Digging Beneath the Surface An Exploration of the Net Benefits of Mining in Southern Africa © 2019 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street NW Washington, DC 20433 USA All rights reserved Photos: Shutterstock CONTENTS Acknowledgements 4 Abbreviations 5 Executive summary 7 1 Introduction 9 1.1 Problem statement 9 1.2 Overview of mining in selected Southern African countries 13 2 Benefits and costs of mining in 23 Southern Africa 2.1 A conceptual framework for the net benefits of mining 23 2.2 Mining value added (and exports) 26 2.3 Multipliers from mining: production linkages 26 2.4 Stakeholder analysis of benefits and costs of mining 35 Workers 35 Benefits 35 Costs 41 Investors 43 Benefits 44 Costs 51 Government 54 Benefits 56 Costs 60 Communities 62 Benefits 63 Costs 65 All other 70 Benefits 70 Costs 71 3 Net benefits, sustainability, 72 and impact on social dynamics 3.1 Net benefits: summary 73 3.2 Adjusted net savings (ANS) 79 3.3 Implications for equity and resource contestation 81 4 Policy implications 92 Bibliography 97 Annex 1: Assumptions for estimating net benefits and ANS 102 Annex 2: Obtaining balance of primary incomes from annual reports 104 3 ACKNOWLEDGEMENTS This report was prepared by a team comprising Marek Hanusch (Senior Economist and Task Team Leader, GMTA4), Javier Aguilar (Senior Mining Specialist and co-Task Team Leader, GEEXI), Kirsten Lori Hund (Senior Mining Specialist, GEEXI), Jane Bogoev (Special Assistant, CROVP), Gracelin Baskaran (Consultant, GMTA4), and Jason Hayman (Consultant, GMTA4), with contributions from William Battaile (Lead Economist, GMTA3), Emmanuel Mungunasi (Senior Economist, GMTA3), Marko Kwaramba (Economist, GMTA4), Zivanemoyo Chinzara (Economist, GMTA4), Jose Pablo Valdes Martinez (Senior Economist, DECES), Bala Bhaskar Naidu Kalimili (Senior Economist/Statistician, DECES), and Chengetai Dare (Consultant, GMTA4). Overall guidance was provided by Mathew Verghis (Practice Manager, GMTA4), Christopher Sheldon (Practice Manager, GEEXI), Sebastien Dessus (Program Leader, AFCS1), and Paul Noumba Um (Country Director, AFCS1). Helpful comments and inputs were also provided by James Cust (Economist, AFRCE), Thulani Matsebula (Senior Economist, GHN01), Michael McCormick (Environmental Specialist, GCCRA), Esther Naikal (Economist, GENGE), Sacha Backes (Senior Investment Officer, CNGMI, IFC), and Montfort Mlachila (IMF) and the regional IMF teams. Peer reviewers were Glenn-Marie Lange (Senior Environmental Economist, GENGE), Rachel Perks (Senior Mining Specialist, GEEXI) and Michael Stanley (Lead Mining Specialist, GEEDR). The report was edited by Sharon Chetty and designed by Cybil Maradza. 4 Abbreviations ABBREVIATIONS AMD Acid mine drainage ARD Acid rock drainage ANS Adjusted Net Savings AIDS Acquired Immunodeficiency Syndrome B-BBEE Broad-based black economic empowerment COPD Chronic Obstructive Pulmonary Disease CMA Common Monetary Area CAD Computer-aided design CNC Computer numerical controlled CSR Corporate Social Responsibility DRC Democratic Republic of Congo DMR Department of Mineral Resources EITI Extractive Industries Transparency Initiative FDI Foreign Direct Investment GDP Gross Domestic Product GTAP Global Trade Analysis Project GHG Greenhouse Gas GNI Gross National Income GNS Gross National Savings HFO Heavy-Fuel Oil HIV Human Immunodeficiency Virus ICMM International Council on Mining and Metals IFC International Finance Corporation IMF International Monetary Fund MPRDA Mineral and Petroleum Resources Development Act NUM National Union of Mineworkers NNS Net National Savings ULP Ultra-Low-Profile OECD Organization for Economic Co-operation and Development PAYE Pay-As-You-Earn PGM Platinum-group metals PICC Presidential Infrastructure Coordinating Commission PM Particulate Matter REE Rare Earth Elements R&D Research and Development RD Resource depletion RCA Revealed Comparative Advantage 5 Abbreviations SMEs Small and Medium Enterprises SAMs Social Accounting Matrices SLP Social and Labor Plan SACU Southern African Customs Union SADC Southern African Development Community TIPS Trade and Industrial Policy Strategies TB Tuberculosis US$ United States Dollar VAT Value-Added Tax ZCCM Zambia Consolidated Copper Mines 6 Executive Summary EXECUTIVE SUMMARY Mining has been central to the social and South Africa, Zambia, and Zimbabwe. economic narrative of Southern Africa, and has been a key provider of investment, Sub-soil assets are sources of national wealth. employment, government revenue and Extracting them from the ground can unlock infrastructure in the region. In South Africa, the their value for societies. This requires that Johannesburg-Pretoria metropolitan area, which “rents” (i.e. income beyond commercial returns serves as the region’s economic and financial from the mining process) are captured and hub, developed because of the local gold supply. used for socially desirable ends - which includes In the early years, mining developed on the back investment in other national assets. This is of migrant workers from across Southern Africa largely the responsibility of the government. who toiled in the mines under poor conditions. Other benefits from mining derive from the Many ex-miners suffer from vocational diseases production process itself which generates to this day. While mining has helped build the returns to the factors of production (especially economies of Southern Africa, it has come at capital and labor). Mining is becoming an social and environmental costs that cast a long increasingly capital-intensive process and thus, shadow. Inequality is also high in many Southern larger returns tend to accrue to capital. Given African countries, suggesting that mining has the local constraints in many Southern African not translated into inclusive growth. This report countries, mining depends on foreign capital attempts to examine and weigh the various and foreign skills, which means that part of benefits and costs that mining has brought to the income generated will accrue to foreigners: the Southern Africa region. not all benefits will be captured by the country owning the natural resources. Data limitations are significant, restricting authoritative conclusions on whether the Mining also creates various costs. Health benefits from mining are positive or negative, impacts on mine workers have been significant; on balance, for Southern African societies. pollution can have significant adverse effects The emphasis of this report is thus on taking on local communities. Carbon-dioxide (CO2) stock of various benefits and costs associated and other emissions can have localized with mining, while drawing on available effects and create global externalities such information and thought experiments to as the acceleration of climate-change. Mining highlight the potential trade-offs and how they companies have increasingly been undertaking affect stakeholder groups: workers, investors, significant efforts to internalize the costs governments, communities, and the rest of the imposed by mining. They have also become economy. The countries this report focuses more socially responsible, through investments on are Botswana, Lesotho, Eswatini, Namibia, in health, skills, housing of their workers, 7 Executive Summary and other significant investments in mining production process, with governments trying communities. Yet in many cases these efforts to capture a higher share of the rent, workers have not fully succeeded in strengthening and communities trying to obtain higher wages relationships across mining stakeholders. or benefits or demanding better compensation for the costs they incur. Such contestation Finally, mining has created significant can become particularly tense when external forward and backward linkages in Southern pressure increases, say due to falling commodity African economies, providing a stepping stone prices, or due to changes in the production for the development of value chains. Economic process, such as mechanization, impacting multipliers are significant, meaning that jobs. Such conflict can be further fueled by the benefits of mining go beyond the mining incomplete transformation due to opaque sector, creating positive spillovers, such as reporting or accounting practices, which can jobs, revenue that governments use to finance undermine trust during negotiations. The study infrastructure in other sectors, (although these shows that these social dynamics at times result sectors also generate negative externalities, in policies (or actions such as strikes) that can such CO2 emissions associated with, say, reduce the commercial viability of mining, limiting energy-generation from the mined coal). At investment and potentially causing the closure the same time, mining can also cause negative of mines. In other words, where the benefits and externalities for non-mining sectors, such as an costs are considered to be inequitably distributed, appreciated or volatile exchange rate. the process of unlocking mineral wealth grinds to a halt altogether. Based on available data, this study finds that the net benefits of mining are positive The analysis yields four broad policy in Southern Africa, even when taking into implications. 1) Given the substantial risks account foreign outflows of income. Yet in the region, relating to contracts, taxation, most of these benefits are consumed rather expropriation, industrial action, corruption, than saved and invested. This means that for security, and regulatory burdens, creating countries to maintain their national wealth a stable regulatory climate to de-risk when depleting their sub-soil assets, they will mining investments and increase investor need to either reduce consumption or mobilize confidence is important. 2) Governments additional savings from other sectors. should implement policies that capture the rent, while being mindful of the need for the Even though this study finds that the net commercial viability of the sector, ensuring benefits of mining are positive for Southern that firms are being compensated for the risks African societies overall - keeping in mind the associated with mining. 3) Local beneficiation data constraints in deriving this conclusion strategies should be developed around — there is still room for contestation. This emerging comparative advantages, that can contestation can link to the overall amount be developed in the medium-term future. 4) mining is expected to contribute to an economy, Sectoral changes, say from mechanization with governments developing requirements or transitioning away from fossil-fuel energy, designed to foster greater linkages (referred to should be managed effectively, by developing as “beneficiation”). Or it could be about the overall skills needed for both the future of mining and distribution of income from the proceeds of the for diversified industries. 8 1. Introduction 1. INTRODUCTION 1.1. Problem statement Southern Africa is home to the world’s facing significant economic challenges and is richest mineral deposits. South Africa alone shut out of capital markets, making foreign is estimated to have non-energy minerals exchange increasingly difficult to acquire. worth upwards of US$2.4 trillion, making it the wealthiest mining jurisdiction in the world Yet the region is still among those with high (if petroleum reserves are excluded). However, levels of inequality. This report explores mining and quarrying as a percentage of total the benefits and costs of mining to various Gross Domestic Product (GDP) has fallen stakeholders in selected Southern African from a fifth in 1970 to 8% in 2018. Lesotho countries. Mining in Southern Africa has a has relatively little mining investment but is mixed history with the sector in many countries home to some of the most valuable diamonds associated with their colonial legacies – such on earth – including a 910 carat gem that was as apartheid in South Africa and Namibia – the fifth largest gem-quality diamond ever and these perceptions continue to shape these found. Zimbabwe is home to over 4,000 gold societies (see e.g. World Bank, 2018a). Figure deposits, 90% in greenstone belts, making 1.1 shows that mining generates significant them some of the richest deposits in the world; income in many countries across the region. the second largest platinum-group metals Yet at first glance, mining appears to be (PGM) deposits in the world; and is host to correlated with high inequality, perhaps with significant diamond deposits, among many the exception of Botswana, suggesting that other minerals. However, the country is still the benefits of mining are not equitably shared 9 1. Introduction across society. This report aims to look more The difficulty in catalyzing mining wealth closely at the benefits and costs associated into more shared prosperity has been a with mining, distinguishing between the recurrent – and controversial – theme across different stakeholders: workers, investors, the region. Countries that are unable to extract governments, and communities. Attempts resources by themselves are reliant on foreign are also made to estimate the foreign direct investment (FDI). However, simply being outflows of mining, although various caveats endowed with resources is not enough to attract apply to these estimates. It is important to investment. Mining is a long-term investment note that the purpose of the report is not to – the process of exploration, development, judge whether mining is “good” or “bad” for extraction, and closure can range from 15 - 80 a country but to take stock of evidence on years. Thus, mining companies require a stable the distribution of mining-related benefits and predictable business environment to make and costs across a variety of stakeholders. such long-term investment decisions. At the The countries this report mostly focuses on same time, governments and their citizens want are Botswana, Eswatini, Lesotho, Namibia, to ensure that they receive an equitable share South Africa, Zambia, and Zimbabwe. While from mining. Conflict over the distribution of acknowledging that artisanal mining is an the net benefits between mining companies and important source of employment in Southern other stakeholders results in policy uncertainty Africa, the emphasis in this report is on that increases risk premia and makes mining industrial mining. companies less likely to invest. Figure 1.1: The mining sector can be a driver of poverty reduction and inequality expansion (Inequality and mining GDP per capita in Southern Africa; the size of each bubble indicates poverty rates at US$1.9 per person per day in Purchasing Power Parity terms) 70 65 South Africa 60 Namibia Botswana 55 Zambia Gini Index 50 Lesotho Eswatini 45 40 35 30 -200 0 200 400 600 800 1,000 1,200 1,400 Mining GDP per capita (US$) Source: World Bank. Note: Latest available data. 10 1. Introduction The distribution of benefits will shift as minerals used by new technologies, such as a result of sectoral dynamics such as autonomous and electric vehicles, robotics, mechanization, evolving fiscal regimes, advanced computing and IT, and renewable global demand changes and commodity energy. Cobalt, nickel and manganese are prices. And as each stakeholder seeks to needed for the future development of batteries; maximize their share of the benefits, conflicts copper is an important conductor of wind can arise. For example, as mechanization power and is also used for wiring and motors; reduces the demand for labor, communities and rare-earth elements (REEs) are important have gone on strike, demanding that more for magnets in wind turbines, computer hard jobs be created, in an effort to maintain their drives, and low-energy lighting. The United income. Some investors have responded by States and European Union have identified finding areas for community development, REEs and cobalt as high priority materials, such as vocational training. given their relevance to clean energy and the existence of only limited substitutes.1 Mining The relative distribution of net benefits companies are largely focusing their exploration is changing as extractive operations are expenditures toward brownfield exploration experiencing growing pressure to increase (expanding existing projects) rather than productivity in order to remain globally greenfield explorations (new opportunities) and competitive. There are a number of factors in jurisdictions that are perceived to have low- contributing to the increasing pressure, risk policy environments. including: (i) declining ore grades means that more ore must be processed in order to extract To remain globally competitive, mining the same quantity of metal; (ii) the need to dig firms have begun to adopt new technologies deeper to access reserves is more costly because across the value chain. This has resulted in superficial deposits have already been mined; large job losses. Technological change largely (iii) the need to secure intermediate inputs, occurs through the application of automation such as electricity and water, at reasonable and artificial intelligence for autonomous costs; (iv) the need to have environmentally- machinery and equipment, remote and long- friendly procedures, and comply with increasing distance operation, and control and monitoring international standards and safeguards; (v) systems. The end of the last commodity super to have social buy-in from local communities cycle accelerated the move to automation, as and to obtain a social license to operate, can firms have looked to increase productivity while require increasing expenditures on community reducing expenditure on labor, which is the development; and (vi) the increasing difficulty largest cost of a conventional mining operation. of accessing finance for coal projects, given the Operational jobs such as drilling, blasting and current climate change policy environment. transporting constitute the largest percentage of mine jobs, and can be easily replaced by Additionally, mining companies have to adapt automated technology. There is an ongoing their strategies for the growing demand for transition from a demand for low-skilled labor 1 Carbon Brief, “These Six Metals are Key to a Low Carbon Future.” April 12, 2018. 11 1. Introduction to high-skilled labor,2 as remotely controlled companies, most of which are foreign, are and automated systems replace blasters and gaining the most benefit from natural resources drillers. This will affect firms’ ability to secure in Southern Africa while the host countries a social license, which largely depends on themselves are not benefiting substantially the degree to which host communities and from their mineral wealth. This has given rise countries perceive the benefits they will derive to resource nationalism, or a tendency for from mining operations, particularly through governments to exert a higher degree of control local procurement (backward linkages) and over the natural resources located within their local employment. Given that no countries in borders. A new wave of mining legislation the Southern African region have the necessary across the region shows that governments capacity to produce all of the automated are increasing the arsenal of tax and non- technology (backward linkages) needed tax policy tools at their disposal to increase domestically and have turned to importing their benefits from mining. In the instance capital from countries such as the United of Zambia, a new policy for higher mineral States, China, Sweden, Canada and Croatia, royalties and taxes is being used to stabilize the firms are compelled to advance other benefit country’s debt crisis; one objective of the third streams. This is one reason that mineral Mining Charter in South Africa is improving the processing (forward linkages) has featured social and economic well-being of rural mining prominently on policy agendas in recent years. communities through the requirement of a 10% Another system that has picked up some investment. This report aims to examine some traction in the region is the infrastructure- of the policy trade-offs and draw lessons on resource swap model, in which foreign mining how policy can help enhance mining production companies develop infrastructure in exchange in an equitable way. for access to natural resources. This report is structured as follows: The Mining capital is mobile. Mining companies remainder of this chapter explores the have finite capital to develop their projects and extractive landscape in Southern Africa. It have many potential investment destinations. provides an overview of Botswana, Lesotho, As a result, mining is a competitive industry; Namibia, South Africa, Zambia and Zimbabwe because there are multiple countries with and specific commodities (copper, diamonds, endowments of any given mineral, investors gold and PGMs). The second chapter develops must be reasonably confident that they can a framework that disaggregates costs run a profitable operation in the long-run, in a and benefits of mining for each of the key stable fiscal and political environment. stakeholders in the mining sector and offers a quantitative and qualitative discussion. By Policy has to carefully balance the objective examining various benefits, including rent, of maximizing the benefits for the country capital, labor and intermediate inputs, and with the commercial incentives of mining costs, including natural resource depletion, extraction. There is a perception that mining carbon emissions and pollution damage, the 2 A report by Accenture (2010) evaluated the economics of three types of equipment (trucks, dozers and drills), and found that automation could reduce the number of operators in open-pit mines by up to 75%. 12 1. Introduction section offers insight into the sustainability Policy implications are developed in the final of the mining sector. It offers mine-level chapter. Chapter four aims to summarize the examples of these costs and benefits across possible policy choices that can help increase the region. The third chapter offers a macro- the cost competitiveness of the mining level sustainability analysis of mining in sector and reduce the negative externalities the region by looking at the adjusted net on society. The section is built on four key savings (ANS) of the mining sector in each objectives: developing a regulatory environment country. ANS is a measure of economic that mandates firms to internalize the social, sustainability and assesses whether savings economic and environmental costs of mining; and investment in a country compensate creating an effective system to capture rents; for the depletion of physical and natural creating policies that promote appropriate capital, pollution damage and depreciation. backward (inputs) and forward (processing The section also examines how conflicts and manufacturing) linkages; and finally, can arise when the four key stakeholders managing the changes affecting the sector – workers, investors, government and as it transitions from being labor to capital- communities – try to maximize the benefits intensive and minimize the negative effects it of mining for themselves. will have on stakeholders. 1.2. Overview of mining in selected Southern African countries Economic developments in the mining sector Following the end of the latest commodity recently, from 2000 to 2015 (see also World super cycle, conditions for the mining sector Bank, 2015). Following the end of the last remain difficult. For centuries, demand and super cycle, global commodity markets remain supply for commodities have gone through depressed primarily due to lower global demand. cycles, resulting in major price swings (Erten For example, gold has witnessed a fall from and Ocampo 2013). Broadly, there have been US$1,569 in 2011 to around US$1,269 per troy four commodity super cycles since the 19th ounce in 2018, while the price of commodities century (Figure 1.2): from 1894 to 1932, from such as silver have fallen further from US$35 1932 to 1971, from 1971 to 1999, and, most in 2011 to around US$16 per troy ounce in 2017. 