Colloquium on beneficiation: Day 5; Workshop with Auditor-General

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Trade, Industry and Competition

10 September 2014
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Chamber of Mines of South Africa (CMSA) had been unable to make its presentation during the earlier colloquium on beneficiation, and was given the opportunity now to brief the Committee, and explain what the CMSA was doing to promote beneficiation. The CMSA supported the objective of adding value through beneficiation to South Africa’s minerals. It noted that downstream beneficiation was significant, given that many products were made locally from locally-mined products, such as cement (94%), steel (80%); liquid fuels (30%), electricity (94%), and platinum (13%). Most of the local chemicals, fertilisers, waxes, polymers, plastics, etc were fabricated using locally mined minerals and coal. The term “beneficiation” was defined in the Mineral Policy White Paper of 1998 as being the successive processes of adding value to raw materials from their extraction through to the sale of finished products to consumers, covering a wide range of very different activities, and in the mining sector this would range from large-scale and capital intensive operations like smelting down to labour-intensive activities such as jewellery making. Mining beneficiation required competency or skills in the mining sector, and in certain parts of the concentrating or smelting areas, as distinct from manufacturing beneficiation, which included beneficiation through from refining to fabrication of the final product. The CMSA suggested that insufficient attention had been given to the significant up-stream beneficiation sectors, which could multiply the effect of mining to more than double the mining sector’s direct contribution to the economy, and this had been done in Canada and Australia. The mining sector was an essential core of the South African economy, had created 1.35 million jobs and accounted for about 19% of GDP, although it had not yet met its full potential. The GDP contribution, in real terms, had dropped between 1994 and 2013, and significant capital investment would be needed. Precious metal and diamonds were generally available at other world markets at internationally determined prices, and the majority of manufacturing beneficiation took place in countries that had little or no mine production of precious metals and diamonds, which suggested that availability of the mined products did not necessarily provide a competitive advantage to countries with those natural resources, but instead comparative advantage would depend on factors such as  cost competitive production, skills and craftsmanship. CMSA explained that on bulk commodities, prices were determined at the international level, but manufacturing tended to take place near the market, and the challenge to bulk commodity beneficiation was the pricing of intermediate products such as steel that challenged the final fabrication, rather than actual mined commodity prices of iron ore. For this reason, CMSA suggested that South Africa needed to promote greater manufacturing beneficiation, through a collaborative problem-solving by all key stakeholders. An enabling environment that attracted the manufacturing fabrication companies to invest in South Africa was needed, and a strong focus on up-stream (procurement) beneficiation was required.

Members noted that the colloquium on beneficiation had actually focused on downstream beneficiation and not up-stream beneficiation, and the question was asked whether up-stream beneficiation would not distort the market, requested more clarity on how issues arising from productivity growth were affecting the  mining sector, and on labour relations, asked about the impact of beneficiation on workers in India, and also whether mining could be seen as  “a bully” to the environment. They also asked how red tape continued to inhibit entrepreneurship and industrialisation in certain areas. They asked for more clarity on the argument that availability of mined precious metal at world determined prices did not necessarily provide a competitive advantage and how mining and fabrication of gold in different countries affected South Africa. Written answers were requested.

The Auditor-General South Africa (AGSA) briefed the Committee on the role and function of the Auditor-General and how this enabled parliamentary committees to effectively exercise oversight over departments. AGSA was a Constitutional Chapter 9 institution, that was also governed by the Public Audit Act 25 of 2004, Public Finance Management Act (PFMA), National Treasury Regulations, and Treasury frameworks. AGSA basically provided an assessment, report and assurance that annual financial statements of public institutions were free from material misstatements. It reported on the usefulness and reliability of the information in the annual performance report, reported on material non-compliance with relevant key legislation, and identified key internal control deficiencies that should be addressed. The timeline between end of financial year and submission of annual reports to Parliament was explained. AGSA noted that the oversight role related to strategic planning, budgeting or review considerations, reporting, and implementation or monitoring, and suggested matters that committees needed to examine in particular, under each of these functions. It was important to assess efficiency, effectiveness and value of spending by departments, and consider both financial and non-financial information. Tools for the briefing process by departments to committees included the Annual Report, including audit report and performance report, the SONA, the budget speeches, the briefing notes provided by AGSA, the estimates of national expenditure (ENE) and the reports from the accounting officer and audit committee of the institution.

