiation, increased regional activity and investigation of global production chains for gas and energy; and thirdly, the FFC identified the need to discover long term latent comparative advantage through education, information technology (IT) software, regional and global heavy industry and sustainable energy.

The FFC identified three key areas (capital accumulation, knowledge accumulation and goods and services) for Government intervention to promote growth. 

Capital accumulation in South Africa was hampered by low savings rates.  The NDP identified that savings and investments in South Africa (at around 16 per cent of GDP) were below the threshold (24 per cent of GDP) required to achieve growth of 4 per cent per annum.  This compared unfavourably to other BRICS (Brazil, Russia, India, China and South Africa) members savings rates, such as China at 40 per cent.  South Africa was actually a nation of borrowers with a negative savings to income ratio.  There had been modest pick up in the investment rate in 2011, but the global crisis kept this slack. Government had a balancing act to achieve inclusive growth and job creation alongside low inflation and fiscal sustainability, whilst facing infrastructural challenges, such as the lack of electricity generation capacity and weaknesses in service delivery.  The FFC advised that targeted infrastructure spending could increase GDP, but that intergovernmental transfers (IGFTs), whilst addressing issues of redistribution (inequality and social cohesion) did not contribute to economic growth.  The FFC also found that, in relation to fiscal policy, Government spending was not sufficient to create the number of jobs required. The FFC concluded that a combination of policies would be required to promote growth through capital.

Knowledge accumulation was critical to growth in order to capitalise on the latent comparative advantages of South Africa.  South Africa needed to transition from a low value-added economy to more knowledge intensive industries, which required Government investment in tertiary education.  FFC analysis identified issues with basic education, which could be enhanced by e-learning, a supply-demand mismatch in Higher Education, in which labour market needs did not match supply, and a lack of investment in quality education and research and development.  Therefore a funding framework was recommended based on a policy of institutional differentiation to meet the FFC's concerns for dividing revenue between higher education, further education and research.

Four main issues were identified for Government at a macro level and in goods and services.  Firstly Government should continue to pursue investment in public infrastructure that had a positive impact on factor productivity. Secondly Government should reward job-creating businesses (small, medium and large enterprises).  Thirdly Government should stimulate demand, domestic competition and an enabling environment for industrial growth through procurement policy.  Fourthly Government should develop and implement credible job plans for all spheres of the market, including employers, unions, Sector Education and Training Authorities (SETAs), economic development agencies and the education sector, since it was apparent from the mining disturbances that the sector lacked a social compact and each party was interested only in securing its own agenda.  The FFC proposed a template for the development of such compacts as one of the recommendations.

Mr Khumalo concluded the presentation by commenting that the current policy of Government was well aligned to market-led development, but that Government needed to engage in a more nuanced way to address the challenges in the mineral industrial strategy.  Mining was a key sector due to downstream positive externalities and it had demonstrated resilience during the crisis.  In the medium to long term it could evolve further to play a significant role in the global market.  While Government played a more direct role in supporting infrastructural development, it could also address issues in capital and knowledge accumulation. The South African mining sector needed medium to long-term vision to become part of the knowledge economy and this required employees with the requisite knowledge.

Mr C Gololo (ANC) suggested that the FFC should present to the Committee every year.

The Chairperson asked what had happened to previous recommendations of the FFC and whether the current recommendations had been made before as well as what powers the FFC had to impose sanctions for qualified audits.

Ms B Tinto (ANC) asked what laws DMR had contravened and what was done to assist departments with qualified audits.

Mr M Sonto (ANC) asked whether the FFC recommendations were taken seriously.

Mr Khumalo explained that for the first 13 years the FFC had been required to brief only the Finance  Committee.  In 2008 the FFC met with the Speaker's Office, as it was apparent that its recommendations impacted on more Departments than just Finance.  Since then the FFC had begun briefing more widely throughout Government and even invited departments to workshops.  The FFC did not need powers for sanctions since it only provided information to the primary partner, Parliament. The law required the Minister of Finance only to respond to FFC recommendations.  It was also the responsibility of Parliament to take actions.  Audits were undertaken within the legislative framework, which defined what sanctions must be considered for qualified audits and it was for Parliament to ensure these were imposed appropriately.

Mr Gololo asked whether the FFC made recommendations for legal intervention if an official was found to have been acting illegally.

Mr Khumalo replied that the FFC has no remit to investigate or report to law enforcement agencies, which was for Parliament to undertake.

Mr E Lucas (IFP) commented on the need for skills improvement, involvement of the unions as representatives of the people, and the need to link improved productivity with earnings.  He highlighted the need for the development of a middle class in order to increase savings and reduce the dependency on foreign investment.

Mr H Schmidt (DA) asked what competitive rather than comparative advantages South Africa could exploit.

Ms Tania Ajam, FFC Commissioner, replied that South Africa needed to plan the development of universities to meet specific skills needs of industry in order to foster competitive advantages.  In the short term Further Education and Training (FET) colleges were important to meet skills needs and therefore access and quality needed to be improved.  The SETAs lacked accountability and were not working.  There appeared also to be a lack of management expertise in tackling the internal issues in mining.

Dr Mabugu replied that the competitive advantage was what the FFC had highlighted as latent comparative advantage.

Mr Schmidt asked whether the report overemphasised the global economic downturn, how much of the mineral resources were economically recoverable, and whether South Africa could avoid ‘Dutch Disease’.