13 1. Introduction Figure 1.2: Commodity prices have experienced long cycles since at least the 1800s (Real commodity price index 1865-2018, 1980=100) 300 250 200 150 100 50 0 1865 1871 1883 1889 1895 1901 1907 1913 1919 1925 1931 1937 1943 1949 1955 1961 1967 1973 1979 1985 1991 1997 2003 2009 2015 Metals Oil Source: Erten and Ocampo (2013) and World Bank staff imputations using data from the World Bank Commodity Markets Outlook (April 2019) for years 2007-2018. As the last commodity super cycle ended, length of the last commodity super cycle mining sector GDP growth slowed down in led analysts and policymakers to believe a number of countries, putting pressure that higher commodity prices were a “new on income, jobs, and the fiscus. Given normal”, and included high prices in growth the reliance on commodity exports, some projections, thus overestimating potential Southern African countries were hit by both economic growth (Amra et al. 2019). This lower production in mining (Figure 1.3) and may have resulted in under saving during lower export prices – although the overall the cycle in countries like South Africa, impact on the terms of trade (Figure 1.4) leaving insufficient fiscal buffers for when was partly offset by weakening oil prices, the cycle ended. This also helps to explain as most Southern African countries are oil the decline in sovereign creditworthiness. importers. Shocks to aggregate demand Some governments have responded by undermined economic growth and resulted levying higher taxes to increase revenues; in job losses. For example, the South African Zambia, in the face of fiscal challenges, platinum sector dropped 3.5% from 198,000 increased its royalties for the tenth time workers to 191,000 between 2012 and 2013, in 16 years. These taxes added costs to the when demand began declining. In many mining firms; and the sector has responded countries with strong mining exposure, to the difficult business environment by fiscal revenues declined and, coupled introducing mechanization, which has with weaker growth, debt sustainability increased productivity, and reduced deteriorated (Figure 1.5). In fact, there is employment, as labor is the largest evidence from emerging economies that the operating cost. 14 1. Introduction Figure 1.3: In some countries, the Figure 1.4: ... and in countries end of the last commodity super like Zambia, the terms of trade cycle resulted in declining growth deteriorated significantly in mining production (Mining sector GDP 2009-2016, 2011=100) (Net Barter Terms of Trade, 2009-2017, 2011=100) 300 120 250 110 200 100 150 90 100 80 50 70 - 60 2009 2010 2011 2012 2013 2014 2015 2016 2009 2010 2011 2012 2013 2014 2015 2016 2017 Botswana Namibia South Africa Botswana Eswatini Lesotho Zambia Zimbabwe Namibia South Africa Zambia Zimbabwe Source: African Statistical Yearbook, 2018. Source: World Development Indicators and World Bank staff. Figure 1.5: Several countries have had sharp increases in public debt (Gross public debt, % of GDP) 140 120 100 80 60 40 20 0 Zambia South Africa Namibia Zimbabwe Lesotho Eswatini Botswana 2007 2015 2019 Source: International Monetary Fund (IMF) World Economic Outlook, April 2019; for Zimbabwe: World Bank. There are also important regional spillover in South Africa’s economy, including the effects. While this report does not disentangle mining sector. Migrant labor from the rest of such regional effects, it is worth highlighting the region used to be an essential part of the the various channels that give rise to them. For South African mining sector, although this one, South Africa is the largest economy and has decreased dramatically over the years. mining producer in the region and is a dominant Second, South Africa forms a Common trading partner and source of remittances Monetary Area (CMA) with Lesotho, Eswatini within the rest of Southern Africa, therefore and Namibia, which constitutes around 43% of neighboring countries are sensitive to changes sub-Saharan Africa’s GDP. Though each CMA 15 1. Introduction country issues its own currency, all are pegged Placer mining involves sifting metals, usually to the South African rand so commodity from sediment in rivers, beach sands or other shocks that drive the South African rand environments. Open-pit mining is typically used (Maveé et al. 2016) will impact on the other for shallow deposits, where the ratio between CMA countries, especially if they produce the amount of ore and sterile rock is high. different commodities. Third, South Africa, Underground mining involves drilling shafts and Botswana, Eswatini, Lesotho, and Namibia galleries to reach deeper deposits or deposits form a Southern African Customs Union where the ratio between the amount of ore (SACU). Member countries need to agree and sterile rock is low. In-situ mining involves on common external tariffs on all imports, dissolving the mineral resource in place then including mining, to the union. Beyond this, processing it at the surface without moving any impact mining has on economic growth rock from the ground. This is primarily used in in SACU countries, import values and prices mining uranium and salt minerals. The choice can affect the revenue transfers to the of mining method depends on the mineral respective member states. The nature of resource, the geometry of the deposit, as well the SACU allocations means that a shock in as the ratio between the amount of ore and one country may affect transfers to another sterile rock. These parameters will determine country (Honda et al. 2017). the profitability of its exploitation. Each mining method also has varying degrees of impact on Economic impacts also depend on the mining the surrounding landscape and environment. methods utilized. There are four main types Mechanization is more appealing for shallow of mining, namely: placer mining, open-pit deposits given the more attractive risk profile mining, underground mining and in-situ mining. and ease of accessing resources. Overview of key commodities in Southern Africa Southern Africa has considerable wealth in wealth globally and in Southern Africa (Figure metals and mineral assets. Yet they are not 1.6). In Southern Africa, agricultural land, necessarily the most important source of forests, and protected areas are overall more wealth. The World Bank’s The Changing Wealth significant assets than subsoil assets, especially of Nations (2018) conducted a wealth accounting in Botswana, Namibia, and Zambia.3 Natural exercise to estimate and quantify the sources resources that are mined are relatively small of wealth for countries across the world. sources of overall national wealth in the grand Human capital (measured as the discounted scheme of things. In Southern Africa, the most value of earnings over a person’s lifetime) and important sub-soil assets, by far, are metals produced capital (such as machinery, buildings, and minerals, followed by coal (Figure 1.7). This equipment, and residential and nonresidential report will focus on four commodities: copper, urban land) are the most important sources of gold, diamonds, and PGMs. 3 The data does not account for certain commodities such as diamonds and platinum, meaning that natural resource wealth is underestimated. 16 1. Introduction Figure 1.6: Human and produced Figure 1.7: Metals and minerals are capital are the main forms of the main mined natural resources national wealth in Southern Africa (National wealth per capita, constant 2014 (Subsoil asset value per capita, constant US$, 2014) 2014 US$, 2014) 180,000 8,000 160,000 7,000 140,000 6,000 120,000 5,000 100,000 4,000 80,000 3,000 60,000 40,000 2,000 20,000 1,000 0 0 -20,000 i a a ia na ld Zim ni ia na e a e a ld tin ric ric bi bi bw bw ib ib or ti or wa wa m m wa wa m m Af Af W W ba ba Za Za ts ts Na Na Es Es h h Zim Bo Bo ut ut So So Human capital Agricultural land, forestry, Oil and gas Coal Metals and minerals Net foreign assets protected areas Produced capital Oil and gas Coal Metals and minerals Net Source: World Bank (2018). Source: World Bank (2018). Disclaimer: These graphs do not include diamonds, PGMs, cobalt, or aluminum. No data for Lesotho. (i) Copper increasingly difficult to access. Much of the Namibia, South Africa, and Zambia are all remaining reserves have lower-quality gold. large producers of copper, with Zambia Eight of the world’s 10 deepest mines are gold the largest of the three. Copper faces mines in South Africa with depths that require three major constraints in the Southern high capital intensity and present substantial African Development Community (SADC): risk to workers. Recent power shortfalls in infrastructure deficiencies, inadequate South Africa have also impacted on mining. electricity generating capacity, and a lack of institutions to manage policy (iii) Diamonds implementation. Zambia has the added Botswana and Zimbabwe are the largest challenge of being landlocked and having producers of diamonds, though Namibia very high transport costs. and South Africa also produce significant quantities. Lesotho also produces a small (ii) Gold quantity of high-grade diamonds. Botswana South Africa is the largest producer of gold, and Namibia produce for the midstream market, although smaller quantities are mined in which is the most competitive, least profitable Zimbabwe and Namibia. Gold mining has and faces challenges in securing financing. The been hampered by the cost of extraction; main activities are cutting and polishing and the costs have risen as reserves are becoming trade in the polished products (Linde et al, 2016). 17 1. Introduction (iv) Platinum-Group Metals (PGMs) prices have suffered. However, commodity South Africa is the largest producer of prices for other minerals have also remained platinum in the world, accounting for 80% low over the past 5 years, affecting the of global reserves. Its reserves are 52.5 times financial profitability of the sector. larger than the next two largest – Russia (second) and Zimbabwe (third). Other metals The narrative of the mining industry in within the PGM group include palladium, Southern Africa is unique. Although the rhodium and iridium. There are also high region is home to some of the world’s quantities of chrome in certain PGM mines. richest mineral deposits, these have not The price of platinum has fallen due to lower been catalyzed into shared prosperity. global demand and an increase in supply due The following chapters will explore the to secondary (recycled) platinum from East distribution of the benefits of mining across Asia. Consequently, platinum prices have various stakeholders, which will shed some dropped from a high of around US$1,719 per light on the reasons why mining may not ounce in 2011 to under US$820 at present. have promoted inclusive growth – and why This has had a significant impact on the this creates a difficult policy nexus between profitability of the sector. The co-products encouraging mining investments while mined in PGM mines have been critical in ensuring that the benefits and costs are sustaining mine operations while platinum equitably shared. Country overview The following provides a brief overview of the mining sector in the main Southern African countries studied in this report.4 Botswana The mining sector constitutes a significant sector account for 10.1% of GDP. Although part of Botswana’s economy, accounting the mining sector is capital intensive, it for 19% of GDP in 2017. Diamonds are the remains a significant employer, with 230,350 single largest contributor, comprising over workers. Economic prospects for the sector 90% of mineral production; while there are are positive, with diamond production smaller quantities of copper, coal and gold. increasing on an annual basis. Although there The sector accounts for 92% of exports, and was a recent cessation in the production of serves as an important generator of foreign copper and nickel,5 two new copper mines exchange. Tax revenues from the mining will start production in 2020. Additionally, 4 In 2017, the ILO estimated that mining's share of employment was 2.7% in South Africa, 2.5% in Botswana, 2.1% in Namibia, 1.7% in Zambia, 1.5% in Zimbabwe, 0.7% in Lesotho and 0.5% in Eswatini. 5 As a result of the closure of BCL, the state-owned nickel mine due to production losses and depletion of reserves. 18 1. Introduction substantial coal reserves have recently railways, electricity and water would support been discovered and are yet to be exploited. continued improvements in the sector. Improvements in public infrastructure in Lesotho and Eswatini Mining remains limited. The mining sector in from 6% in 2003 to 2% in 2010. Other minerals Eswatini is very small, at less than 1% of GDP. such as dolerite, clay and sandstone are Small amounts of coal, diamonds and gold mined though their contribution to GDP is are extracted. Other minerals such as arsenic, very small. There is no formal mining of the copper, manganese and tin have been found country’s coal reserves. Mining contributes an but it is not profitable to extract them. Poor estimated 6% to GDP and to a third of exports.6 infrastructure, a weak regulatory environment The sector, however, faces major challenges. and limited deposits constrain future activity Though there are opportunities for investment, in the sector. In Lesotho, although mining poor infrastructure, legal and institutional contributes less than 1% of exports, it bottlenecks limit prospects for growth in the contributes to 8% of GDP and is home to some sector. In particular, the government lacks the of the world’s most valuable diamonds. The capacity to develop the Mining Authority Bill share of labor in the mining sector declined and there are few regulations in place. Namibia The country has a vibrant mining sector, Husab Mine, the second largest uranium mine accounting for 13% of GDP, and is a major in the world recently commencing operations. producer of uranium, diamonds, zinc and Gold, zinc and diamond production are also gold, with diamonds accounting for around expected to increase. 7 Nevertheless, the 7% of GDP. The sector also accounts for sector still faces challenges. Poor public 51% of total exports. With around 130,250 infrastructure (in particular transport and workers, it is a significant employer and electricity) coupled with a difficult business tax contributions from mining account for environment due to volatile taxation policies, approximately 7% of public revenue (2% of have raised the cost of doing business, GDP). Prospects for the sector are largely causing the country’s largest gold producer positive. Annual production is expected to rise, to threaten a production halt and to curb due to increased uranium operations with the future investments. 6 According to data supplied by Lesotho’s Bureau of Statistics. However, Central Bank data put it at 4% of GDP. 7 Onshore diamond reserves are being slowly depleted, but offshore diamond extraction will increase. 19 1. Introduction South Africa Although the country is a top producer of a While this represents a mere 3% of formal range of commodities, including gold, diamonds, employment, estimates suggest that due to PGMs, coal, and iron ore, the mining sector has the high wages earned by workers, every new fallen to around 7% of GDP. As one of the largest job created lifts 1.3 people out of poverty. After export sectors (28% of total exports), mining numerous delays, finalisation of the third Mining generates significant foreign exchange for South Charter in 2018 reduced policy uncertainty, but Africa. In 2016, exports amounted to R294 billion, the industry in March 2019 applied for a judicial or nearly a quarter of total exports. However, the review. The sector has attracted three major sector has experienced a substantial increase investments as part of President Ramaphosa’s in capital intensity and a commensurate drop drive to attract US$100 billion in investment by in employment to around 400,000 at present. 2023 to stimulate economic growth. Zambia The mining sector in Zambia is dominated by in the north-west province where newer mines copper mining and accounts for 80% of exports. are located, and to scale up production in Total GDP of the sector was around US$3.7 some existing mines. Nevertheless, policy billion, 95% of which was copper and cobalt, and inconsistency – primarily around tax changes 5% gold.8 Until a few years ago it also produced – has been a growing deterrent to investors. In emeralds. The sector accounted for 15% of total 2018, the Zambia Chamber of Mines released an GDP. Moreover, the sector contributed around emergency statement stating that a proposed 26% of public revenues when payroll tax (PAYE) tax change commencing January 1, 2019 would is included and employed 2% of the country’s make Zambia “uninvestable,” warning that up to labor force. Growth prospects for the sector are 7,000 direct and 14,000 indirect jobs were at risk. mixed with production expected to increase at Additionally, an unreliable power supply, high cost key mines such as the Kalumbila Mine. There is of transport, and inadequate infrastructure are potential to attract more investment particularly constraints to future growth of the sector. 8 Zambia Extractive Industries Transparency Initiative (2016), ‘9th Zambia EITI Report’, December 2018. 20 1. Introduction Zimbabwe The mining sector is an important part of the critical for importing mining inputs and the economy, accounting for around 7% of GDP in restrictions amount to an unofficial, yet 2017. Zimbabwe has a long history of mining additional tax on the mining sector. At present, and is a significant producer of platinum, gold, around 80% of foreign exchange generated PGMs, chrome, diamonds and nickel along by the mining sector is exchanged for the with other minerals and metals.9 The sector government’s In 2018, RioZim was forced accounted for around 50% of exports, which has to close three mines – Cam & Motor, Dalny been particularly important given the country’s and Renco – after running out of spare parts precarious external position. Around 37,000 and consumables due to a lack of foreign people are employed in large-scale mining, exchange.11 Prices quoted by local suppliers with approximately another 500,000 people for some of these products were 300% higher employed in artisanal and small-scale mining. than international counterparts, making It plays a vital role in livelihoods and the mining operations commercially unviable. As a result, sector has potential for significant future growth, investment in mining has been limited; assets given the level of untapped reserves of minerals are aging and average capacity utilization and metals.10 However, growth of the sector stood at only around 71% of the sector’s continues to be constrained by low commodity potential. The government has introduced prices, high taxation and poor infrastructure, policy reforms to boost investment. In including unreliable power supply, and limited particular, removing the 51% local ownership access to credit and foreign exchange. requirement in the Indigenization and Economic Empowerment Act in 2018, has Foreign exchange restrictions have been allowed wholly foreign-owned investors to particularly damaging as hard currency is establish operations for specific minerals. The narrative of the mining industry in stakeholders, which will shed some light on the Southern Africa is unique. Although the reasons why mining may not have promoted region is home to some of the world’s richest inclusive growth – and why this creates a mineral deposits, these have not been used difficult policy nexus between encouraging as catalysts for shared prosperity. The mining investments while ensuring that the following chapters will explore the distribution benefits and costs are equitably shared. of the benefits of mining across various 9 The discovery of diamonds in Marange was one of the largest diamond discoveries this century and there is a good probability of further diamond discoveries. 10 For instance, Zimbabwe has current reserves of 1,200 tons of PGMs and there is estimated to be around 7,800 tons of PGMs in undiscovered resources. Source: USGS 2014; Platinum-Group Elements in Southern Africa—Mineral Inventory and an Assessment of Undiscovered Mineral Resources. 11 These included cyanide, activated carbon, caustic soda, explosives, forged steel balls, and spares for the repair of critical equipment. 21 Table 1.1: Mining production and reserves in selected Southern African countries 1. Introduction Key Botswana Lesotho Namibia South Africa Zambia Zimbabwe commodities Reserves Prod. Reserves Prod. Reserves Prod. Reserves Prod. Reserves Prod. Reserves Prod. Aluminum ... 890,000 Bauxite Cobalt ... 4,770 29,000 3,000 270,000 4,600 ... 358 Copper ... 16,121 ... 74,220 20,000,000 740,000 ... 8,840 Diamonds (carats) 281,528 6 109,260 0 73,600 0 387,940 1 10,000 4 Gas ... 7 0 0 (millions of tons) Gold ... 1 300,000 9,272 6,000 140 ... 5 ... 21 22 Iron 1,200 6 (millions of tons) Lead ... 40,000 Nickel 490,000 17,612 3,700,000 50,000 ... 1,756 ... 18,802 Oil (barrels) 15,000,000 806,600 ... 80,000 Phosphate 1,500 2 ... 1,200,000 13,000 (millions of tons) Platinum (kgs) 63,000,000 120,000 Silver ... 5 ... 14 ... 32 ... 10 Zinc ... 107,812 ... 26,433 Source: World Bank and SNL. 2. Benefits and Costs of Mining in Southern Africa 2. BENEFITS AND COSTS OF MINING IN SOUTHERN AFRICA 2.1. A conceptual framework for the net benefits of mining Mining impacts a whole range of stakeholders or domestic). It is important to note that any and the sector’s inclusivity depends on how economic actor in the framework could take the benefits and costs are shared among on multiple stakeholder roles: for example, them. Figure 2.1 presents a simple conceptual the benefits and costs of both workers and framework disentangling the various community members would apply to a worker stakeholders and the types of benefits and living near a mine; in countries like Botswana, the costs that are discussed in this report. Broadly, government owns a share of mining companies these stakeholders are workers, investors, the and is thus also an investor; similarly, workers government, mining communities, and other or communities holding shares in mining parts of the economy (which could be foreign companies would also be considered investors. 23 2. Benefits and Costs of Mining in Southern Africa Figure 2.1: A conceptual framework for the net benefits of mining Society Workers Investors Government Communities All other Total benefit of mining Total mining output Mining value added/income from mining Royalties/tax Rent Royalties Profits minus royalties/ Capital taxes Wages - payroll tax Labor Payroll tax Sales Interm. VAT/duties inputs Sales Health, edu., Social & housing, etc. sustainability Health, edu., infrastr. etc Total cost of mining Natural Reduction in resource national wealth depletion Climate change CO2 Climate change Climate change damage Climate change Climate change Pollution Pollution Pollution Pollution damage Pollution Pollution e.g. health Other costs e.g. health Source: World Bank staff. 