 

Meeting report

Chamber of Mines: Contribution to beneficiation
Opening and Welcome

The Chairperson noted that since the Chamber of Mines of South Africa (CMSA) had been unable to make its presentation during the colloquium on beneficiation that the Committee held earlier, it had been asked to do so now.

Mr Roger Baxter, Chief Operating Officer, Chamber of Mines South Africa, took the Committee through his presentation (see attached document for full details). He focussed on what the CMSA was doing to promote beneficiation, general principles of beneficiation, up-stream (procurement) beneficiation, key drivers of downstream manufacturing beneficiation, what South Africa was doing in terms of manufacturing beneficiation; and strategic and collective facilitation of beneficiation and policy implications.

Mr Baxter noted that the CMSA supported the objective of adding value  through beneficiation to South Africa’s minerals, which should be a meritorious objective. He noted that downstream beneficiation was significant, given that many products were made locally from locally-mined products, such as cement (94%), steel (80%); liquid fuels (30%), electricity (94%), and platinum (13%). Most of the local chemicals, fertilisers, waxes, polymers, plastics, etc were fabricated using locally mined minerals and coal.

In defining the term beneficiation, he referred the Committee to the Mineral Policy White Paper (1998), which described the term as ‘the successive processes of adding value to raw materials from their extraction through to the sale of finished products to consumers, covering a wide range of very different activities. These include large-scale and capital intensive operations like smelting and technologically sophisticated refining, as well as labour-intensive activities such as craft jewellery.’

He drew the differences between mining beneficiation and manufacturing beneficiation. The former required the competency/skills in the mining sector, and in certain parts of the concentrating/smelting areas, whereas the latter included beneficiation from refining to the fabrication of final consumer product.

He suggested that insufficient attention had been given to the significant up-stream beneficiation sectors that existed because of mining. Up-stream beneficiation would multiply and induce the effect of mining to more than double the direct contribution of the mining sector to the economy. He said that in countries such as Canada and Australia, the up-stream beneficiation industries had been given due recognition and had been supported by their governments.

He noted that the mining sector was an essential core and the “flywheel” of the South African economy. It created 1.35 million jobs and accounted for about 19% of GDP and it was one of the most extensive and best developed South African industrial clusters. However, he did concede that the mining sector had not met its full potential (see attachment).

Mining in real GDP terms was, in 2013, smaller when compared to the 1994 GDP. He said that the mining sector had to invest 2X capex to generate the same revenue as the rest of the economy.

He noted that, in respect of precious metals and diamonds, the products were generally available in any of the world’s markets at internationally determined prices and the majority of manufacturing beneficiation took place in countries that had little or no mine production of precious metals and diamonds. This would suggest that the availability of mined precious metals and diamonds at world determined prices did not necessarily provide a competitive advantage. For bulk mined commodities prices were generally determined at the international level, but most manufacturing processing took place near the market for the product (such as steel). The challenge for bulk commodity beneficiation was the pricing of intermediate products (steel) which challenged the final fabrication rather than actual mined commodity prices (iron ore).

Manufacturing beneficiation was driven by competitive advantage issues and not necessarily by the availability of raw materials. Comparative advantage issues such as natural resources were no longer considered to be key driver of manufacturing beneficiation investment, but instead, this depended on factors such as cost competitive production, skills and craftsmanship (see attached document for more detail).  |

South Africa needed to promote greater manufacturing beneficiation, and this must be seen as a collaborative problem requiring a solution-driven partnership between the key stakeholders. An enabling environment that attracted the manufacturing fabrication companies to invest in South Africa was needed, and a strong focus on up-stream (procurement) beneficiation was required.

Mr Baxter concluded that the mining sector was so much greater than the sum of its direct contribution to economy. 

