Discretionary power gives potential investors the jitters

ENSafrica director in the mining business area, Otsile Matlou (Supplied)

ENSafrica director in the mining business area, Otsile Matlou (Supplied)

A barrage of challenges has hit South Africa's mining industry in the past two years. The fall in demand and a drop in commodity prices globally, and locally by a dissatisfied workforce, shrinking margins and increasing operating costs.

These obstacles are in no way eased by the cloud of regulatory uncertainty that looms over the sector, exacerbated by the “wait and see” approach inflicted on the industry by the Department of Mineral Resources (DMR) with the finalisation of the long-awaited Mineral & Petroleum Resources Development Act (MPRDA) Amendment Bill.

Predictability, transparency and clarity are fundamental for investor confidence in any industry, but nowhere more so than in the mining sector, where funding decisions for projects need to be made many years in advance.

In 2013, South Africa was ranked 64th out of 96 mining jurisdictions in the Canadian-based Fraser Institute’s Survey of Mining Companies.

The annual study analyses the attractiveness of jurisdictions around the world for mining investment.

Compared with that of Botswana in 17th position, South Africa’s low ranking was put down to uncertainty over the administration, interpretation and enforcement of existing regulations; as well as regulatory duplication and inconsistencies.

The MPRDA of 2002 has been criticised for many years, and the proposed amendments to the Act went under public scrutiny in December 2012.

According to the DMR, the Amendment Bill will be finalised before the closure of parliament prior to the elections in May.

Two of the most heavily criticised areas of the Amendment Bill have been the increasing of ministerial discretion and restrictions on the sale of minerals declared by the DMR as “strategic”.

Allowing discretion

ENSafrica director in the mining business area, Otsile Matlou, said ministerial discretion is not new to the legislation, the MPRDA always allowed for it.

“What the Amendment Bill does is extend the minister’s discretionary powers. While previously a company could be guaranteed mining rights if all regulatory requirements were complied with, the new bill puts this power completely at the minister’s discretion,” said Matlou.

The legislation will also see individual timelines for applications also at the discretion of the minister.

While this flexibility will suit regulators, mine operators are likely to be frustrated – they require reliable timelines for accurate financial forecasting.

The proposed amendments also allow for ministerial discretion on what amount of a “strategic mineral” must be held back for beneficiation, and how that mineral will be priced.

“Mining companies are concerned they will be forced to sell their production locally at prices significantly below the international market, damaging profitability,” said Matlou.

He said the tension stems from the concept of rule of law.

“If you look at the principle of rule of law at its most basic, laws must be clear and known. People must arrange their affairs in accordance with those laws.

"The moment you have something in the law that is unclear, and does not enable people to scope the risk upfront, or allow business decision makers to envisage what is likely to happen during the term of a project, then you offend the rule of law.”

However, another aspect of the rule of law is that governments must be free to pass laws that comply with the national constitution, and is free to change the laws as and when it deems necessary to meet issues on the ground.

“This means parliament gives the minister the power to determine such changes, without having to go through the laborious parliamentary system for permission.”

Matlou recommended a simple way forward: “Have the legislation that allows the minister to prescribe. But that legislation should also include the factors that should be taken into account when the minister exercises her discretion.

"The problem lies not in allowing discretion, but in the unfettered nature of that discretion,” said Matlou.

This article forms part of a supplement. Content was sourced independently by the Mail & Guardian supplements team.