24 2. Benefits and Costs of Mining in Southern Africa On the benefit side, the focus is on the mining come. Overall, this framework seeks to provide production process, which is the income (or a lens for analyzing the net benefit of mining value added) that mining generates. Value (benefits minus costs) for various countries added includes the return on the factors on and mines. The individual components of the production: wages (the return on labor) to report will be discussed in more detail below, workers, profits (the return on capital) to clearly laying out the extent to which they investors, and revenue to the government. affect the various stakeholders. Special focus is given to the “economic rent” in mining, in other words the return on the Chapter 3 will extend the framework to natural resource itself. These rents are often look at the overall sustainability of mining. supernatural profits that arise from mining, Exploring the concept of ANS specifically for or the difference between the value of mining the mining sector, the chapter will examine sales, given the costs. As costs are relatively whether savings generated from the mining constant, or change slowly, the commodity sector are likely to offset the reduction in price determines the size of the rent, with high wealth associated with mining a finite national prices resulting in high rents. In a sense, the resource. To maintain or increase national purpose of mining is for societies to capture the wealth through mining, savings (including rent that can be obtained by commercializing health and education spending) need to natural resource deposits which are a national match or exceed the value of the mined asset, asset. In addition to value added, the analysis depreciation, and the generated externalities. will also focus on the multipliers mining generates through backward and forward There are limits to measuring the costs linkages with the rest of the economy; this and benefits of mining. This report draws can range from communities supplying mines on available macro data, including national to highly sophisticated technical inputs sold accounts, social accounting matrices (SAMs) by local companies or imported from foreign from the Global Trade Analysis Project (GTAP), firms. Mining companies internalize many balance of payments statistics, and World of the externalities the production process Bank ANS data. It is important to note that generates, including health or pollution costs country-level data is not available for all – this compensation has to also be accounted benefits and costs; there are measurement for under benefits, offsetting costs. issues that affect the reliability of data, and there is considerable variation around The identification of costs broadly draws on estimates across time and stakeholder groups. the ANS methodology. They include natural These have contributed to the considerable resource depletion, pollution damage and shortcomings of this report. An attempt other costs, which are often not measured was made to use micro-level and qualitative but will still be discussed in this chapter. These data to improve the narrative. Yet caution is costs can have far-reaching consequences, warranted when interpreting the magnitude of as mine pollution can adversely affect health the results presented. (See Annex 1 for a more and pollute water, air and land for centuries to detailed explanation of costs and benefits.) 25 2. Benefits and Costs of Mining in Southern Africa 2.2. Mining value added (and exports) the importance of mining to Southern African economies. In Botswana, mining accounts for 19% of GDP and 92% of exports, making it the Mining value added/ dominant sector in the country. South Africa income from mining is the most diversified economy in Southern Africa and although the country’s development relied on mining (and associated sectors like finance and energy), the sector has become relatively less important when compared to Mining is an important income generator other sectors (including those that originally for the region, and a number of countries catered primarily to mining, such as finance). rely heavily on mineral exports for sales of The following section discusses the benefits extracted resources. Figure 2.2. demonstrates and costs to the identified stakeholders. Figure 2.2: Mining is a big 2.3. Multipliers from mining: contributor to both exports and GDP in Southern Africa production linkages (Mining export share; mining share in GDP) 100 Botswana 90 Mining exports (% of total exports) 80 Total mining input 70 Zambia 60 50 40 Namibia 30 20 South Africa 10 Eswatini Lesotho Mining has significant multipliers in many 0 Southern African countries. The multiplier 0 5 10 15 20 25 explains what the impact of spending US$1 in Mining GDP (% of total GDP) a sector will generate on the overall economy. Source: Comtrade12 and African Statistical Yearbook. For instance, a multiplier of 3 for the mining 12 Calculated by using HS codes 71 (natural, cultured pearls; precious, semi-precious stones; precious metals, metals clad with precious metal, and articles thereof; imitation jewelry; coin); 72 (iron and steel); 73 (iron or steel articles); 74 (copper and articles thereof); 75 (nickel and articles thereof); 76 (aluminum and articles thereof); 78 (lead and articles thereof); 79 (zinc and articles thereof); 80 (tin and articles thereof); and 81 (metals; n.e.s. cermets and articles thereof). 26 2. Benefits and Costs of Mining in Southern Africa sector will ensure that US$1 spent in the policies are intended to develop the mining value sector will generate an overall economy-wide chain. Backward linkages, which are reflected benefit of US$3. All countries included in this in the multipliers in Figure 2.3, include inputs study have estimated multipliers equal or into the mining process, such as machinery. In greater than 1, and are comparable to other addition, forward linkages come in the form developing countries (Figure 2.3). of the processing of raw minerals and in using them to manufacture other goods. Forward Given the impact on living standards, linkages can be a valuable source of national governments often attempt to design policies income, as processing and manufacturing can to increase the multiplier. Value creation be activities of significant added value. Figure 2.3: Southern Africa has mining sector multipliers on par with other key mining jurisdictions, such as Brazil and Chile. (Mining sector multipliers) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 a e o ia a a il ile n ia a t sia yp az ric bi n in bw th o ib n Ch wa ati ne m za Ch Eg Br so m Af ba Za er n do ts Na Le h Ta Zim Bo d ut In Fe So ian ss Ru Source: World Bank staff based on GTAP SAMs. Note: Implausible data for Eswatini. The Southern African Development forward linkages, creating either a regional or Community (SADC) “Industrialization global comparative advantage is important Strategy and Roadmap” was designed to ensuring sustainability. Value chains can to identify areas where the region can be built across countries in the region if an capitalize on opportunities based on its individual country does not have a comparative current and expected economic profile. advantage in every part of the value chain. Given the reliance on mining within the region, World Bank (2019, forthcoming) explores developing an industrialization strategy where SADC countries are likely to develop a around the sector is highly relevant. For those comparative advantage. Table 2.1 summarized countries hoping to develop backward and/or estimated probabilities of progression to other 27 2. Benefits and Costs of Mining in Southern Africa parts of the value chain, based on the concept chain; it is also inefficient for every country of Revealed Comparative Advantage (RCA).13 to utilize its limited resources to develop the same part of the value chain as its neighbors. There are a number of challenges that must Additional challenges to developing an RCA be addressed to develop a comparative include limited access to and the high cost of advantage, including a policy environment infrastructure, as well as skills constraints. It is that promotes national interests over regional important to note that the results in Table 2.1 collaboration. It is difficult for a country to do not factor the political economy of reform become competitive in every part of the value into the calculation of progression probabilities. Table 2.1: There are opportunities to develop mining sector linkages in Southern Africa (Standardized probabilities of having an RCA>1 within next 5 years) Unlikely Possible Likely Prog. probability A. Platinum Country Entire Platinum, Platinum, Palladlum, Palladlum, Rhodium, Rhodium, Iridium Iridium Regional unwrought/ in semi- unwrought/ unwrought/ in semi- in semi- osmim & osmim & Value in powder from manufactured In powder In powder form manufactured manufactured ruthenium ruthenium Chain (711011) forms form (711031) forms forms unwrought/ In semi- (RVC) (711019) (711021) (711031) (711039) In powder form manufactured (711041) forms (711049) South Africa 2.72 2.51 2.13 3.15 2.69 4.35 1.84 4.30 0.76 Zimbabwe 0.06 1.39 -0.46 0.03 -0.17 0.24 -0.48 -0.11 0.03 B. Diamonds Country Entire RVC Diamonds, unsorted Industrial diamonds, Industrial diamonds, Diamonds, non- Diamonds non-industrial unworked worked not industrial, unworked other than unworked mounted/set Botswana 2.36 2.53 2.75 1.44 2.53 2.56 Lesotho 0.71 0.16 1.40 -0.22 2.22 0.00 Namibia 2.29 2.17 2.72 1.36 2.48 2.70 South Africa 2.32 2.54 2.19 1.98 2.22 2.65 Zimbabwe 1.93 2.72 2.53 1.18 1.97 1.27 13 The study employs progression probability analysis at the 6-digit HS level, based on the likelihood of developing a RCA. To put the problem into a more concrete perspective, the study aimed to help answer the question: “What is the probability that, say, Namibia will become a competitive exporter of polished diamonds in 2020, given the set of products in which it is competitive in 2015 and given the capabilities of countries that have in the past developed a comparative advantage in polished diamonds?” The analysis is based on historical data. 28 2. Benefits and Costs of Mining in Southern Africa C. Mining machinery Product South Africa Zambia Entire machinery RVC 1.07 -0.19 Self-propelled fork-lift trucks & other works trucks fitted with lifting/handling equipment powered by an electric motor 1.13 0.05 Self-propelled fork-lift trucks & other works trucks fitted with lifting/handling equipment other than those powered by an 0.76 -0.71 electric motor Lifts (i.e. passenger elevators) & skip hoists 1.05 -1 Pneumatic elevators & conveyors 0.82 -0.94 Escalators & moving walkways 0.28 -0.69 Teleferics, chair-lifts, ski-draglines; traction mechanisms for funiculars 0.96 -0.7 Other lifting, handling, loading/unloading machinery, n.e.s in 84.28 2.06 -0.58 Self-propelled bulldozers & angledozers, track laying 0.95 -0.53 Self-propelled bulldozers & angledozers (excl. track laying) 1.4 0.26 Self-propelled graders & levellers 1.78 0.59 Self-propelled scrapers 1.87 0.52 Self-propelled tamping machines & road rollers 0.45 0.95 Self-propelled front-end shovel loaders 0.46 -0.37 Self-propelled mechanical shovels & excavators with a 360 revolving superstructure 0.19 -0.78 Pile-drivers & pile-extractors 0.67 -1.39 Snow-ploughs & snow-blowers 0 -0.8 Coal/rock cutters & tunnelling machinery, self-propelled 0.68 0 Coal/rock cutters & tunnelling machinery other than self-propelled 1.21 1.39 Tamping/compacting machinery, not self-propelled 1.54 -0.27 D. Coal & uranium Country Entire Anth. Bitu. Other Lignite Peat Coke/ Coal, Naph. Pitch Pitch coke Uranium Thorium RVC Coal semi- water, ore & con ore & coke prod. gas con Botswana -0.67 -0.92 -0.46 -0.98 -0.54 -0.62 -0.76 -0.22 -0.74 -0.92 -1.00 -0.57 -0.69 Namibia -0.25 -0.2 -0.34 0.61 -0.58 -0.70 0.23 0.98 0.82 -0.63 -0.16 5.13 0.29 South Africa 1.34 3.19 2.78 2.36 0.96 0.73 2.84 1.60 2.91 2.25 2.34 0.79 0.77 Eswatini -0.20 1.77 1.84 2.22 0.27 -0.45 1.34 0.04 -0.76 -0.21 0.71 -0.46 0.13 Zimbabwe -0.25 -0.12 0.35 -0.09 -0.52 -0.61 1.17 0.76 -0.27 -0.35 -0.19 -0.46 1.21 E. Oil & gas Country Entire Petroleum (P.) P.oils & LNG Butanes Micro-crystal P.Coke, P.Bitumen P.Jelly RVC oils/bituminous bituminous liq. P. Wax uncalcined crude min. Botswana -0.68 -0.68 -1.66 -0.82 -0.95 -0.62 -0.99 -1.40 0.59 Namibia -0.43 -0.74 -0.34 -0.79 0.74 -0.92 -1.26 -1.13 -0.35 South Africa 1.23 -0.04 0.16 -0.30 0.24 1.52 2.10 1.48 2.45 Eswatini -0.36 -0.82 -0.20 -0.76 1.42 -1.12 -0.73 -0.22 -0.69 Zimbabwe -0.31 -0.49 -1.89 -0.79 -0.86 -0.64 0.58 -0.56 0.20 Source: World Bank, 2019 forthcoming. 29 2. Benefits and Costs of Mining in Southern Africa Increasing access to and reducing the cost of inputs and reduced backward linkages in the key infrastructure, such as transportation, domestic economy. Currently, the majority of is important to becoming competitive. new machines being tested are imported from According to the Zambian Chamber of Mines, the United States, Sweden, Croatia, and Japan, it is cheaper for South African firms to import and include equipment manufactured by goods from South America than Zambia. A Caterpillar, Epiroc, Komatsu, Atlas Copco and UNU-Wider Study (2016) confirmed that Terex. Reliance on foreign technology has been prices for overland cross-border freight in exacerbated by human capital challenges. The Southern Africa are much higher than in new ultra-low-profile (ULP) bolter equipment other regions. Additionally, border delays add manufactured by DOK-ING, a Croatian US$20/ton per day to delay costs for a bulk company, has increased safety and efficiency load. For a landlocked country like Zambia, when drilling the ceiling of a mine, helping to the cost of reaching a port can be sizable prevent rock collapses. It is manufactured and is in addition to high fuel costs and those abroad by DOK-ING, then exported to South of replacing transport equipment (mining Africa, with the technology managed locally transport equipment depreciates at 25% per by a team of Croatian expatriates. annum, with an average asset lifespan of 4 years). On the one hand, high transportation Thus, it is important to acknowledge costs may incentivize firms in Zambia to that countries should develop policies develop local processing facilities so they can that help accelerate the development of ship a refined rather than a bulk product, but a comparative advantage, in a way that is may prevent them from trading with other sensible to their current social, political, countries in the region or the world, in a cost- economic and geological landscape. competitive manner. Policies to develop local production linkages should not be replicated without accounting Increasing cost-competitiveness of linkages for the contextual specificities, given that requires sufficient skills. Until recently, the region is highly heterogeneous in cutting and polishing diamonds had been terms of infrastructure, capabilities and highly skilled work requiring many years of geological deposits. Although Botswana development – that was reflected in the tacit had a unique set of circumstances that knowledge needed to perform these tasks. allowed the government to reach an Thanks to technological advances, diamond agreement with De Beers to set aside a cutting is on the verge of transformation, specified amount of rough diamonds for utilizing computer numerical controlled (CNC) local processing, not every country has cutting and polishing machines, computer- such an advantage in terms of bargaining aided design (CAD), and laser equipment. power (Box 2.1). In both Tanzania (Box However, the provision of training for these 2.2) and Indonesia (Box 2.3), the ban on skills is not yet on the government’s radar exporting raw minerals contributed to a (Morris et al, 2012). The transition to capital- sharp decline in production and led mining intensive mining has led to a reliance on foreign firms to take their investments elsewhere. 30 2. Benefits and Costs of Mining in Southern Africa Box 2.1: Diamonds for development: Botswana’s story of developing skills and local production linkages At the height of its business, De Beers, a London-based mining company, controlled more than 80% of the world’s rough diamond supply and oversaw the entire value chain – from mine to consumer. The mining giant had a near-monopoly of the diamond industry in Southern Africa and controlled prices for the entire industry through a single marketing channel. Botswana has one of the richest diamond deposits in the world – and the stones are both high quality and easy to access due to their surface location. To extract the diamonds, the government of Botswana partnered with De Beers to create a joint venture, Debswana, in 1969, with the government holding a 15% stake. In 1975 the share was increased to 50%. In the 1980s, the Botswana government sought to increase the value the country gained from diamonds and asked De Beers to facilitate the creation of local production linkages. The company responded by saying that cutting and polishing activities were not commercially viable, but to meet the government’s request, it created three cutting and polishing factories – though none were commercially viable. Critics claimed that De Beers had intentionally made these entities unprofitable to avoid further requests from the government. Two decades later, as its Botswana mining licenses were set to expire, De Beers was also starting to lose its global monopoly due to competition from other regions. Given that 70% of its profits and 60% of its supply of rough diamonds came from Botswana, it would have been impossible for De Beers to stay globally competitive without renewing its licenses in Botswana. As a result, Botswana became vital to the future existence of De Beers and the government was in a strong bargaining position. In 2005 the government successfully negotiated an agreement with De Beers for a specified amount of Debswana’s rough diamonds to be cut and polished domestically. The government invited international cutting and polishing companies to set up local operations on the understanding that they would transfer cutting and polishing skills to Botswanians, facilitate local job creation, and develop local manufacturing. Also known as sightholders, 16 operators were chosen and licensed. In exchange for their skills and technology transfer, they were guaranteed a supply of rough diamonds and 13 of the 16 companies received rough diamonds from across the world through De Beers’ aggregation business. In general, international good practice shows that if the first exploitation period has been correctly developed, the renewal of a mining right under the mining law provisions should be a smooth process. Today, Debswana has four diamond mines, including the world’s largest, Orapa, and the richest, Jwaneng. It produces 22% of the world’s diamond output, contributes to 70% of Botswana’s export earnings, and brings in 50% of the government’s revenues. There are more than 2,100 firms that are involved in cutting and polishing diamonds and Botswana continues to loosen restrictions to attract investment for beneficiation. Its ability to drive beneficiation hinged on several factors: (i) a stable regulatory climate which enabled De Beers and the government to collaborate through a joint venture; (ii) the high degree of negotiation power the government had due to De Beers’ declining position in the 31 2. Benefits and Costs of Mining in Southern Africa global diamond markets because of increasing competition; and (iii) the country’s ability to attract international processing firms to facilitate skills and technology transfer. Source: Waves (2016) Box 2.2: Export bans can limit the production of minerals In Tanzania, there has been growing tension between the government and mining companies. In an effort to increase the domestic benefits of mining, the government of Tanzania implemented an export ban in 2017 on raw concentrates (including gold, copper and silver) to ensure mineral value-addition activities took place within the country (forward linkages). However, the development of forward linkages was hampered because the country lacks the capacity to process raw mineral output profitably. A 2012 feasibility study showed that based on volume, local processing was not feasible as an insufficient amount of gold was produced. As a result of the ban, mining output and fiscal revenues have been drastically reduced. The 14 Tanzania Chamber of Minerals has recommended that the government temporarily suspend the ban while assessing the viability of in-country refining, smelting and processing operations. Figure 2.4: The ban on exporting mineral concentrates has been a constraint for many mines. (Gold production at Acacia’s Bulyanhulu Mine in Tanzania) 350,000 300,000 Production (oz) 250,000 200,000 150,000 100,000 50,000 0 2016 2017 2018 (pre-ban) (ban implemented) (ban ongoing) Source: Acacia Annual Report. The conflict between firms and the government of Tanzania is exacerbated by distrust. For example, the Tanzanian government has accused Acacia, the country’s largest gold mining company, of tax evasion, and handed the London-headquartered firm a US$190 billion tax bill – about four times the country’s GDP – for underreporting output. Acacia has firmly denied the allegations and agreed to pay US$300 million to settle all outstanding tax claims. 14 Mining Weekly, March 3, 2017 “Tanzania bans metals minerals, exports in bid to increase domestic beneficiation”. 32 2. Benefits and Costs of Mining in Southern Africa Box 2.3: Requirements for local production linkages can act as a deterrent to investment The Indonesian government passed a law in 2009 that compelled mining companies to develop local processing facilities or face a ban on mineral exports within 5 years. The policy was intended to start a minerals processing industry by requiring firms to smelt their ores domestically. But neither domestic nor foreign firms developed refining capabilities for minerals such as bauxite, nickel, or copper, partially because they thought the government would back down. The ban on the export of raw minerals was implemented in January 2014. Bauxite is a sedimentary rock composed of a mixture of hydrous aluminum oxides. It is the principal ore of aluminum. Indonesia is home to significant bauxite deposits; its state-owned mining company, Aneka Tambang, exports the ore, while the country’s sole aluminum manufacturer, Asahan Aluminum, imports the processed alumina – the main constituent of aluminum – from China. China produces 60% of the world’s aluminum and Indonesia has been its largest supplier, providing 70% of the bauxite used. The government’s decision to ban the export of unprocessed bauxite was part of a wider plan to force China’s alumina refiners to invest in local processing rather than exporting bauxite ore and adding value abroad. Attracting foreign companies to invest in processing facilities became complicated, given the uncertainty as to whether the country had enough high-quality bauxite reserves to remain a competitive supplier in the long term, which was a necessary precondition to justify the construction of costly smelters. As the ban loomed, China’s operators stockpiled bauxite and commenced explorations elsewhere. They 15 16 also began financing new suppliers of high-quality bauxite reserves in West Africa’s Republic of Guinea. Although the Indonesian government began loosening the ban on bauxite exports in January 2017 to alleviate the pressure on local mining firms and workers and to give downstream processing facilities additional time for construction, Indonesia’s position in the global bauxite market had permanently changed, leaving the government with limited power. In Guinea, mining exports increased by 79% year-on-year in 2017, as a result of higher bauxite production. FDI in the mining sector is strong at 13% of GDP and investment-related imports stayed buoyant (Figure 2.5) (IMF, 2018). 