Ms Ajam replied that South Africa aspired to be a developmental state and had wasted the commodity boom.  The European Union (EU) was floundering and the USA had merely used debt to postpone its problems, while growth in India and China had been revised downwards.  The World Bank had highlighted Africa as the next locus of growth and South Africa needed to be able to capitalise on this.  The National Development Plan (NDP) made many references to social compacts.  Those developmental states that had successfully overcome Dutch Disease, such as Norway, had done so through social compacts, and a developmental state such as South Africa should consider this route.

Mr C Huang (COPE) asked how much the share of GDP attributed to mining had declined and what could be done to prevent that decline.

Mr Khumalo replied that the upstream and downstream linkages in the value chain were important for expansion of employment in the sector.  The decline in share of GDP did not mean that the sector was not growing, but that other sectors are growing more.

Dr Mabugu replied that in a developing economy it was expected that the share of resource-based sectors would decline as the service sector grew in comparison.  The sector had been in decline for over a century, but was to be expected.  Any attempts to halt the decline through Government intervention would likely lead to inefficiencies.  However, growth was possible up and down the value chain and in indirect activity to meet the employment growth targets for the industry.

Mr Huang asked what impact the development of sustainable sources of energy would have on the mining industry.

Dr Mabugu replied that the growth in renewable energy would not impact on the mining sector, despite the 93 per cent contribution to energy production, since energy shortages were already a problem and demand was rising.

Mr Lucas commented that the earlier Bench Marks Foundation report (see PMG report of 19 September 2012) on miner’s accommodation had been concerning.

Ms Ajam suggested that in the area of worker accommodation, there needed to be improved co-ordination between municipalities and traditional councils, for better cohesion of mines and local economies.

Mr Gololo asked the FFC how the low savings rates could have been changed. 

Dr Mabugu replied that both South African households (net debtors) and Government (running a budget deficit) had contributed negatively to the savings rates and so foreign investment had effectively prevented the economy from collapse.  Incomes were key to savings rates and the National Treasury had issued a paper on Government responses to drive savings, to which the FFC would submit a response.

Ms Ajam replied that it was important to differentiate between two types of foreign investment.  Foreign Direct Investment was investment in companies and was therefore long term and contributed positively to building the economy.  Portfolio investment was investment in financial products that was short term and speculative and could therefore be removed quickly and provided little long-term support for growth.  Changes to US bonds would possibly lead to increased speculation in South African bonds.

Mr Gololo asked what rewards could have been offered to business successful at increasing employment.

Dr Mabugu replied that although taxation of mining companies was considered an issue, the regime was globally comparable.  There was potential for the introduction of a JSE index of companies that supported job creation.

Mr Sonto asked what transformative role the agencies of the DMR had and whether there was any measurement of their achievements above the financial audit.

Ms Ajam agreed that financial audits were the minimum oversight required of agencies and entities and that the Government plans for outcome-based monitoring would offer evaluation against aims of organisations.

Mr Schmidt asked for clarification on whether splitting the Department of Minerals and Energy had effectively doubled the employment budgets.

Mr Mahabir replied that the figures did not enable the FFC to determine whether wages were on the increase, but that splitting the departments would have inevitably had to lead to additional support services.

Mr Khumalo replied that although compensation on employees had been growing across Government, the issue was why the share was 3 per cent higher than other departments.

Mr Schmidt raised the issue of South Africa’s poor GINI rating (a measurement of wealth inequality within a country), acknowledging that raising salaries in mining by 22 per cent would make the mines uncompetitive. The NDP and the FFC presentations were both high level and lacked detail and questioned the logic of trying the increase employment in a sector that ought to be experiencing productivity gains and the concurrent reductions in employment numbers that come with increased mechanisation.

Ms Ajam replied that the NDP did provide a long-term view.

Mr Sonto commented that ownership within the mining industry seemed to be an issue; and that the allocation of leases for five-year periods led to plundering and destabilising behaviours. 

Mr Sonto asked what suggestions the FFC had made on the role of Government in the mining industry.

Mr Gololo asked for an opinion from the FFC on state ownership or privatisation. 

Mr Khumalo replied that the FFC had no particular view on privatisation, and only made recommendations on decisions.

The Chairperson thanked the members of the FFC for the presentation and advised that a future meeting to support the Budgetary Review and Recommendation Report (BRRR) process might be required.  The FFC was asked to send through details of the FFC board structure and previous relevant reports to the Committee secretary.

Committee business
The Chairperson asked Members to check the Committee programme, especially for outstanding issues from last term.  The Chair had noted that the review of the top 10 mining companies was missing and that the platinum mining companies were to be called in for a briefing.

Mr Schmidt suggested that the unions should be called to the meeting with the platinum firms to get a more rounded view.

Ms Tinto supported the suggestion from the Chairperson that the review of the programme be postponed to a future session.

The Chairperson advised that the 16/17 and 19 October 2012 had been scheduled for Committee BRRR sittings.

Ms Tinto advised that some Members had clashing meetings for other Portfolio Committees.

The Chairperson advised that the full BRRR programme would be circulated to determine any clashes for Committee Members.  The Committee Secretary would then contact all Members with timings for sittings.

The Chairperson advised that the Committee was awaiting approval from the House Chairperson for the proposed study tour of Australia.

Mr Gololo asked whether a motivation for the tour had been submitted.

The Chairperson confirmed a motivation had been.

The Chairperson advised that the oversight meetings were scheduled for 3 – 7 December, but were not confirmed nor was the agenda.

Mr Schmidt requested that the Mining Charter be tabled during the oversight week.

The Committee agreed with the Chairperson’s recommendation that the review of the seven sets of outstanding minutes and reports for adoption would be postponed until the meeting on 16 October 2012. 

Meeting adjourned.


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