Discussion
Mr D Macpherson (DA) said that the colloquium on beneficiation was focussing on downstream beneficiation and not up-stream beneficiation.  He sought clarity on whether up-stream beneficiation would not distort the market.  He asked for more detail on the issues arising from productivity growth which were attracting investment, and how they were affecting that sector, and how things were looking in relation specifically to labour relations. He asked whether the labour relations were beneficial to mining business. Further clarity was also sought on whether mining was “a bully” to environment, and whether such “bullying” was a good thing. He also asked if the CMSA conducted any study to see the impact of beneficiation on workers’ uprising in India.

Mr Baxter replied that South African mining sector had, traditionally, been struggling to compete with global players. The issue of environmental bullying should be subjected to debate – for such bullying could occur from a legacy of an unregulated mining industry, and the challenge was how the sector should respond to such legacy. Mining beneficiation was an essential core of the South African economy, given that it contributed R20 billion in royalties in 2012 and that most of the products were locally fabricated. The mining industry had opted to localising production. 80% of steel was made locally from locally raw materials. The mining sector was committed to being a reliable supplier and customer-oriented industry.

He said that the up-stream effects would be significant in terms of creation of job, especially in the financial services, contracting services, heavy engineering, transport and manufacturing. The CMSA was improving on red tape and was trying to work with the government to remove barriers to trade, and allow for an easier evolvement of entrepreneurship and industrialisation in certain areas.

Speaking to the position in India, he said that a study was conducted that revealed that India had an industrial and well-educated young generation who were not willing to work for a low wage. That problem of wage expectations could be avoided by cutting down some costs to improve wages. He said that issues of decent wages and labour relations would be dealt in an upcoming workshop on labour.

The Chairperson said that she did not agree with Mr Baxter’s portion of the presentation on up-stream beneficiation. She suggested that he needed to comply with the “letter of the law” and he had inadvertently given a presentation that misused this colloquium on beneficiation. This colloquium was about downstream beneficiation.

The Chairperson sought further clarity on how the red tape continued to inhibit entrepreneurship and industrialisation in certain areas.

Mr B Mkongi (ANC) asked Mr Baxter to clarify his arguments that the availability of mined precious metals and diamonds at world determined prices did not necessarily provide a competitive advantage, and his statement that the countries that mined the gold were not necessarily the countries that fabricated gold products. If this was the case, then he asked about the impact of that practice to South Africa in respect of pricing final products, if the price were determined internationally. He believed that that practice was leaving South African customers vulnerable to higher pricing. The country that fabricated gold should sell the products at affordable prices to its citizens. That practice was against the downstream beneficiation.

Mr Baxter reiterated that there was a difference between South Africa and Australia in their approach to beneficiation. Australia was, owing to up-stream beneficiation, doing well whereas South African manufacturing was proceeding at a slow pace and that pace need to be changed. He further said that the factors that were taken into account in determining the price of gold and diamonds or competitiveness did not include owning raw materials. South African production was relatively small compared to others, but South Africa should be one of the price takers.

The Chairperson said that the issues raised by Members of the Committee should be responded to in writing and the response should be submitted to the Committee not later than Friday 12 September 2014. She said that she would like Mr Baxter to include, in his response, the list of countries that had raw materials and how their prices appeared, and whether they were competitive or not. She would also like him to address the impact of the property clause in the South African Constitution to the mining industry, and how this compared to other countries, and whether it was seen as an impediment to beneficiation.

Role and function of Auditor-General and the oversight role of the Committee: Auditor General South Africa:
Mr Lourens van Vuuren, Business Executive: Auditor General South Africa, stated that the purpose of the presentation was to provide members of the Committee with the necessary information and guidance on the role of the Auditor-General South Africa (AGSA) to enable Members to effectively execute their oversight function over departments. He noted that his presentation would focus on the audit mandate and process, committee oversight role, and briefing process.