15 Insideindonesia article: “The life and death of Indonesia’s mineral export ban”, October 19, 2017. 16 Mining Journal article: Will-indonesia-abandon-its-plan-to-ban-bauxite-exports?, April 12, 2019. 33 2. Benefits and Costs of Mining in Southern Africa Figure 2.5: Guinea’s bauxite production sharply increased in 2015 after the export ban in Indonesia took effect. (Production and Growth in Guinea’s Mining Sector) Millions of tons Percent 52 Bauxite - Production Gold- Production 70 Bauxite - Growth (RHS) Gold - Growth (RHS) 60 44 50 40 36 30 20 10 28 0 -10 20 -20 -30 12 -40 2010 2011 2012 2013 2014 2015 2016 2017 Source: IMF (2018). While Indonesia has a rich supply of bauxite, the regulatory changes requiring local production linkages backfired as firms opted to take their operations elsewhere. Even with the subsequent loosening of restrictions, the government did not manage to draw investment back to Indonesia. This proved to be very costly – reducing nickel and bauxite exports by approximately US$4 billion annually in 2014 and US$2.5 billion in 2015. To increase the economy-wide impact of the such projects, in addition to paying taxes. In mining sector, governments are faced with Southern Africa, there has been an increase in balancing two instruments. They can tax regulations that compel firms to pay taxes and firms and use revenues for social and economic spend in other areas such as levies to develop projects and/or require companies to spend on skills and community spending. 34 2. Benefits and Costs of Mining in Southern Africa 2.4. Stakeholder analysis dynamic is changing. There are a number of benefits and costs of factors that affect the job creation potential of a mining investment, including: of mining (i) the type of ownership (publicly-owned mines often employ more workers than privately-owned mines); (ii) size of the mine; (iii) the mining life-cycle – employment levels are higher during the Workers construction than the production phase and labor demand can also vary as a project transitions between phases; (iv) type of mining operation – conventional underground mining employs substantially more workers than mechanized open-pit mines; (v) type and grade of the commodity Historically, mining has absorbed large being extracted; and (vi) the construction amounts of unskilled labor, but that of infrastructure (Cordes, et al, 2016). Bw = (w ( 1 - τ ) + [ + H ) - HC - Ø1Y (1) The net benefits for workers (L) in the mining sector (Bw) are that they earn a wage (w) minus payroll taxes (τ). They may also receive additional education ([) and health spending (H) through a combination of public ([g+Hg ) and/ or private ([p+Hp) provision. Moreover, the worker may save part of his wages to invest in capital in the mining sector which generates a return. Conversely, the activity of mining may introduce specific negative health costs (HC) and carbon emission costs (Ø1Y) on the worker. 35 2. Benefits and Costs of Mining in Southern Africa Benefits Wages commodity prices, wages have tripled or base salaries quadrupled, but during periods of low Typically, the wages of workers in the mining commodity prices production bonuses have sector in Southern Africa compare favorably diminished or disappeared.17 Thus, the mining relative to workers in other sectors, but sector has been a notable driver of poverty workers’ incomes are often more volatile. reduction.18 The capital-intensity of mining Historically, the sector has been a significant has increased across the region, including in employer of low-skilled labor. Moreover, Tanzania, Botswana, South Africa and Zambia. workers in the mining sector have earned This has led to a reduction in the number and high wages. For instance, in the South African composition of workers, and an increase mining sector, wages more than doubled in in labor wages. On the other hand, mining real terms from 1994 to 2015. In 2014, the operations in Namibia, Lesotho, Eswatini and median monthly base wage in mining came Zimbabwe continue to be more labor-intensive, to R7,000, or close to twice the median pay in (Figure 2.6). While a wage from mining can be the rest of the formal sector. However, wages important to reduce poverty, the impact of have been volatile. During periods of high inequality from mining is less clear. 19 Figure 2.6: In Southern Africa, mining is most labor-intensive in Zimbabwe (Labor income in % of GDP) 40 35 30 25 20 15 10 5 0 Botswana South Africa Zambia Namibia Lesotho Eswatini Zimbabwe Source: World Bank staff. 17 Employment, pay and workplace conflict in mining, Trade and Industrial Policy Strategies (TIPS) Briefing Note, October 2015. 18 A recent report estimated that around 13 people were lifted out of poverty for 10 people employed in the mining sector. World Bank (2017) “South Africa Economic Update: Private Investment for Jobs”. 19 World Bank Group (2018c) finds that for South Africa, growth in mining tends to generate more demand for skilled labor, raising the skills premium and thus contributing to wage inequality. This also highlights the importance of investment in skills for inclusive growth. 36 2. Benefits and Costs of Mining in Southern Africa Box 2.4: Impact of mechanization on the mining sector Geology plays an important role in determining whether mechanization is appropriate for a particular mineral deposit. For example, in the platinum sector, mines that are thick, flat and less undulating are optimal for mechanization, compared to those that are narrow and potholed. Additionally, shallow deposits have lower risk profiles, and are thus more appealing for mechanization. Mechanization improves cost-competitiveness but reduces jobs. Levels of automation in the region vary: Botswana and South Africa have a higher degree of mechanization while Zimbabwe and Zambia still largely rely on labor-intensive mines. The reliance on labor as a factor of production is important for the local economy and can make the benefits of mining more broad-based – but it affects cost-competitiveness. Figure 2.7 shows that Mogalakwena falls in the lower half of the first quartile on the cash-cost curve, while Impala, which is a conventional operation, falls in the fourth quartile. Labor costs comprise a majority of the costs in conventional mining. Although Impala employs significantly more people, it announced the closure of five shafts and retrenchments affecting one-third of its workforce (13,000 people) in 2018 due to its sustained unprofitability; while Mogalakwena has continued to scale up operations. Impala’s retrenchments were all geographically concentrated in the Rustenburg area, which is primarily home to conventional mining operations and has been heavily affected by retrenchments in recent years. Figure 2.7: Globally, mechanized mines are significantly more cost- competitive compared to conventional mines. (Global platinum cost curve) Impala 2018 Platinum Production Ranked on Total Cash Cost conventional mine Scenario: Market intelligence 2017 Cost and US$ Labor cost: US$735/oz Production (%) 50 75 100 1,200 Mogalakwena Total cash costs (US$/oz) 1,000 mechanized mine 800 Labor cost: US$70/oz 600 400 200 0 0 1,394 2,788 4,182 5,57 Platinum (000 ounces) Labor Energy Reagants Other Onsite TCRC + Shipment Royalty Source: S&P Global Market Intelligence. 37 2. Benefits and Costs of Mining in Southern Africa In addition to reducing the amount of labor required, mechanization has also shifted the type of labor needed – from low-skilled to high-skilled. For example, rock blasters have been replaced by engineers who can manage the automated equipment used to blast the rock. At Mogalakwena, per worker output was 11 times higher than that at Amandelbult, a conventional underground platinum mine (both wholly owned by Anglo Platinum, a subsidiary of Anglo American) (Figure 2.8). Moreover, the shift to capital-intensive mining has led to the mines becoming increasingly detached economically from the region in which they are located. Amandelbult employs more than 14,000 people who live proximate to the mine, while Mogalakwena employs just 1,800 but enjoys significantly higher output. Because mechanized mines require high-skilled labor and local mining communities tend to be constrained by skills shortages, it is not uncommon for capital-intensive mines to bring in engineers from other parts of the country. Figure 2.8: Open-pit mechanized mines are significantly more productive than their conventional underground counterparts. (Production output, per person, per annum for 3 different types of Anglo American’s PGM mines) 700 Output (oz/person/annum) 600 500 400 300 200 100 0 Conventional Underground Mechanized Underground Open-pit Mechanized Source: Anglo American annual reports. 38 2. Benefits and Costs of Mining in Southern Africa Additionally, employment in the mining mandated, and professional development. sector has been vulnerable to shocks, which Health and safety training is legally has created cyclical employment patterns. mandated across the mining sector and For example, in South Africa, employment in is used to de-risk an inherently dangerous diamond mining fell nearly 40% between 2005 sector. Firm-mandated training is often and 2013; while employment in platinum mining task-specific (such as operating certain was volatile over the period, after peaking at just machinery). Professional development is under 200,000 workers in 2008 (TIPS, 2015). optional training, to improve existing skills or develop a new technical or soft skill. Social & Sustainability Spending In South Africa, firms are legally required Mining companies provide significant benefits to provide retrenched workers with to workers. In Zambia, the tradition of providing portable skills training prior to the education, health and social benefits as part conclusion of their employment, under of workers’ benefits package has dated back section 189a of the Labour Relations Act to colonial times (ICMM, 2014). The real value No. 66 of 1995. Portable skills training is of these benefits was increased when the intended to develop skills that employees mines became nationalized. This gave way can use for self-employment at the end of to an increased demarcation between living their careers, after retrenchment, or when standards on the Copperbelt and elsewhere losing their jobs due to a mine closure. (Mosley, 2017). When copper prices began to Training includes gardening, agriculture, decline in the mid 1970s, it was impossible to construction and sewing, and is useful maintain the high level of real social benefits, for workers who have firm-specific skills leading to violent strikes in 1977. At the turn of and have only ever worked in the mining the 21st century, private mines began to scale industry. There is consensus within the up benefits again. Konkola Copper Mines and industry that portable skills training is often Mopani Copper Mines are two deep underground merely done for compliance purposes, rather mines that have struggled with productivity, than ensuring competence of the workers and by extension, profitability. They continue to by providing training of a sufficient quality operate multiple hospitals, clinics, and schools and duration. Additionally, most training near the mines. Firms in Southern Africa have is done for a single skill rather than a skill utilized social protection expenditures to set – which can make it difficult to obtain improve the lives of their workers in several future employment, given that multi-skilling ways, though they have had limited success. (for example, bricklaying, plastering and tiling as a set of construction skills, rather Education than just bricklaying) is a growing demand in the labor market. When Petra Diamonds Mining companies finance a variety of skills carried out portable skills training prior to programs. Workers are provided with three retrenchments in 2014, it cost US$345,000 types of training – legally-mandated, firm- for 183 employees. 39 2. Benefits and Costs of Mining in Southern Africa Health There were two major gaps in coverage for TB diagnosis and treatment. First, of Mining communities have been epicenters the 233,000 mineworkers included in the of communicable diseases, especially 2010 review of TB in the mines, 80,000 were tuberculosis (TB) and HIV (Human contractors; with the study finding that Immunodeficiency Virus). Mineworkers in contractors did not have the same access Southern Africa have the highest rates of TB as regular employees to health services. of any working population in the world with Additionally, 33% of companies had no written workers on gold mines at greater risk because policy in terms of providing TB services for of occupational lung disease and the high HIV20 contractors and those without written policies burden. There are two reasons for this. First, the did not necessarily allow contractors to high incidence of silicosis, pneumoconiosis, and utilize their TB services. Second, only regular other lung diseases caused by exposure to silica employees are generally given access to the dust makes mineworkers more susceptible. In free care provided by mining companies’ South Africa the prevalence of TB among miners health facilities; their family members are and ex-miners is estimated at 2,500-3,000 per required to purchase separate insurance to 100,000 people (compared with 834/100,000 be treated there. Given the airborne nature people in the general population), and is more of TB, it’s common for it to spread to family than 10 times the World Health Organization’s members but treatment for them could be threshold for a health emergency (World Bank prohibitively expensive. Group, 2018c). Second, nearly 70% of TB cases in the mines are missed or go untreated (World Although current and former mineworkers Bank, 2014). in South Africa are eligible for compensation for occupational lung disease, regardless Around 82% of the mining companies of their country of origin, many logistical analyzed as part of the 2014 World Bank challenges have prevented workers from study gave their employees access to a receiving the care and/or compensation they mine clinic or hospital. These were well- deserve. South Africa’s Occupational Diseases equipped, with no shortages of laboratory in Mines and Works Act of 1973 required equipment or pharmaceuticals, including compensation for miners who contracted TB medication. However, facilities were sub- occupational lung diseases, including TB, standard in the field of diagnosis; only 67% silicosis and chronic obstructive pulmonary utilized a cough questionnaire (a basic test to disease (COPD), to receive biennial benefit identify a nagging cough, which is a hallmark mediation examinations (Kistnasamy et al symptom of both silicosis and active TB); and 2018). However, this compensation legislation not all companies had access to chest x-ray only covered white miners, excluding black machines and sputum tests. miners even though they comprised the 20 Higher rates of HIV stem from the fact that historically, mine workers have lived away from their partners/spouses and have been more likely to engage in risky sexual behavior. 40 2. Benefits and Costs of Mining in Southern Africa majority of exposed workers. Limited After racial clauses were removed from the diagnosis and treatment avenues made it legislation after 1994, hundreds of thousands difficult for black workers to obtain help, of former miners were found to have been left as access was difficult in their home areas. with occupational lung disease. Costs Pollution Damage kimberlite and their proximity to asbestos deposits, and in Eswatini, where asbestos Pollution, health and safety mines operated for many years. The mining industry has not fully paid for the Though measures are in place to address health challenges workers face stemming the consequences of pollution on the health from pollution. In addition to the chronic lung of mineworkers, there is still much room conditions such as TB, silicosis and COPD for improvement (Table 2.2). The study by that are best addressed through firm-level Kistnasamy et al (2018) shows that regional expenditures, pollution can impose other long- health spillovers are highly prevalent. Although term health challenges for mine workers, but the mine workers in the table below worked they are seldom discussed. in South Africa, negative health effects have spilled over to other countries, as former Asbestos pollution has been known to cause mineworkers returned home. Just over a lung cancer and mesothelioma (a rare cancer quarter of all compensable claims originated of the chest and abdominal lining), among from neighboring countries, including Lesotho, other conditions. In 2011, a court decision21 Mozambique, Eswatini, Botswana and Malawi. in the United States ruled that it is a “fact Given that these ex-mineworkers receive of common knowledge” that asbestos is a limited health care provision when they leave toxic pollutant. Asbestos is common in South the immediate mining area, the burden of care African diamond mines due to the nature of can fall on the government. 21 Villa Los Alamos Homeowners Association v. State Farm Ins. Co., 198 Cal. App. 4th 522 (2011). 41 2. Benefits and Costs of Mining in Southern Africa Table 2.2: Occupational lung disease claims stemming from South African mines span the region. (Number of compensable occupational lung disease-related claims for countries in Southern Africa, 1973–2017) Country Miners N Compensable Rate of claims by (% of total) claims country (%) (N (% of total) South Africa 1,189,515 (73.3) 159,858 (73.2) 13.4 Lesotho 191,225 (18.8) 38,192 (17.5) 20.0 Mozambique 152,091 (9.4) 11,496 (5.3) 7.6 Eswatini 31,958 (2.0) 3,402 (1.6) 10.6 Botswana 29,224 (1.8) 4,235 (2.0) 14.8 Malawi 29,741 (1.8) 1,028 (0.5) 3.5 Total 1,623,754 218,301 13.4 Source: Kistnasamy et al (2018). Figure 2.9: The number of compensation claims paid has steadily increased, by year and amount, from 868 claims paid in 2011, to 8,727 in 2017. (Frequency and value in ZAR of occupational lung disease claims that have been paid)22 26K Number of claims paid Total claim value R250 260 24K 240 20K 220 Total claim value (Million ZAR) 18K 200 Number of claims paid 16K R171 180 160 14K R127 R127 140 12K R113 120 10K R100 R97 R95 R92 R107 8,727 100 R103 8K 7,115 80 6K R76 R79 60 R49 R48 4,875 R66 R64 4K R33 R32 R47 R29 2,107 2,993 2,699 2,830 2,730 2,177 40 4,353 2K 2,613 3,100 2,648 2,375 868 20 1,376 2,151 1,575 1,458 1,569 0K 1,383 0 2000 2005 2010 2015 Source: Kistnasamy et al (2018). 22 Displayed by calendar year, from 1997 to 2017. Graph includes 61,722 paid claims over 21 years from 1997 to 2017; it excludes 49,444 paid claims from 1973 to 1996. 42 2. Benefits and Costs of Mining in Southern Africa Accidents and deaths are not uncommon January 1960, there were 437 deaths at the in the mining industry. Mine workers are Coalbrook North Colliery in South Africa; and at heightened risk due to seismic activity, in September 1986, 177 were killed in the which can cause the rock to collapse on Kinross gold mine in South Africa. However, miners without warning, underground fires, there has been a substantial decline in and user error with machinery. Historically, mine-related accidents and deaths, due to some of the world’s worst mining accidents increased efforts to make the industry safer. have happened in the Southern African In 2018, the South African mining industry region: in September 1970, 89 miners experienced 2,350 injuries and 81 deaths. were killed in the Mufulira mine disaster in The gold sector had 40 fatalities, followed Zambia; in June 1972, 476 were killed in the by 12 in platinum, 9 in coal, and 20 in the Kamandama mine disaster in Zimbabwe; in remainder of commodities. are foreign (primarily British, American, Canadian, as further discussed in Chapter 3), and are balancing their central role in the Investors value chain with the fact that there are limited benefits for local workers as most of the capital is repatriated to the country of ownership (Mosley, 2017). Furthermore, large-scale mining operations can become a foreign enclave in the host country as the expatriates who run Mining companies are a centerpiece of the the mines on behalf of the investors don’t mining value chain, as they provide the necessarily integrate. Zambia is particularly capital and skills needed to extract the vulnerable to this “dual economy,” where local, resources. However, many of these companies small-scale mines are sparse (Mosley, 2017). BF = ( 1 - τ ) PQ - ( w + [p + Hp ) L - p ( IM ) - r( K ) - dK (2) An investor in the mining sector’s benefits are assumed to consist of total sales revenues net of taxes23 (τ) minus costs. Total revenue is denoted by (PQ) , where (P) are commodity prices, and output (Q) is a function of capital, labor and intermediate (IM) inputs, Q = f(K,L,IM). Costs consist of labor costs (wages plus health and education costs); the price (p) of intermediate inputs; and the return on capital r(K), which also includes rental costs, retained profits, interest on loans, and depreciation costs (dK).24 23 That is taxes minus subsidies provided by the government. 24 w r p Firms employ inputs on the basis, L = ,K= , IM = that is until the point that the cost of the input, P*MPL P*MPK P*MPK ∂ f (K,L) wages (w) or return on capital (r) equal the value of its marginal product. Where marginal product of labor (MPL) = ∂L ∂ f (K,L) and marginal product of capital (MPK) = ∂K 43 2. Benefits and Costs of Mining in Southern Africa Benefits Capital and natural resource factor income Bank 2018c). Essentially, the main reason for (rents) account for the majority of mining mining to take place is for societies to capture sector GDP in all countries (Figure 2.10). The the rent: that is monetizing the value of sub-soil distinction between profit (capital income) and assets. In practice, capturing the rent is difficult rent is a conceptual one. In principle, rents are (as further described below), and investors and considered the return on capital that exceed governments tend to share parts of the rent some market-based competitive rates of through profits and fiscal revenue respectively. return. Such a rate is difficult to estimate as Figure 2.10 shows that capital income accounts it is highly context specific and would need to for the predominant share of GDP, with take into account the risk associated with a Botswana being the most capital-intensive mining operation – which may be idiosyncratic country. Zimbabwe, followed by South Africa, and are generally difficult to measure (World has the highest natural resource rents. Figure 2.10: Capital absorbed the highest share of mining income in Botswana. Zimbabwe had the highest resource rents (Rent and capital share of mining GDP, 2016) 90 80 70 60 50 40 30 20 10 0 Botswana Zambia South Africa Eswatini Lesotho Namibia Zimbabwe Rent Capital Source: World Bank staff. Profits the ability to get produce to markets (where the reliability of infrastructure matters, including Commodity prices are an important electricity, rail, and port infrastructure), and work determinant of profits. As shown in Chapter stoppages due to industrial action. Perhaps with 1, commodity prices can go through relatively the exception of platinum where South Africa long cycles, which have important implications is by far the largest global supplier, Southern for national economies. The price is the main African countries are too small to affect global determinant of the size of the rent and, to the prices and are therefore price-takers. Due to the extent that it is captured by investors, of a dominance of mining in the Southern African firm’s profits. Prices have various determinants, region, exchange rates in many of the countries including global demand – China has recently serve as buffers (or natural hedges) for mining been the main source of demand for metals given companies – although other sectors may be buoyant investment in the country. Supply is the adversely affected by the impact of mining on other factor, and it is affected by new discoveries, exchange rates (Box 2.5). 44 2. Benefits and Costs of Mining in Southern Africa Box 2.5: Commodities, exchange rates, and economic performance The term “Dutch disease” was coined in the 1960s when the Netherlands discovered large natural gas deposits in the North Sea; causing its currency the guilder to appreciate, making other sectors less competitive globally (Ebrahimzadeh, 2018). The productivity gains in mining exports raise prices in the non-tradable sector, meaning that the prices of non-traded goods increase the levels of non-mining traded goods. The real exchange rate appreciates and unless non-mining exporters step up their productivity, they will lose competitiveness and get crowded out. It is one of the factors that may make it difficult to develop a manufacturing sector in the shadow of mining, a reason South Africa and some other countries in the region have invoked to support manufacturing through industrial policy. South Africa has a pocket of oil-equivalent and gas condensate resources estimated at 1 billion barrels that was discovered in 2019. Though generally a boon to a country, support from commodities also harbors risks for other sectors. Whether in response to new discoveries or commodity price upswings, currency fluctuations are a consideration. However, policymakers have experimented with mechanisms to limit the appreciation of the real exchange rate. These can include monetary, exchange rate, and fiscal policy interventions, possibly backed by a sovereign wealth fund. Chile and Norway have imposed structural fiscal rules with some success (Caputo and Valdes, 2015). The South African Reserve Bank experimented with a “leaning against the wind” stance through asset purchases to reduce rand appreciation at the beginning of the commodity super cycle. However, the effectiveness or otherwise of this policy is still to be determined. Overall, macro-economic policy responses to avoid commodity-induced exchange rate appreciations require considerable technical capacity – as well as the political clout to explain to voters that the government will run high surpluses for potentially extended periods while apparently ignoring important spending needs. Figure 2.11: Precious metals have Figure 2.12: Export commodity the highest degree of volatility price shocks have a strong (Volatility of major global commodities) impact on currencies 60 (Correlation of commodity prices and exchange rates, 2000-2017) 50 0.6 Coefficient of variation 0.4 40 0.2 0 30 -0.2 -0.4 -0.6 20 -0.8 -1 Botswana CMA countries Zambia 10 Minerals and Metals Base metals 0 Precious Metals Precious Metals & Base Manufactures Source: World Bank staff. metals Minerals metals Unit Value Note: Countries of the Common Monetary Area (CMA) are South Africa, Lesotho, Eswatini and Namibia. Source: World Bank staff. 45 2. Benefits and Costs of Mining in Southern Africa Commodity prices also affect economies through their volatility as they fluctuate faster when compared to prices for manufactured goods, for instance (Figure 2.11). This volatility affects exchange rates across the region (Figure 2.12). For commodity exporters, the impact of commodity prices on the exchange rate offers a “natural hedge”, where the exchange rate depreciates when commodity prices fall, thus smoothing the income from commodity sales in local currency terms. Yet, for all other companies this creates uncertainty and costs. In countries like South Africa, large companies have access to sophisticated hedging products, but smaller companies may have difficulty accessing such products. In other Southern African countries, hedging options are limited. There is evidence that exchange rate volatility reduces FDI and investments by companies (Algu et al. 2018; Chortareas and Noikokyris, 2018). Macro-policy options to smooth the exchange rates have proven to have limited effect and can be expensive. Company-level financial sector solutions to insulate firms from commodity price volatility may have a higher impact, although more evidence is needed on this. Mineral grade is another important factor surface operations, compared to 2.7% for the for prices and thus profit margins. Prices for DRC (Figure 2.14)), the country managed to minerals can vary significantly, as illustrated attract considerable mineral exploration until in Figure 2.13 in the case of iron ore; and the 2017/18, when investment trends diverged in difference across grade prices varies over time. the two countries. This was largely due to This applies to the ores (as the iron mineral) a confluence of factors, including increased sold directly without previous concentration taxes, levies and the tenth successive royalty processes. For the concentrated ores, the selling increase in 16 years (Figure 2.15).25 As a prices are more uniform. In 2017, high-grade result, when compared to the DRC, Zambia ore was almost twice as valuable as lower- earns lower revenue for each ton of copper grade ore. This has important implications for produced. Given Zambia’s fiscal challenges, calculating the economic rent, taxation and the country increased taxes in 2018. However, royalties, and for the relative competitiveness the successive royalty changes have adversely of a country as compared to deposits in other affected the commercial viability of Zambian parts of the world. copper mines, undermining investment in exploration (Figure 2.15). Another example can The importance of mineral grade for the be drawn from Namibia whose gold mines are commercial viability of a mine – and the struggling to stay open as they balance mining relative competitiveness of a resource only low-grade gold with the cost of potential deposit – can be illustrated with several tax changes.26 The Otjikoto Mine, owned by examples. One is related to copper: although B2Gold, Namibia’s largest gold producer, will Zambia averages a lower head grade than the close earlier than planned and result in the Democratic Republic of Congo (DRC) (0.7% for retrenchment of 900 Namibians.27 In addition 25 The Zambian Chamber of Mines (ZCM) released an emergency statement stating that the proposed tax change would make Zambia “uninvestable,” and warned that up to 7,000 direct and 14,000 indirect jobs were at risk. 26 World Gold Council defines a high-quality underground mine as having a gold ore density between 8 and 10 g/t (grams per ton), while a low-quality underground mine has a gold ore density of 1 to 4 g/t. Namibian gold averages 1.4 g/t. 27 Letter from B2Gold to Namibian Ministry of Finance dated December 13, 2018. 46 2. Benefits and Costs of Mining in Southern Africa to reducing revenue to the government million per annum, there will be other negative (including royalties, levies, and taxes paid effects from the closure of an operating mine, by employees) by approximately NAD420 especially on local communities. Figure 2.13: Prices for iron ore can vary widely, based on mineral grade (Iron ore spot prices for various grades, US$) 180 58% 62% 65% 160 140 120 100 80 60 40 20 0 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Source: Thomson Reuters and World Bank staff. On the flip-side, higher mineral grades gem-quality diamond ever found, mining provide room for firms to incur additional firms are willing to pay a premium in costs, as is the case in Lesotho. As it is a more operating costs to access the stones recent producer of diamonds, Lesotho has less (Figure 2.17). The operating costs per carat infrastructure than Botswana, an established in Lesotho are nearly four times higher than diamond producer. Poor infrastructure is a Botswana’s. To offset the lack of electrical concern for development generally and adds grids, a R195 million infrastructure project to the costs of mining. Given that Lesotho has to bring electrification to Letseng Mine and some of the most valuable diamond deposits surrounding communities, thus reducing in the world (Figure 2.16), as emphasized the need for diesel generators, which is a by the recent recovery of the fifth-largest substantial cost, has been planned for 2019. 47 2. Benefits and Costs of Mining in Southern Africa Figure 2.14: Despite being Africa’s Figure 2.15: Few exploration second biggest copper producer, investments have been made in Zambia has a much lower average Zambia copper quality than the DRC (Average copper head grade for surface (Exploration investments made in Zambia operations in Zambia and the DRC) and the DRC in 2018, US$ millions) 500 Zambia 400 300 200 DRC 100 0 09 10 11 12 13 14 15 16 17 18 0 1 2 3 20 20 20 20 20 20 20 20 20 20 Average head grade (%) DRC Zambia Source: Deloitte (2015) and World Bank staff. Source: S&P Global Market Intelligence. Figure 2.16: On average Lesotho’s Figure 2.17: Although the operating diamonds are five times more cost per carat is nearly four times valuable than Botswana’s higher in Lesotho, partially owing (Average per carat sales price for diamonds) to a reliance on diesel generators, mining companies are still making new investments, given the high quality of diamonds (Operating costs for two mines in Lesotho and Botswana) Letseng (Lesotho) Letseng (Lesotho) Karowe (Botswana) Karowe (Botswana) 0 500 1,000 1,500 0 1,000 2,000 3,000 US$/Carat US$/Carat Source: Lucara & Gem Diamonds Annual Reports. Source: Lucara & Gem Diamonds Annual Reports. 48 2. Benefits and Costs of Mining in Southern Africa Another important determinant of profits is at Amandelbult, its conventional counterpart, productivity, a factor over which a firm has 85,000 tons are extracted each month. the most control. Higher productivity leads to higher rents and revenue streams flowing to Despite greater depths, globally there is a the various stakeholders. Beyond the mineral shift from open-pit to underground mining. grade, several factors contribute to the level of With lower grades of minerals remaining, productivity, including depth, the co-products underground mining is more effective because mined and the level of technology and innovation new technologies can identify the precise integrated into the mining process. The transition location and grades of deposits that can be from labor-intensive to capital-intensive mining extracted through fully automated systems. has increased productivity substantially while This is more efficient than removing a large ore helping to reduce accidents and fatalities. body just to get a small mineral deposit, as is At Anglo Platinum’s Mogalakwena open-pit the case with open-pit mining. However, depth mechanized mine, four shifts are run a day and also affects the long-term sustainability of a 85,000 tons are extracted in one shift, whereas mine (Box 2.6). Box 2.6: High depreciation in capital-intensive, deep underground mines results in low long-term sustainability. Gold Fields South Deep in South Africa is the world’s second largest gold mine, and at a depth of 3 kilometers, one of the deepest in the world. It has a life-of-mine of over 70 years. Given its unusual shape – the mine fans out like the pages of a book – it became one of the first South African gold mines to undertake an intensive mechanization process. However, this did not render a profitable operation, as other factors made it difficult to control costs. When expensive machinery fails deep underground, it is both costly and difficult to repair. As a result, South Deep has not been able to come close to the production levels it had hoped for. Gold Fields has also cited a range of operational challenges, including higher operating costs, poor equipment reliability, poor maintenance, low labor productivity, and the need for expensive infrastructure. The mine is experiencing very high depreciation costs after sinking R32 billion into the shaft since 2006, and as of 2019, has yet to yield a sustainable profit. Gold Fields has tried various measures, including changing mining methods, training employees, bringing in expert consultants, reducing management by 25%, and other cost- saving initiatives but is still losing approximately R100 million each month. As a result, 44% of the workforce was retrenched at the end of 2018, negatively affecting workers and the local community. South Deep’s significant depreciation costs contributes to low sustainability. By comparison, shallow underground and open-pit operations in North Mara, Tanzania result in lower depreciation and has a higher degree of sustainability. This illustrates the need for government policies to take into account mines that require significant investment, otherwise production in these types of mines are likely to diminish. 49 2. Benefits and Costs of Mining in Southern Africa Mines with high value co-products are most The Rustenburg area has low quantities of likely to generate income and withstand palladium in its platinum reefs, so profitability the boom-and-bust nature of commodity has been minimal, if at all. In the meantime, cycles. Palladium is a co-product in many Implats has raised finance to build a new platinum mines. A surge in palladium prices mechanized palladium mine in the Waterberg, amidst a decline in platinum prices, led 85 km north of Mokopane in Limpopo. Anglo many PGM firms to re-examine their mining American Platinum has similarly increased strategy (Figure 2.18). Implats, the world’s palladium output through the expansion of second biggest platinum producer, in 2018 Mogalakwena, the open-pit mechanized mine announced 13,000 retrenchments, amounting also located in Limpopo. Anglo American also to a third of its workforce at its conventional sold some of its Rustenburg-area operations mines in the Rustenburg area of South Africa. between 2012 and 2017, citing low profitability. Figure 2.18: PGM mines with high palladium concentrates, a co-product of platinum, have been able to stay cash positive and continue operations, while mines with low co-product concentrations have closed due to low platinum prices (Platinum and palladium prices between 2012 and 2017, US$) Palladium Platinum 1,000 1,800 1,700 900 1,600 1,500 800 1,400 700 1,300 1,200 600 1,100 1,000 500 900 800 400 03/01/2012 03/01/2013 03/01/2014 03/01/2015 03/01/2016 03/01/2017 03/01/2012 03/01/2013 03/01/2014 03/01/2015 03/01/2016 03/01/2017 Source: UNCTAD. 50 2. Benefits and Costs of Mining in Southern Africa Figure 2.19: In South Africa, diamond, gold, and PGM mining are in the third and fourth quartiles of the cost curve, which can be a disincentive for further capital investments for ongoing projects and act as a deterrent to future investments (Mining cost curves for various minerals in South Africa) Estimate of sector loss-making Gold (31%) Electricity Diamonds (10%) intensive sectors Cash costs (US$) are relatively uncompetitive PGM (45% Iron Ore (60%) Thermal coal (40%) Manganese Ore (70%) First Second Third Fourth quartile quartile quartile quartile Source: Chamber of Mines (2015). Innovation in mining is significant. According and development is relatively high, although to World Bank (2017), South Africa has been a that has been declining in light of recent policy leader in innovation, making major advances in uncertainty in the mining sector. World Bank mining technology and holding a high number estimates suggest that stimulating innovation of patents. The country’s miners have a in mining can result in meaningful job creation, reputation for their know-how in deep mining especially in low-skilled, labor-intensive sectors and related services. Spending on research like gold (but less so in coal). Costs Costs include fiscal obligations, wages, communities – they are discussed in the social and sustainability expenditures, and relevant sections in this report. Generally, the cost of capital. Taxes and other fiscal mining companies should internalize the measures accrue to the government and are externalities that the mining process generates examined in the next section; wages accrue (including social and environmental costs). to workers; and social and sustainability The cost of capital is another cost. Given the expenditures can accrue to workers and significant need for capital, mining companies 51 2. Benefits and Costs of Mining in Southern Africa often tap into global capital markets – the on the ability of gold, diamond, and PGM Johannesburg Stock Exchange, Africa’s oldest mines to remain open. Other infrastructure, bourse, was established primarily to obtain from roads, rail and ports, and water, to capital for mining in South Africa. The cost of telecommunications – as well as trade- capital for mining companies is thus linked to related costs on imports – all affect mining developments in global financial markets, but operations and the relative competitiveness can also factor in country-specific risk. of countries as mining destinations. Figure 2.20 provides an overview of the The cost of inputs is a critical determinant performance of infrastructure in Southern of mine profitability and commercial African countries, demonstrating the high viability. As Figure 2.19 demonstrates for quality of infrastructure in Namibia and the South Africa, electricity is an important input varied performance in other countries. Lack into mining production, determining the of consistently reliable electricity supply is a commercial viability of different commodities. constraint; in light of regional power markets, This analysis would suggest that the large the performance of South Africa’s Eskom increases in electricity prices in South Africa has implications for the competitiveness of in recent years will have considerable impacts neighboring countries. Figure 2.20: There is considerable variance in the quality of infrastructure in Southern Africa (Quality of infrastructure, global rank, 1=best out of 140 countries) Best 20 40 60 80 100 120 140 Botswana Eswatini Lesotho Namibia South Africa Zambia Zimbabwe Roads Railroad Ports Electricity Source: World Economic Forum, The Global Competitiveness Report 2017–2018. Depreciation is another cost. The depreciation mines can produce for 25-80 years, there is an of plant, property and equipment can be a ongoing need to replace capital. Depreciation large cost to companies (Box 2.7). On average, is particularly high for deep underground transport equipment has an asset lifespan operations, so tax allowances for these mines of 4 years, machinery 8 years, and buildings are important for their long-term sustainability and equipment, 21 years. Given that many (Figure 2.21). 52 2. Benefits and Costs of Mining in Southern Africa Box 2.7: Average annual rates of consumption for different asset types The average annual rates of depreciation for different asset types are: Transport Equipment 25% PER ANNUM with an average asset lifespan of 4 years. Machinery & Other 12% PER ANNUM Equipment with an average asset lifespan of 8 years. Buildings & Construction Works 5% PER ANNUM with an average asset lifespan of 21 years. Source: Lockwood (2015). Figure 2.21: Depreciation is significantly higher for deep underground mines, compared to open-pit or shallow underground mines, which contributes to a higher risk profile (Depreciation for South Deep, a deep underground gold mine, and North Mara, an open-pit and shallow underground gold mine, US$ millions) North Mara South Deep 0 -100 -200 US$ millions -300 -400 -500 -600 -700 Source: Annual reports and World Bank staff calculations. 53 2. Benefits and Costs of Mining in Southern Africa to the surface area granted in the mineral rights; and royalties, which are a tax on the value of extracted minerals. Other levies Government include withholding tax on dividends, interest and services; capital gains tax, which is generated from the transfer of mining rights and free equity for the state. It is important to note that two mining projects operating at the same time can have different tax and When governments confer mineral rights customs policies, because: (i) the dates on which (either prospective or mining rights) the mining rights were conferred are different, to an investor, they confer both rights or (ii) the companies utilize stability clauses and obligations, including applicable differently.28 Some of these fiscal instruments fiscal measures. Such measures can be are described further in this section. tiered based on the various phases of the mining process (exploration, development, Although maximizing various benefits production); and include direct and indirect to society is important, taxes and taxes, fees and levies. Sometimes investors royalties are always the most important. ask for a stability clause to be built into the While commodity prices have fluctuated mineral rights, which guarantees the stability significantly over the last decade, taxes have of tax and customs regimes for a specified remained the most important and effective time period. Direct taxes include corporate way of capturing mineral rents. Governments income tax, or the tax on a company’s have various instruments at their disposal; yearly profits and resource rent tax, which foremost, they have taxes and royalties; is levied in addition to corporate income tax second, they have a host of “regulatory taxes,” to capture a higher percentage of mineral in the form of social and sustainability costs. rents. Indirect taxes include value-added tax It is important to find ways to increase the and customs duties. Duties include the fees effectiveness of revenue policies to capture that are payable upon the granting of mineral the rent without undermining the commercial rights and each subsequent renewal; ground viability of mining operations that are needed rent, which is paid annually, proportionate for extraction. 28 International Centre for Tax and Development Legal Tax Database. 54 2. Benefits and Costs of Mining in Southern Africa BG = τ ( PQ + wL + rK) + ([g + Hg ) L - RD - Ø1Y (3) Government benefits consist of revenues from net fiscal measures (τ) on firms’ revenues (PQ) (royalties and sales taxes) employment (payroll) and return on capital. It is assumed the government is required to spend on education/training and health care for workers in the mining sector (or education before joining the labor market) and incur resource depletion costs (RD), the costs of carbon emissions, Ø1Y as well as other environmental externalities, and, RD = ∑1i,j,t - n...t Pijt - n - Cijt - n + ... + Pijt - Cijt x Qijt -n ( 1+r ) t-n ( 1+r ) t t Resource depletion (RD) in any period is essentially the discounted stream of current and future rent from mineral reserves divided by the remaining life of the mine. Where, Pijt-n is the unit price for a commodity (i) in a particular mine (j), according to the time period (t-n), which is the number of years of reserves at present (t) minus the remaining number of years (n) at a period in the future. Cijt-n is the unit cost for a particular mine and commodity and a point in time. This is discounted by the discount rate (r), which is assumed to be 4%, raised to the power of the time period (t-n). The resulting stream of future unit rents from now until the mine is depleted is multiplied by production in the current period (Qijt-n), ivided by the years left of operation (t). This provides us with resource depletion. Where there is public equity participation in a mine, a share of the benefits described in equation (2) above will also apply to the government. Governments seek to maximize revenues of South Africa collected from mining in raised from mining and negotiate fiscal 2017. Notably, revenue from mining is terms with firms to achieve this objective. relatively low in South Africa, at a mere Key taxes include royalties, corporate taxes 1.3% of GDP compared to the 7.3% of GDP and value-added taxes. Companies also the sector accounts for. There are multiple have to pay prevailing duties on imports. reasons for this, from low commodity Additionally, taxes may be targeted on prices, to provisional payments, and tax mining activity that generates negative incentives. Overall in South Africa, payroll externalities on society, such as chronic taxes exceeded corporate taxes. Royalties health problems, and to offset pollution were only 0.6% of total revenue. Value-added or CO2 emissions. Table 2.3 provides an Tax (VAT) collections were negative due to overview of the main taxes the government high refunds. 