Mr Van Vuuren started his presentation by screening a video clip of 10 minutes, and requested that the Committee Secretary also send it to other Members who were not able to be present, as it contained some valuable information. He then referred the Members of the Committee to the Auditor-General’s Annual Report, especially pages 14 and 100, which contained important information on oversight role and briefing process and the views of the Auditor-General on budget spending.

He explained that AGSA had both a constitutional and legislative mandate. It was a Constitutional Chapter 9 institution. Secondly, its mandate was further spelled out in the Public Audit Act 25 of 2004, Public Finance Management Act (PFMA), National Treasury Regulations, and Treasury frameworks.

AGSA basically provided an assessment, report and assurance that annual financial statements of public institutions were free from material misstatements. It reported on the usefulness and reliability of the information in the annual performance report, reported on material non-compliance with relevant key legislation, and identified key internal control deficiencies that should be addressed. The main duty of AGSA was to conduct risk assessment, risk responses and reporting (see attached document for more details). 31 March was the financial year end for national department auditees and by 31 May they were to submit their financial statements for auditing. By 31 July, AGSA would complete the audits, and on 30 September there would be submission of annual reports by auditees to Parliament. The general reports were published in the last quarter of the year or first quarter of the following year.

Mr van Vuuren presented to the Committee an oversight model (see slide 20). The oversight model was comprised of four steps relating to exercising oversight, namely strategic planning, budgeting or review considerations, reporting, and implementation or monitoring.

In the context of planning, he advised that parliamentary committees should check whether the department or entity’s strategic plan was in line with legislative requirements, whether the strategic plan and strategic initiatives were aligned with government priorities, National Plan of Action (NPA) and the Medium Term Expenditure Framework (MTEF). The committees should enquire into any challenges in meeting the strategic objectives and about the initiatives taken to address them and should evaluate how the success in doing so would be measured.

In the context of reviewing budget, the committees should first understand the mandate of the entity, and then determine if there was adequate budget and human resources to deliver on the mandate. Secondly, it was necessary to understand how the NPA and State of the Nation Address (SONA) requirements were reflected in the initiatives. Thirdly, the committees should examine the link between the budget and Annual Performance Plan (APP) and enquire into whether there was adequate funding to execute the strategy. Fourthly, the committees should be able to analyse prior year expenditure (trends analysis, significant increases, history of underspending and reasons) and to analyse prior performance against actual expenditure, to assess to what extent the budget was used to achieve performance. Fifthly, it should do an assessment of breakdown of budget (checking matters such as how much for was assigned for administration, whether this suggested excessive travel and other matters) and how much was assigned for actual implementation. An important point was to ensure value for money in terms of checking efficiency and effectiveness and finally look at the impact of financial management matters such as accruals, litigation and forward expenditure.

In the context of reporting, he noted that Parliamentary committee should keep  management accountable. In so doing, it should determine whether there was:
-compliance with reporting responsibilities as set out in the PFMA
- compliance with the Appropriations Act
- effective and efficient utilisation of resources.

Moreover, the committees should review the Annual Report of the department/ entity it was overseeing, including the audit report, and consider both financial and non-financial information.

In the context of monitoring, he suggested that Parliamentary committees needed to seek answers to the following questions:
- Is the departmental/entity spending on the right track and in line with the strategic plan priorities?
- Does management evaluate monthly and quarterly reports?
- Do action plans exist to address audit findings and improve financial management and accountability?
- Are there designed, implemented and maintained internal controls (financial and non-financial information)
- Are procedures in place to prevent, detect and identify fraud?
- Are there adequate governance arrangements in place and are they effective (internal audit and audit committee)

Mr van Vuuren presented to the Committee the tools for the briefing process by departments to committees. These included the Annual Report, including audit report and performance report, the SONA, the budget speeches, the briefing notes provided by AGSA, the estimates of national expenditure (ENE) and the reports from the accounting officer and audit committee of the institution.

He concluded by stressing the importance of committees having a full understanding of the role of the accounting officer and the oversight model.

Discussion
Mr Mkongi commented that it would be important for committees to know how the committees could detect fraud and whether the role of the AGSA included looking at the outcome of performance.

The meeting was adjourned.

 

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