55 2. Benefits and Costs of Mining in Southern Africa Table 2.3: Fiscal revenue from mining in South Africa is relatively small (ZAR billion and % of total revenue, 2017) ZAR bn % of total revenue Total Revenue29 1336.2 100.0 Revenue from the Mining and Quarrying Sector 17.0 1.3 Non-Tax 7.8 0.6 Mineral Royalties 7.6 0.6 Mining Leases and Ownership 0.2 0.0 Tax 9.2 0.7 Personal Income Tax 21.1 1.6 PAYE 20.6 1.5 Individuals with Business Income 0.5 0.0 Corporate Income Tax 13.4 1.0 Value-Added Tax -25.3 -1.9 Domestic VAT 10.9 0.8 Import VAT 3.6 0.3 VAT Refunds -39.8 -3.0 Source: South African Revenue Service Tax Statistics, 2019 Budget Review (National Treasury). Note: Total Revenue is the consolidated government revenue as reported in the budget, minus the proceeds from transactions in assets and liabilities, which, according to IMF Government Finance Statistics, should be treated as a financing item. Benefits Taxes and royalties production is happening (regardless of prices); and that there is a degree of progressivity so Taxes and royalties are the main tools that revenue windfalls can be shared between for governments to capture the rent. It governments and firms. A mix of taxes and is therefore important to ensure that an royalties can achieve that (Figure 2.22). Table efficient tax structure exists to provide a 2.4 demonstrates the importance of mining revenue stream to the government whenever revenue for a number of governments in 29 Total revenue is the consolidated government revenue as reported in the Budget Review, minus the proceeds from transactions in assets and liabilities, which, according to IMF Government Finance Statistics, should be treated as a financing item. 56 2. Benefits and Costs of Mining in Southern Africa Southern Africa. Mining revenue is particularly comes from taxes. In Lesotho, Namibia, and important in Botswana, accounting for about Zambia, royalties provided a greater share of a third of total revenue, of which the majority revenue in 2017/18. Table 2.4: Taxes and royalties in selected countries (% of total revenue and % of mining revenue, latest available estimates) Botswana Lesotho Namibia Zambia Zimbabwe Revenue from mining 34.2 4.6 6.8 12.1 3.7 (% of total revenue) Royalties 29.8 67.4 51.3 61.6 15.8 (% of mining revenue) Tax (% of mining revenue) 70.2 32.6 48.7 38.4 84.3 Source: IMF. Note: Estimates. Royalties include dividends in Lesotho. For South Africa see Table 2.3. Most countries use a corporate income tax to to ensure that the government gets revenue collect revenue from mining projects within from sudden windfalls due to commodity their standard tax regime. In addition to price increases, some countries have utilized income tax, firms may also pay a withholding a progressive profit tax by creating a stepped tax on dividends when they are paid to non- tax rate schedule. In essence, this means residents or on interest payments. When firms that as commodity prices increase, tax rates, operate across multiple tax jurisdictions, there which are linked to production, volume, sales, is scope for mining firms to reduce revenues or or profit-to-sales ratios, also increase. The inflate tax deductions to reduce their tax liability perverse incentive of progressive taxes is that in a specific country. Thus, it is important for they may encourage firms to under report governments to close such loopholes. In order income and/or discourage investors. Figure 2.22: Governments often use a combination of volume-based, value-based, and profit-based taxes to capture mineral wealth (Volume-based taxes, value-based-taxes and profit-based taxes are three vehicles for rent capture) Quantity + Quality + Price + Costs Resource revenue = Volume-based taxes Value-based taxes Profit-based taxes Source: World Bank. 57 2. Benefits and Costs of Mining in Southern Africa Royalties have been one of the most capital imports during mine construction and important vehicles for taxing mineral development, import duties can either be a extraction, as the government begins significant stream of revenue for governments collecting revenue as soon as the mine while an import tax exemption can be highly begins producing. Royalties are a payment attractive to potential investors. Many mines to the holder of mineral rights. They can be export the majority, if not all of their mineral levied as a per-unit tax (fixed charge levied outputs, and thus get rebates for VAT. on a unit of production) or ad valorem (fixed This rebate is central to maintaining cost charge levied on value of output, which are competitiveness. However, Zambia has recently gross revenues). It is a common usage- replaced refundable VAT with a non-refundable based tax which is generally calculated as a sales tax, which has increased operating costs. percentage of the gross fair market (Halland et al, 2015). A royalty can be categorized as a Payroll tax factor payment for the extraction of minerals to factor payments on capital and labor Payroll taxes paid by workers and firms inputs (Conrad et al, 1990). Some countries are an important source of revenue for the apply royalty rates based on the mineral. For government. There are two types. The first is example, in Zimbabwe, diamonds attract a employer taxes borne by the firm, and include royalty rate of 15%, platinum 10%, and coal the employers’ social contributions and payroll just 1%. High royalty rates can be a strong taxes. The second stream of revenue for the deterrent to investment and can make it government is employment taxes, which are unprofitable to develop reserves below an collected through employees’ income tax economic cut-off grade. As a result, high and any income-dependent taxes for social royalty rates can result in lower-grade mineral protection measures, such as social security deposits going untouched. or public health care. Indirect taxes from the mining sector remain High payroll taxes are reflective of an an important source of revenue for the industry with high wages. In 2008, when authorities. In fact, indirect taxes attributed commodity prices were high, a global study to the mining sector are significant. However, conducted by PricewaterhouseCoopers these revenues vary between Southern analyzed average employment taxes paid African countries, partly reflecting the size across three regional groups. It showed that of the sector in relation to the economy and average employment taxes paid per employee the nature of imports and duties. Indirect tax in African countries was US$5,539, compared rates, particularly sales taxes, remain fairly to an income per capita of US$1,770; in Latin similar across this sample of countries, but America, employment taxes of US$9,385 the use of supplementary taxes may differ. compared to income per capita of US$6,766; and employment taxes of US$40,475 VAT / import duties compared to income per capita of US$41,971 in OECD countries. This illustrates the fact Mining is often treated better than other that during the upswing of the commodity sectors when it comes to breaks on import cycle, employees in the mining sector were duties. Given the substantial demand for well-paid and that governments benefited 58 2. Benefits and Costs of Mining in Southern Africa from employment taxes. As commodity prices asymmetry (including on the actual value of declined, fewer workers were needed and the rent) as both stakeholders are represented significantly lower bonuses were paid, which on the board. On a negative note, conflicts of negatively affected the scale of employment interest may arise as the government plays taxes collected by governments. the role of the regulator while being an equity stakeholder. One way to prevent a conflict Non-tax instruments of interest is to separate the regulatory and operational functions of the government, so Governments use state equity to ensure that there are two distinct state entities. revenue streams from profitable projects However, for countries with limited state and to hold decision-making power over capacity, it is better to keep the functions the future of mining projects. There are good aggregated. Though there is no panacea, and bad reasons for governments to utilize there are various mechanisms through which state equity. On a positive note, it allows firms the government can hold equity in mining and governments to overcome information operations (Table 2.5). Table 2.5: Types of state equity participation Government equity participation Effects Paid-up equity on commercial terms Puts government on equal footing with private investors Paid-up equity on concessional terms Government acquires equity share at below-market price Carried interest Government pays for equity out of production proceeds, including interest charge Tax swapped for equity Government’s equity share is acquired through reduced tax liability Equity in exchange for Government provides infrastructure non-cash contribution facilities Source: Daniel, 1995. Incentives made by mining companies; (ii) costs of decommissioning mines (particularly To offset the risks that mining companies environmental rehabilitation costs); and experience during the production life cycle, (iii) commodity-specific allowances – for a package of tax allowances has been a example, the costs associated with financing key part of the sector. In South Africa, the capital outlays needed to commission a incentives provide certain allowances: (i) mine – and relief for firms mining marginal cater for the large front-end investments ore bodies. 59 2. Benefits and Costs of Mining in Southern Africa Governments often forego tax revenue gas (GHG) emissions to meet its Paris in order to attract investments. Given Agreement commitments. To reach this that minerals exist in multiple countries, goal, the government passed a Carbon Tax governments across Sub-Saharan Africa in February 2019. The purpose is to direct often create packages of tax incentives to corporate investments away from high- attract mining companies. A 2016 report carbon fuel inputs and production processes showed that 4 East African countries – toward low-carbon alternatives. The nominal Tanzania, Kenya, Rwanda and Uganda – tax rate is R120 per ton of carbon dioxide- were losing US$1.5-2 billion a year from tax equivalent. To facilitate a smooth transition breaks; Ghana was losing up to US$2.27 billion to a low-carbon economy and to mitigate the each year; and Nigeria lost US$3.3 billion in concerns over competitiveness of the affected tax revenues to three oil companies – Shell, industries, the government allows specified Total and ENI – through a combination of tax tax-free allowances, which can reduce the breaks. In South Africa, the mining sector rate to between R6 and R48 per ton. The tax had the lowest marginal effective tax rates is based on fossil fuel inputs (such as coal, among all sectors (World Bank, 2015). Overall, oil and gas usage), and applicable to entities there is a trade-off between imposing costs with a total installed thermal capacity of on mining companies (such as taxes, royalties around 10MW. To address concerns raised and “regulatory costs”) and offsetting those by the mining sector, the first phase of the costs with tax incentives. There is no easy tax (up to 2022) is not designed to affect the formula for achieving the right balance price of electricity. After the first three years between obligations and incentives. of implementation, the National Treasury intends to review the impact of the tax, its The South African government is developing design features including rates, and the level measures to reduce its greenhouse of the tax-free thresholds. Costs Reduction in national wealth stakeholders. For the purposes of this report it will be assigned to the government. As Given that natural resources are finite and high-quality mineral deposits have already exhaustible, it is apparent that minerals are been extracted globally; the remaining known becoming increasingly difficult to reach and deposits are mainly of a lower quality. This deposits tend to be of lower grades. But new has heightened the need to make mining technologies for exploration can discover high cost-competitive as profit margins are lower, grade deposits that were previously unknown. putting pressure on firms to reduce operating In addition, the evolution of technology makes costs. A feature of declining natural wealth the exploitation of lower grades economically is the argument that countries should make feasible. Although natural wealth is “national”, sure that they gain maximum value from it could also be associated with other minerals and that if they cannot ensure 60 2. Benefits and Costs of Mining in Southern Africa meaningful benefits for the country, it may be for migrant workers who have moved worth leaving the minerals in the ground until back home after the closure of a mine. the necessary conditions are in place and the Regardless, governments may need to appropriate technology becomes available. cover costs associated with the pollution that stems from mine closure, repairing Other infrastructure damage, and providing health care to workers and communities affected Additionally, governments may need to by mine-related illnesses but who have cover the social and economic costs that insufficient health care. are not internalized by mining investors. Other costs explored in Figure 2.1 – such Good governance is critical to catalyzing as climate change, pollution, and health – mineral deposits into shared prosperity. may not always be covered by firms. This Whether the fiscal revenue enhances inclusive can be due to the difficulty of tracing the growth depends on the ability of the government historical ownership of an abandoned or to manage the resources and to spend them closed mine, because costs associated with effectively. Although governance in the region climate change can be difficult to pinpoint is largely better than the continent as a whole to a particular company, or because it is (Figures 2.23 and 2.24), there is significant difficult for a company to provide care room for improvement (see Chapter 4). Figure 2.23: Countries in Southern Africa rank well below the global average for governance effectiveness (Governance effectiveness scores) 1 0.5 0 -0.5 -1 -1.5 Botswana South Africa Namibia Eswatini Zambia Lesotho Zimbabwe Score Regional Average Global Average Source: World Bank, World Wide Governance Indicators Project (2017). 61 2. Benefits and Costs of Mining in Southern Africa Figure 2.24: With the exception of Botswana, countries in the region still lag in terms of effective mining revenue management. (Natural Resource Revenue Management Index) 100 90 80 70 60 50 40 30 20 10 0 Mali Botswana Ethiopia Tunisia Indonesia Niger Burkina Faso Tanzania Zambia Mauritania South Africa Ghana Sierra Leone Guinea Chile Morocco Madagascar Madagascar Peru Dem. Rep. of Congo Zimbabwe Eritrea Colombia Source: Natural Resource Governance Institute (2017), Although, in principle, national governments should collect taxes from the mines and then spend on the provision of basic services and Communities infrastructure to local communities, this has not been the case. As most are located in rural areas, these communities often have to contend with an “out of sight, out of mind” attitude and as a result are underdeveloped. Communities and workers bear the brunt Communities then expect mining companies of mining. Mining communities experience to provide the benefits that the state would environmental and health consequences – ordinarily provide since firms are profiting there is significant overlap between workers from the land on which they have lived for and communities, as illustrated in Figure 2.1. many generations. BC = R (w (1 - τ - s)L) + ϑ (IM) + (RC) + CSR - HC - Ø1Y - Ø2Y (4) Mining communities benefit from the spending of workers, and possibly to a lesser degree investors, in the mining sector, where R is the proportion of income spent in mining communities. Local firms sell some intermediate inputs to mines ϑ(IM). Royalties accruing to communities (RC) and corporate social responsibility initiatives are other benefits. Yet communities are also affected by health impacts, carbon emissions (Ø1Y) and pollution costs (Ø2Y). 62 2. Benefits and Costs of Mining in Southern Africa Benefits There are close links between mining conclusion of mining royalty agreements companies and neighboring communities. with communities (including a conversion of In fact, many communities are located where royalty agreements from a D-account to equity they are because of mining activities. In the sharing, or vice versa); and the withholding of past, this included forced resettlement. mining royalties by companies. Tensions can be Today, communities are home to mine exacerbated by stakeholders – including mining employees and many livelihoods depend on companies, traditional leaders, provincial the incomes spent in the community, and on governments, and community members – opportunities to sell goods and services to who may try to increase their piece of the the mines. Increasingly, communities benefit royalty pie. These challenges lead to mining from royalties and social and sustainability communities living in extreme poverty, despite spending, such as CSR initiatives. the existence of royalties. Royalties CSR spending Mining royalties are intended to improve CSR has become a key part of community- living standards in communities around the mine relations, and has been used to mines. Royalties are paid to communities facilitate social and economic development who own the land from which the minerals are in local communities. An array of education, extracted and are disbursed in one of two ways: health, and community development either into a development account (D-account), initiatives have been funded in this way. or by converting the royalties into equity in the However, mining companies in South Africa mining accounts.30 However, a 2018 study had employed some socially destructive by Corruption Watch in two South African practices in the past. Since South Africa’s provinces showed that the royalties rarely move to democracy in 1994, CSR has been reached community members. There were a a vehicle for restorative justice to redress number of reasons for this: misappropriation the effects of apartheid. To this extent, the and maladministration; severe lack of mining sector has been a leader, making the transparency around the negotiation and largest financial contribution to CSR of any 30 For local communities who have ownership of the land, mineral extraction is a cost due to the depleting nature of mining. Historically in South Africa, mining companies had to pay two forms of rent – land rent to the surface owner and royalties to the holder of the mineral rights. These could be the same or different people. In many parts of the country, traditional authorities held rights for both surface ownership and the mineral rights ownership. However, in 2002, the Mineral and Petroleum Resources Development Act (MPRDA) was passed, which stated that the state would assume “custodianship” of all mineral resources, thus terminating the existence of mineral rights as a form of property. However, this policy had an exception for black communities who had historically been paid mineral royalties – they could continue receiving that revenue as long as it was used for the development of their communities (Capps, 2016). As a result, people living under tribal authorities were able to continue earning royalties. Therefore, for these communities, a cost of mining is the inevitable reduction of mineral wealth that occurs when resources are extracted. 63 2. Benefits and Costs of Mining in Southern Africa sector. The shift to democracy led to two Local procurement (sales) big changes in CSR: first, South Africa’s capital markets joined the international Local procurement refers to the purchase by markets, largely by listing mining companies mining companies of goods and services from on international stock exchanges, putting local businesses. By sustainably and responsibly pressure on mining companies to meet including local communities in the supply chain, international CSR standards, in line with communities can be supported through skills corporate governance structures. This development, job creation, and higher incomes, nudged companies into increasing their CSR while firms can source inputs more cost spending to attract investors mindful of effectively, by lowering the costs of logistics sustainability. Second, the democratically- and accessing good services more easily. Local elected government took ownership of the procurement is an increasingly common tool country’s mineral reserves on behalf of its being used by international mining companies for citizens, making private investors apply for three reasons: (i) to de-risk company operations mining licenses and concessions. This gave (communities are less likely to stop operations rise to competition between private investors, with protests if they are involved in the value and a perhaps unintended consequence of chain); (ii) to comply with government regulations that was that companies set out to improve or investment agreements that include local their image and reputation. Competition content requirements, making it easier for firms can have positive effects as firms had the to obtain and keep their licenses to operate; and incentive to develop coherent, integrated (iii) provide benefits for local communities by projects rather than disjointed ones merely creating business opportunities from which the for the sake of compliance (Siyobi, 2015). firm can be an off-taker (IFC, 2011). Box 2.8: Partnerships to facilitate the development of local suppliers In July 2007, Lonmin began a three-year partnership with the International Finance Corporation (IFC), a member of the World Bank Group, on local supplier development. The IFC provided expertise, staff and consultants to Lonmin and helped serve as a catalyst for economic development, bringing valuable benefits to local businesses and communities. IFC and Lonmin helped strengthen local businesses with: • Business diagnostics • Training in business management and technical skills • An incubation center • ISO and industry quality standards • Business plan development • Facilitating access to finance The Lonmin-IFC Program, through training and mentoring, also focused on capacity building for local small and medium enterprises (SMEs) to meet tender, financial and technical requirements. 64 2. Benefits and Costs of Mining in Southern Africa Key Achievements Since the start of the Lonmin Supplier Development Program, 230 SMEs have been selected to participate in business and technical skills capacity building, including through courses on management and technical skills. Additionally, a health and wellness component ensured that SMEs were taught best practices to reduce the risk of HIV/AIDS, tuberculosis, and malaria among their workers and communities. 288 Contracts worth US$38 million local supplier contracts issued to SMEs awarded to local SMEs 19 companies have been assisted with setting up financial and non-financial systems 55 209 company diagnostics completed individuals provided with small business training. Source: International Finance Corporation Oil, Gas and Mining SME Linkages Program Costs Benefits are intended to offset some of the Health costs associated with mining. They include royalties, which ensures that communities Mine dumps have detrimental health participate in the resource wealth of their consequences for communities. immediate vicinity – which gets depleted Approximately 1.6 million people live in through the production process. Externalities informal and formal settlements on, or near, of the mines that affect communities include mine dumps in South Africa. People in these health impacts and pollution. Mining also settings tend to be historically disadvantaged produces emissions that affect the global and poor. A study done on air pollution near climate but which also have localized effects, mine dumps examined the impact of dust such as drought or flooding. particles on the health of children and the 65 2. Benefits and Costs of Mining in Southern Africa elderly living in nearby communities. It found high-value arable soil (100 million hectares), that children in these communities displayed may be irrevocably damaged by coal mining. a higher incidence of asthma symptoms such The Centre for Environmental Rights (CER, as a wheezing chest and runny nose (21.1%), 2014) states that “even with the best post- congested nasal passages and a post-nasal coal mining rehabilitation (a rare occurrence drip (32.9%), than those who lived in Cape in South Africa), land that has supported Town (20.3 % and 20.7% respectively), or coal mining operations cannot ever be used Polokwane (18.0% and 16.9%). Even after to grow crops.” As a result, coal mining in this taking into consideration lifestyle factors region can have crippling long-term effects on such as smoking habits, exposure to smoke, rural livelihoods and national food security, residential heating and the type of fuel used as rural municipalities cannot recover from for cooking, age and sex, the youth and elderly industrial-scale mine closures by turning to living near mine dumps suffered higher levels agriculture, which is the primary economic of pneumonia, asthma, emphysema, chronic activity in these areas (Ledger, 2015). bronchitis, wheezing and a chronic cough.31 Water has been described as mining’s “most Pollution common casualty.” Although there have Land and Water been improvements to the mining process, there are still significant environmental In the past, once land was used for mining, it risks, particularly relating to water. Most could not always be used for other purposes water pollution stems from waste rock and such as agriculture, even after the mining tailings, which can last for hundreds, if not stops. In modern mining projects however, the thousands, of years. As mines have become landscape, soil and forest should be restored, more mechanized, they can extract greater enabling the pre-mining activities to continue amounts of ore. While this allows them to afterwards. Therefore, granting mine licenses extract low-quality ore at a profit, it is done could, in some instances, only temporarily at the risk of generating higher amounts of render land unavailable for other uses. This waste. The level of waste is dependent on a conflict is apparent with coal mining in host of factors, including composition of the Mpumalanga, which is also a key agricultural minerals being mined; type of technology area and home to 45% of all of South Africa’s utilized; sensitivity of terrain; skill, awareness, high-potential arable soils. Much of this land and the environmental commitment of the is being lost to mining. The Bureau for Food mining company; and the government’s and Agricultural Policy (BFAP, 2012) estimates ability to implement, monitor, and enforce that 12% of all of South Africa’s high-potential environmental regulations. It depends also arable land will be permanently damaged by on the monitoring capacity of the local current coal mining activity, while an additional government administration to enforce the 13.6% is being prospected in Mpumalanga. As environmental management, mine closure a result, nearly 25% of all of South Africa’s and restoration plans. 31 Nkosi, V. (2018, September 05). How mine dumps in South Africa affect the health of communities living nearby. 66 2. Benefits and Costs of Mining in Southern Africa but the leaching is exacerbated by low pH 32 There are four primary types of water pollution: environments, such as those created by AMD. 1. Acid mine drainage (AMD) and acid rock 3. Processing chemical pollution drainage (ARD) This kind of pollution occurs when chemical Acid rock drainage (ARD) is a natural process agents (such as cyanide or sulphuric acid during which sulphuric acid is created when used by mining companies to separate the sulphides found in rocks are exposed to air and target mineral from the ore) spill, leak, or water. Acid mine drainage (AMD) is the same leach from the mine site into nearby water process, but magnified exponentially. Both bodies. These chemicals can be highly toxic processes are exacerbated by disturbances to humans and wildlife. caused by mining. Once the mine water reaches a certain acidity threshold, a 4. Erosion and sedimentation naturally-occurring bacteria called Thiobacillus ferroxidans expedites the oxidation and Mineral development disturbs soil and rock in the acidification processes, causing even more course of constructing and maintaining roads, trace metals to leach out from the waste. Acid open pits, and waste impoundments. Without will continue to leach out as long as the rocks adequate prevention and control strategies, are exposed to water and air – and until the erosion of the exposed earth may carry sulphides are leached out – a process that can substantial amounts of sediment into streams, take hundreds, or even thousands of years. The rivers and lakes. Excessive sediment can clog acid is carried from the mine through surface riverbeds and smother watershed vegetation, drainage or rainwater and deposited into wildlife habitats and aquatic organisms. local streams, lakes, rivers, and ground water. AMD severely damages water quality, can kill Water infrastructure concerns are growing aquatic life, and render the water unusable. – and areas being mined or prospected tend to need new dams and water infrastructure. 2. Heavy metal contamination and leaching Although mining is not particularly water-intensive (it consumes 2.5% of South Africa’s water, which Heavy metal pollution is caused by metals is well below its share of GDP), the water damage such as copper, cobalt, arsenic, cadmium, arising out of it is on a much larger scale. The lead silver and zinc in rocks that have been construction and maintenance of roads, mines excavated from an open-pit mine or exploded and waste impoundments has detrimental effects from an underground mine. When the rocks on soil and rock. Without sufficient prevention come into contact with water the metals and control techniques, erosion of the exposed leach out and are carried downstream. Metals earth can carry large amounts of sediments into can be released in neutral pH environments streams, lakes and rivers. Excessive sediment 32 Safe Drinking Water Foundation fact sheet, 2017. 67 2. Benefits and Costs of Mining in Southern Africa can clog riverbeds and suffocate watershed Mines are given “de-watering” licenses enabling vegetation, water organisms and wildlife habitats. them to pump large amounts of groundwater Rehabilitation can be costly. In 2010, the out of the mines for safety. Farmers near the rehabilitation of the Witwatersrand region cost mines argue that this has a crippling effect on an estimated R10 billion (over US$1 billion).33 ground water levels and causes their boreholes to run dry. Although some of this water is The competition between agriculture and pumped into a government water scheme, it is mining activity is an issue in many places, not available as groundwater to local farmers. including the Northern Cape of South Africa. (Ledger, 2015). Box 2.9: Lead Poisoning at Zambia’s Kabwe Mine With lead levels in Kabwe as much as 100 times higher than recommended safety levels, the town is one of Africa’s most polluted places. Far from avoiding contaminated areas, children not only play in the dirt, but community members seek opportunities for income by searching slag heaps for metal and spoil heaps for gravel (Carrington, 2017). The situation in Kabwe is severely detrimental to people and livestock and remains an environmental disaster. Kabwe started production in 1906, becoming Zambia’s largest zinc and lead mine and pre-dated the Copperbelt mines. Operating for 88 years, it is said to have produced 1,800,000 tons zinc, 800,000 tons lead, 7,816 tons vanadium oxide, 80,000kg silver, and 235,000kg cadmium (https://mining-atlas.com/ operation/Kabwe-Zinc-Lead-Mine.php; Mufinda, 2015) during its lifetime. The mine was run without pollution controls by Zambia Consolidated Copper Mines (ZCCM) until its closure, at which point such controls were considered financially unviable. The smelters released heavy metals in dust particles, with lead, cadmium, copper and zinc dispersed through the soil over a 20km radius from the mine (IRIN, 2006). The mine’s legacy for the local communities is one where “… on a daily basis we receive cases of severe anemia, vomiting, kidney damage and brain damage, which are all linked to lead poisoning…” (IRIN, 2006). The Blacksmith Institute, since renamed Pure Earth, a New York-based environmental group, in 2007 ranked Kabwe among the world’s 10 worst polluted places (Blacksmith Institute, 2007). The direct and indirect ingestion of heavy metals, not only in the communities surrounding the mine, but also in the livestock and wildlife in the area has been well documented (Nakayama et al. 2011, 2013; Yabe et al., 2011, 2013, 2015; Corley et al., 2014; Mbewe et al., 2016; Bose-O’Reilly et al., 2018). In 2018 the surface operations of the mine were acquired by the BMR Group which is focused on the recovery of lead and zinc from the tailings deposits. The BMR Group’s website makes clear that the company is insulated from any claims or actions arising from the past mining operations. It further states 33 Trade and Industrial Policy Strategies. 2015b. “Environmental Protection and Mining.” 68 2. Benefits and Costs of Mining in Southern Africa that it is only responsible for ensuring that its own operations are conducted in a manner that avoids any further pollution, in accordance with current regulations. The responsibility for decommissioning and rehabilitation of the sites was retained by ZCCM. Work on remediation and rehabilitation only started in recent years through initiatives by the Zambian government with support from the World Bank (World Bank, 2012; 2018). The Zambia Mining and Environmental Remediation and Improvement Project will run from 2017 to 2022 and focus on reducing “environmental health risks to the local population in critically polluted mining areas … including lead exposure in Kabwe municipality.” The social and environmental consequences Climate change of mining can be endured by communities long after a mine has closed (Figure Although the environmental impact 2.25). Responsible mine closure requires of a mine affects all of society, mining much more than stopping production communities are more vulnerable to certain and decommissioning a mine. Removing effects. Mining communities tend to have hazardous materials, securing pits and informal settlements, which are particularly waste disposal facilities and mitigating vulnerable to flooding and have insufficient future groundwater pollution is a starting protection from extreme weather, such as point. But it also requires reclaiming the land floods, heat waves or hail. Because they are so that it can be repurposed, and ensuring also vulnerable to high unemployment rates, that workers, their families and larger these communities may not have the financial communities, who previously relied on the ability to respond to these challenges. Mining mine for their income, employment and firms have helped to build more resilient services, have sustainable livelihoods. infrastructure in some areas. Figure 2.25: The impact of a mine on the surrounding community starts during the exploration phase and lasts for many years beyond mine closure. (Negative externalities across the life of a mine) MINE EXPLORATION MINING, EXTRACTION MINE CLOSURE OF NATURAL RESOURCE AND ABANDONMENT SHORT-TERM MEDIUM-TERM LONG-TERM Occupation of land; Air and water pollution; Air and water pollution; solid displacement of solid waste dumps; dust; waste dumps; long-term health people loss of land consequences; unusable land Source: World Bank staff. 69 2. Benefits and Costs of Mining in Southern Africa by workers outside the economy. It should be noted that there is an inverse relationship with mining communities. More money spent within All Other communities by the mining sector reduces the impact on the rest of the economy, increasing inequality. Conversely, more spending by the mining sector outside of communities either impacts on the domestic economy or flows All other sectors – in the rest of the economy out through spending on imports. For this and the world – also benefit from mining reason, governments try to create incentives activities. This could take the form of capital for mining firms to source inputs domestically spending by the mining sector or spending (see discussion on local beneficiation). Bs = (1 - R)(w (1 - τ - s)L + (K)) + (1 - ϑ ) (IM) - (Ø1 + Ø2) Y (5) All other sectors benefit from the proportion of labor and capital income spent in the rest of the economy ( 1 -R), intermediate inputs not procured from local communities, and global negative environmental and climate externalities. Benefits Mining remains an important sector for the key benefits of mining operations for Southern African economies. As discussed communities. In rural mining areas, mining earlier, many industries – beyond local companies have extended infrastructure communities – supply to mines, while for energy, transport, mobile and internet downstream value chains are also developed connectivity – services that may otherwise to varying degrees. For many countries, mining not have been provided in the foreseeable is a stepping stone into global value chains, future. In Namibia, B2Gold, the country’s and can bring to them innovation in addition biggest gold producer, built a 7MW hybrid to other benefits such as export earnings. solar power plant that is the world’s first Income from mining remains an important large-scale, three-way (solar, heavy- source of demand and of national savings. fuel oil (HFO) and electric) power plant. Beyond this there are other less tangible In addition to substantially reducing benefits, such as infrastructure spillovers. the mine’s reliance on HFOs, it also contributed to the mine’s CSR program Infrastructure spillovers as the plant will continue to provide power to local communities after the mine has Infrastructure spillovers have been one of been shut down. 70 2. Benefits and Costs of Mining in Southern Africa Costs While there are positive infrastructure to ports and tax structures were created to spillovers, mining can also damage reinforce this – tariffs put cargo transporters existing infrastructure. In South Africa, at a disadvantage when compared to bulk the Presidential Infrastructure Coordinating transporters, making non-mining industries Commission (PICC) identified two provinces rely on road transport. Low-quality port – Mpumalanga and North West – with facilities coupled with high port fees (88% serious road safety challenges and damage higher than the global average) reduced to infrastructure as a result of heavy-duty the cost competitiveness of non-mining trucks transporting bulk commodities out firms, forcing many out of doing business in of mines. Additionally, not all infrastructure international markets and making imports has been adapted for non-mining uses. For expensive (World Bank Group, 2018). example, even though the mining sector drove the creation of transport corridors, they have Mining can lead to multi-dimensional costs not been equipped to allow non-mining firms for the rest of society. Climate change affects to access foreign markets. In South Africa, the the whole world; exchange rate volatility, economic hub of the greater Johannesburg- stemming from commodity fluctuations, Pretoria metropolitan area developed as hurts non-mining firms; industrial policy can a result of gold mining. In other countries prioritize mining firms, which affects logistics development was facilitated by harbors/ and incentives for other industries; and while ports and motorways, opening up access mining can drive infrastructure development, to international markets. Rail lines were it can also contribute to rapid deterioration of built to get mining outputs from the mines some infrastructure. 71 3. Net Benefits, Sustainability and Impact on Social Dynamics 3. NET BENEFITS, SUSTAINABILITY, AND IMPACT ON SOCIAL DYNAMICS This chapter summarizes the net benefits amount of net benefits for the mining sector to from Chapter 2, drawing on available be sustainable. In other words, it asks whether data. It also examines implications for the the mining sector generates sufficient savings sustainability of mining in Southern Africa. that can be used to develop other types of Chapter 2 discussed the benefits and costs national assets (from infrastructure to human from mining in detail, laying out some of the capital) that at least offset the depletion of complexities in fully taking account of all of natural wealth through mining. them. This chapter will use available data to aim to quantify benefits and costs in order An equitable distribution of the benefits to come up with an estimate of overall net of mining is important to mitigate the benefits, and their distribution across capital, contestation over resources. As all labor, and the government. As some of these stakeholders have incentives to maximize benefits will be saved, the chapter will then benefits from mining for themselves – referred deploy the ANS methodology to examine to as resource contestation – conflict can whether countries are likely to save a sufficient arise over the distribution of benefits. The 72 3. Net Benefits, Sustainability and Impact on Social Dynamics third section of this chapter will explore mining operations in Southern Africa typically this in more detail and also examine how require significant foreign investment and, to these underlying social dynamics can affect an extent, labor. Although local mines exist, government policies. The chapter will show a sizeable proportion of the mining sector in that conflict over distribution, be it through the selected countries have foreign ownership. industrial action or more demanding tax or As a result, the foreign factor flows are likely regulatory policies, can create contradictions to be considerably higher and require careful with the commercial mandate of mining attention. The chapter will use information companies and can, in the first place, from an annual report of a multinational undermine investment in mining and the mining company operating across the region incentives to extract the natural resource. It to conduct various thought experiments on is in this context that Chapter 4 will discuss potential losses to countries from foreign policy implications. outflows. The chapter is limited by the availability of More broadly, all analysis in this section is data on foreign factor flows. Estimations of based on macroeconomic data only, which foreign factor flows are a critical element in adds to the limitations. Given the nuance and calculating gross national income (GNI) and complexity in the benefits and costs discussed are important to calculate ANS. However, this in Chapter 2, some of the costs and benefits is a difficult exercise as data are not readily discussed there cannot be captured in this available. Foreign factor flows are particularly chapter. All numbers are estimates with important to the mining sector and consist considerable measurement error as well as of interest payments, rental of assets, short- variation around the estimates for different term labor, dividend payments and retained stakeholders. The results should therefore not profits that flow into the country, minus be seen as exhaustive or authoritative and flows out of the country. As noted earlier, should be interpreted with utmost caution. 3.1. Net benefits: summary Estimating net benefits of the mining sector By adding and rearranging equations 1-5 we can arrive at the overall net benefits of the mining sector (equation 6 below). B = (1 - Ø1 + Ø2 ) Y - RD (6) Where Y is GDP of mining sector at market prices. And, Y=(rK +wL) + τp, that is capital factor income on mining sector investments (rK) plus wage costs of the mining sector (wL) plus product taxes net of subsidies (τp). 73 3. Net Benefits, Sustainability and Impact on Social Dynamics Estimating net benefits requires various that mining companies internalize. With regard data sources. To calculate benefits, mining to cost, information on CO2 damage and air sector GDP was ascertained through national pollution damage was obtained from the World accounts data. The shares of factors of Development Indicators. CO2 damage was production (capital, labor, factor rent) and apportioned to the mine sector by drawing on indirect taxes in mining income were obtained the amount of fossil fuel required for mining from national SAMs. Given the limited available production in national SAMs. Air pollution data, it is not possible to account for all taxes damage is estimated as the total share of and to detail the social and sustainability costs mining in production. Figure 3.1: Coal and PGMs can expect to have the longest life of a mine in Southern Africa (Life of a mine in years; 10th, 33rd, 50th, 57th, 90th percentile, and outliers; number of included properties in parentheses) 800 600 400 200 0 Coal (24) Diamonds (6) Copper (16) Gold (46) PGM (23) Iron ore (5) Source: S&P Global Market Intelligence and World Bank staff. Understanding the expected life of a mine and assumed to be constant over the life of a in Southern Africa is critical to estimating mine, discounted at 4% per annum. The life of resource depletion. In line with established the mine was estimated based on S&P Market World Bank methodology, resource depletion Intelligence data, assuming that latest available was estimated using the formula in equation annual production volumes will be sustained 3 as a stream of foregone future rents.34 To to extract all available reserves of a mine. The this end, factor rents were used from the SAMs estimated life of each mine was weighted by 34 Resource depletion has been estimated for Botswana elsewhere (WAVES, 2016). However, due to a different discount rate, data for Botswana is estimated identically to all other countries included in this report. 74 3. Net Benefits, Sustainability and Impact on Social Dynamics reserves across properties. Only data from active instruments; quantifying the relative shares and operational mines were selected from the goes beyond the scope of this report. The costs following commodities: coal, diamonds, copper, are relatively modest, with resource depletion gold, PGMs and iron ore. Figure 3.1. provides some being the largest cost. Looking at the overall descriptive statistics of the estimated life of a effect in Figure 3.2, Zambia, Botswana, and mine in Southern Africa. It shows that coal and Zimbabwe have the highest net benefits of PGM mines still have the longest estimated life mining, as estimated in this report. lines in the region. Gold, copper, and diamonds have a larger number of active mines but lower When including multiplier effects, net benefits expected lives, with a few notable exceptions could be even larger. Figure 3.3. applies the in gold (such as Dominion and South Deep in calculated multipliers from Chapter 2 to the South Africa) and copper (such as Lubambe and benefits as additional GDP. However, this is Konkola in Zambia). In Zambia, the average life incomplete. For the analysis to be balanced, the of mine is estimated at 237 years. associated costs would also have to be included. In many Southern African countries, sectors The net benefits from the mining sector are linked to mining companies are likely to be bigger substantial across Southern Africa. Benefits polluters than mining companies themselves. primarily centre on increased GDP and additional For example, while a mine may produce coal, revenues to the fiscus from mining, as shown it is not responsible for the associated CO2 in Figure 3.2. Due to the relatively high capital- from the burning of the coal for energy – this intensity of mining, it is little surprise that will be associated with the power plant in the capital tends to claim the largest share of mining industrial sector. And demand for energy grows income, with wages the second largest. As for with increasing multipliers. CO2 emissions of fiscal revenue, indirect taxes are relatively small. the mining sector itself are in fact relatively Factor rents are sizeable in Southern Africa. small (Figure 3.4). Nevertheless, although this As Chapter 2 explained, the extent to which report cannot tease out these effects in detail, these rents are captured by the government or the overall impact of multipliers on net benefits capital-holders depends on the choice of fiscal is likely to be significant and positive. Figure 3.2: The net benefits of mining vary across the region (Net benefits as percent of mining GDP in 2016) 25 20 15 10 5 - -5 Zambia Botswana Zimbabwe Namibia South Africa Lesotho Eswatini Labor Capital Factor rent Taxes Resource depletion CO2 damage Air pollution Net Source: World Bank staff. 75 3. Net Benefits, Sustainability and Impact on Social Dynamics Figure 3.3: If externalities in other Figure 3.4: … but industry tends sectors were zero, including multipliers to be associated with high CO2 of mining would significantly increase emissions in many countries the net benefit … (Mining share of total CO2 emissions) (Mining GDP with multipliers as percent of total GDP) 100 90 80 35 70 30 60 25 50 20 40 15 30 10 20 5 10 0 0 -5 a ia a i a ia i e a o a a o e tin tin ric ric bi n n bi bw bw th th ib ib wa wa m m wa wa so so m m Af Af ba ba Za Za ts ts Na Na Le Le Es Es h h Zim Zim Bo Bo ut ut So So GDP Additional GDP Resource depletion CO2 damage Mining Agriculture Air pollution dammage Net Industry Services Source: World Bank staff. Source: World Bank staff. To estimate the share of the net benefits for multinational mining company operating in domestic residents, a thought experiment Botswana, Namibia and South Africa were was developed. Given that many mining studied for the period 2014-2018, developing companies have foreign shareholders (Table estimates of primary income flows in line 3.1) and also borrow abroad, a significant with UN National Accounts conventions (see share of capital income is likely to leave Annex 2 for details). Table 3.1 describes that the country. In addition, foreign skills in the company’s calculated value added and the mining sector are not inconsequential, hence balance of primary incomes. The table shows remittances are also likely to reduce the overall that primary incomes of foreign factor flows benefit to the domestic economy. No data (that is, flows of the mining sector leaving are available on the foreign income flows in the country) are considerable. In 2016, they mining. To get a sense of possible magnitudes accounted for around US$5,695 billion or of such flows, the annual reports of a large around 58.8% of gross value added. 76 3. Net Benefits, Sustainability and Impact on Social Dynamics Table 3.1: Foreign flows for a selected mining multinational (Foreign flows in millions, US$) Year Balance of primary Value added BPI / GVA incomes 2014 8,250 14,431 57.2% 2015 4,954 10,519 47.1% 2016 5,695 9,684 58.8% 2017 8,471 13,193 64.2% 2018 8,136 12,894 63.1% Source: See Annex 1. Figure 3.5: Including foreign flows, net benefits are much smaller but remain positive (% of GDP) 25 20 15 10 5 - -5 Zambia Botswana Zimbabwe Namibia South Africa Lesotho Eswatini Resource depletion CO2 damage Air pollution damage Domestic Domestic or foreign Foreign Net (low) Net (high) Source: World Bank staff. Note: Applies net foreign flows from Table 3.1. 77 3. Net Benefits, Sustainability and Impact on Social Dynamics Table 3.2: Ownership structure of major mines in Southern Africa Property Commodity Foreign Government Domestic Headquarters ownership ownership ownership Mupane Gold 100 Canada Jwaneng Diamonds 50 50 Botswana, UK Orapa Diamonds 50 50 Botswana, UK Letlhakane Diamonds 50 50 Botswana, UK Karowe Diamonds 50 50 Botswana, UK Ghagoo Diamonds 100 Australia Botswana Selebi-Phikwe Copper, Nickel, Cobalt 100 Botswana Phoenix Copper, Nickel, Cobalt 100 Botswana Selkirk Copper, Nickel, Cobalt 100 Botswana Liqhobong Diamonds 75 25 Lesotho, UK Kao Diamonds 62.5 25 12.5 Lesotho, South Africa Lesotho Letseng Diamonds 70 30 Lesotho, UK Mothae Diamonds 70 30 Lesotho, Australia Skorpion Zinc India Otjikoto Zinc Namibia, Canada Rosh Pinah Zinc, Lead, Gold, Silver 100 Namibia, Canada Rossing Uranium 90 10 Namibia, UK, Iran, South Africa Tschudi Copper, Lead, Silver, Zinc 90 10 Namibia, UK Langer Heinrich Uranium, Vanadium 93.62 3.3 3.38 Australia, Chinese Namibia Navachab Gold 97.5 2.5 Namibia, Canada, US Husab Uranium 100 Namibia, UK Secunda Mining Complex Coal 80 100 South Africa Grootegeluk Coal 97.5 100 South Africa Sishen Iron ore 96.9 3.1 South Africa Middelburg Coal 8 South Africa, Australia New Vaal Coal 100 South Africa Mogalakwena PGM 92 100 South Africa Khumani Iron ore 100 South Africa Rustenburg PGM 100 South Africa South Africa Kolomela Iron ore 96.9 3.1 South Africa Manganese Impala PGM 96 South Africa Kansanshi Copper, Gold 80 20 Zambia, Canada Treident-Sentinel Copper, Cobalt, Nickel, Uranium 100 Canada Lumwana Copper, Gold, Cobalt, Uranium 100 Canada Mufulira Copper, Cobalt 90 10 Zambia, Switzerland, Canada Kansanshi SX-EW Copper 80 20 Zambia, Canada Nchanga SX-EW Copper, Cobalt 79.4 20.6 Zambia, Bahamas Muliashi North Copper, Cobalt 80 20 Zambia, China Konkola Copper, Cobalt 79.4 20.6 Zambia, Bahamas Zambia Chambishi Copper, Cobalt 85 15 Zambia, China Nkana Copper, Cobalt 90 10 Zambia, Switzerland, Canada Hwange Coalfield Coal 100 Zimbabwe Zimplats PGM, Copper, Silver 100 UK Mimosa PGM, Copper, Cobalt 100 South Africa Unki PGM 100 Zimbabwe How Gold, silver 100 UK Trojan Nickel, Cobalt, Copper 100 Zimbabwe Freda Rebecca Gold 85 15 Zimbabwe, UK Zimbabwe Blanket Mine Gold 49 15 26 Zimbabwe, Canada Shamva Gold 100 Zimbabwe Mazowe Gold 100 Zimbabwe Source: S&P Global Market Intelligence and World Bank staff. 78 3. Net Benefits, Sustainability and Impact on Social Dynamics Although foreign flows are likely to be with mechanization. Since richer households large, the net benefits of mining remain have higher savings and are therefore more positive when including income leaving the likely to invest in capital markets, they are country. Assuming cross-border financial likely to capture more of this capital income flows for mining companies across the than poorer households. However, a large region similar to those depicted in Table 3.1, share of capital income also leaves countries it is possible to illustrate what this means as many investors are foreign. It goes beyond for the benefits of mining that accrue only the scope of this report to estimate the to domestic residents and governments. extent to which capital-intensity increases This is a very strong assumption and should inequality in a country. Wages also tend to only be considered a thought experiment – be high compared to the median, which can for example, for South Africa, the outflows also contribute to inequality. Yet Figure 3.2 are likely to be much smaller: most mining also shows that governments do capture companies are domestically owned (although a significant part of revenue, although this they would have some foreign shareholders varies by country (and over time, given to whom dividends will accrue) (Table 3.2). commodity price developments). Depending Foreign interest payments of the South on the progressivity of fiscal policy, this African mining sector were only about 0.1% is likely to offset some of the pressures of total foreign interest paid by the entire on inequality. Finally, the impact on the economy in 2017 (Figure 3.5).35 It shows that distribution of income within a country due even when assuming considerable outflows to forward and backward linkages is unknown. of income, based on data from one company, Overall, the analysis suggests that mining can the net benefits of mining remain positive in put pressure on inequality, which may partly Southern Africa. help explain levels of inequality documented in Chapter 1. Yet this inequality may have As a highly capital-intensive industry, built up over generations and disentangling mining may contribute to inequality in to what extent this is a function of history and Southern Africa. Figure 3.2 demonstrates to which extent governments have been able that capital tends to capture the largest share to use public policy to counter the pressures of mining income, which is a reflection of the on inequality more recently, is difficult to high need for capital, and that is increasing quantify and requires further research. 3.2. Adjusted net savings To estimate whether a country uses its natural gained from Table 3.1 to gauge the magnitude resources sustainably, ANS are estimated at the of possible factor flows, which are required to sectoral level. This analysis expands on insights calculate sectoral Gross National Income (GNI). 35 Only reflects private enterprises resident in South Africa. 79 3. Net Benefits, Sustainability and Impact on Social Dynamics ANS, a measure of sustainability, can be calculated not just at the country level but also at the sector level. This is done via the following formula: ANS = GNI - C - dK - RD - (Ø1 + Ø2 ) Y + ([ + H) L (7) ANS is composed of the following components: GNI minus consumption of fixed capital (gross fixed capital formation), investment in human capital and depletion of natural capital. Where, GNI=Y - r (Kf - K*) + w(Lf - L*). GNI is GDP plus net foreign flows (rKf ), which is the difference between short-term flows from foreign workers living in the country and overseas plus the return on foreign capital and the return on the country’s capital overseas (K*). GNI minus consumption (C) of fixed capital, the value of carbon emissions (Ø1Y) the value of particulate emissions damages (Ø2Y), depreciation of capital (dK) resource depletion (RD) plus the value of investment in human capital ([L) and (HL). Equation 7 can be simplified to examine the likely impact of such externalities on national savings: ANS = NNS - RD - Ø1 + Ø2) Y + ([+ H) L (8) Where, Net national savings (NNS)=GNI – C - dK Given resource depletion and other was made on the consumption of income externalities, it is important to assess the from mining which is assumed by applying impact of such costs on savings. Here we the national savings rate. This again is a proxy Gross National Savings (GNS) of the bold assumption, as mining is a particularly economy for Net National Savings (NNS). capital-intensive sector and investing Equation 8 is an important test: if countries households are likely to have higher savings are to increase or maintain their national rates than average households. In addition, wealth derived from their natural resource it is assumed that mining is taxed similarly endowment, savings from the mining sector to other sectors, supporting national health would need to at least cover these costs. This and education spending. This is a strong work requires considerable assumptions. assumption as mining companies receive One is on net foreign flows to calculate significant tax incentives – however, this is GNI – here using data from Table 3.1. It is a somewhat compensated for by the fact that strong assumption because evidence from this analysis cannot account for mine-level one company operating in Southern Africa spending on health and education which can offers only limited representativeness for be substantial (see Chapter 2). The costs are other companies. One additional assumption identical to those in Figure 3.2 above. 80 3. Net Benefits, Sustainability and Impact on Social Dynamics Figure 3.6: Only few countries in Southern Africa are estimated to have had positive ANS (ANS and components in percent of mining sector value added and in percent of GDP) 30 20 10 - -10 -20 -30 -40 -50 -60 -70 -80 Zambia Eswatini Nambia Zimbabwe Lesotho Botswana South Africa Savings Depreciation Education expenditure Net resource depletion CO2 damage PM damage ANS (% of mining value added) ANS (% of GDP) Source: World Bank Staff Calculations. Most Southern African countries require the main reason for negative ANS is not the additional savings to maintain national depletion of the resource but depreciation. This wealth (Figure 3.6). Given the various strong is linked to the capital intensity of mining, which assumptions made, only the South African absorbs a significant part of national savings mining sector is estimated to have positive ANS, for investment to simply offset depreciation. i.e. depleting assets to invest in other forms of The more capital is invested, the more assets wealth. Zambia is roughly managing to keep depreciate and the more savings are required the balance. In other countries, ANS is negative for investment to maintain the assets. One and additional income would need to be saved implication of this is that mechanization puts for the mining sector to sustain itself. One such additional strain on domestic savings, requiring additional income linked to mining could come either higher national savings or higher capital through multiplier effects that are again not inflows from abroad (which would be reflected accounted for in this analysis. Interestingly, in a larger current account deficit). 3.3. Implications for equity and resource contestation As a capital-intensive industry, mining may richer households have higher savings and contribute to inequality in Southern Africa. are more likely to invest in capital markets, it Figure 3.2 demonstrates that capital tends to stands to reason that they would capture more capture the largest share of mining income, of this capital income than poorer households. reflecting the greater demand for capital, However, a large share of capital income also which increases with mechanization. Since leaves countries as many investors are foreign.36 36 It goes beyond the scope of this report to estimate the extent to which capital-intensity increases inequality in a country. 81 3. Net Benefits, Sustainability and Impact on Social Dynamics Wages in mining also tend to be higher than the open to contestation. Investors want a share median, which can contribute to inequality. Yet of the rent to maximize their returns; workers Figure 3.2 also shows that governments do to maximize their wages; communities aim capture a significant portion of the revenue, to maximize revenue participation or social although this varies by country (and over time, spending for themselves; and other players given commodity price developments). Fiscal in the value chain try to gain support for policy is likely to offset some of the pressures on the beneficiation of mining products. At the inequality, depending on its progressivity. Finally, same time, incentives are meant to minimize the impact on the distribution of income within a exposure to the costs of mining. In light of the country due to forward and backward linkages complexity of measuring and capturing the is unknown. Overall, the analysis suggests that rent, including in many cases low transparency mining can put pressure on inequality, which and a lack of trust among stakeholders, the may partly help explain the levels of inequality government may have limited capacity to be observed in Chapter 1. Yet this inequality may an effective arbitrator. At the same time, the have built up over generations and disentangling ability to deliver benefits from the captured to what extent this is a function of history or if rents may be constrained by a government’s governments have more recently been able to capability to deliver services to the people. use public policy to counter the pressures on This can increase the demands on the mines inequality, is difficult to quantify and requires to deliver benefits directly. The competing further research. demands of various stakeholders can give rise to policy uncertainty, which can deter investors Disagreement over the equitable distribution (Figure 3.7). This section reviews some of the of the benefits and costs of mining can fuel experiences with resource contestation in conflict. In particular, the economic rent is Southern African mining. Figure 3.7: The conflict between various stakeholders can give rise to policy uncertainty, which can act as a strong deterrent to investments (Uncertainty about the administration, interpretation and enforcement of existing regulations, % of respondents) Would not pursue investment due to this factor Strong deterrent to investment Mild deterrent to investment Not a deterrent to investment Encourages investment 0 10 20 30 40 50 60 70 Zimbabwe Zambia Tanzania South Africa Namibia Botswana Source: Fraser Institute (2018). 82 3. Net Benefits, Sustainability and Impact on Social Dynamics Governments seek to capture the rent. The rent August 16, 2012, the police opened fire on the is the income a society obtains from turning a strikers, killing 34, in what is now referred to resource that is in the ground into a transferrable as the Marikana Massacre. But in an 8-day asset. Governments capture rent37 to provide period before the massacre, there had been public services and infrastructure. However, several incidents of violence among different governments and mining firms have often been factions of workers, between the strikers and in conflict, with each trying to maximize its mine security and between the strikers and share of the rent with the disagreements often the police, resulting in 10 deaths. At least 78 arising out of a lack of transparency. people had been injured throughout the period, most at the hands of the police. In 2014, all the Conflict between labor and mining major platinum producers in the Rustenburg companies has characterized mining in area – South Africa’s key platinum producing Southern Africa. Because of discrimination region – were again rocked by industrial action and wage suppression, the mining industry when more than 70,000 workers went on in Southern Africa, especially South Africa, strike at Impala Platinum, Anglo American has historically had to contend with industrial Platinum, and Lonmin. Marikana also opened action that often turned acrimonious. During a new era for labor unions,38 as it ended the the apartheid era in South Africa, poor and dominance of the once illustrious National unsafe working and living conditions and Union of Mineworkers (NUM). The NUM was a “color bar” under which there were high founded in 1982 with Cyril Ramaphosa – South minimum wages for whites and low maximum Africa’s current state president – serving as its wages for blacks, fueled dissent. Mineworker first general secretary. The NUM’s proximity unions were also a prominent part of the to power is illustrated by the fact that from labor movement’s contribution to the struggle 1991 until 2017, the secretary generals of the against apartheid. governing African National Congress, were all former NUM officials. In August 2012 a labor conflict on Lonmin’s platinum mine in Marikana in the North West But NUM has since ceded ground to the more province escalated into a brutal confrontation militant Association of Mineworkers and with the police, marking a turning point in Construction Union and to the National Union labor relations. The strikers, mainly rock drillers, of Metalworkers of South Africa, a former ally had demanded a salary increase from R4,000 that was expelled from labor federation the (US$482) a month to R12,500 from Lonmin, Congress of South African Trade Unions. Union the world’s third largest platinum producer. On rivalry is now a factor in workplace conflicts. 37 This report does not associate “rent-seeking” with corruption. Rent-seeking and corruption are closely related when these rents are used for private gain and not public benefit. High tax and customs rates; controls on domestic prices and foreign exchange; and ambiguous, opaque and restrictive laws can support corruption (Coolidge and Rose-Ackerman, 1995). 38 In South Africa, major labor unions have investment companies usually started with seed money from the unions themselves. NUM started the Mineworkers Investment Company (MIC) with R3 million in seed money and by 2015, MIC was managing assets valued at more than R5 billion. Though the MIC does not invest in mining companies, the investment arms of other labor unions are likely to do so. 83 3. Net Benefits, Sustainability and Impact on Social Dynamics The platinum sector strikes were costly for mining activity, even though the strikes halted both employees and the mining companies production. Suppliers lost R17 million in sales (Figure 3.9). Estimates from the South African per day while capital investments, estimated at Reserve Bank suggest that in the aftermath R30 million per day, did not materialize. The loss of Marikana between August 2012 and June of income had far-reaching impacts beyond the 2014, the direct loss to striking employees in Northwest Province where the mines are located, terms of foregone salaries and wages was an as many of the workers were migrants from estimated R9.4 billion and lost revenues for Gauteng, the Eastern Cape, Mozambique and firms was estimated at R21.1 billion. In addition, Lesotho. Labor militancy and heavy regulations mining companies incurred costs of R68 million are strong deterrents to investments in five per day to keep the shafts accessible for future Southern African countries (Figure 3.10). Figure 3.8: The rise in labor strikes from 2012 has become a very strong deterrent to investors in South Africa (Perceptions of labor regulations/employment agreements and labor militancy/ work disruptions, 2011 & 2015, % of respondents) 2015 2011 0% 10 20 30 40 50 60 70 80 90 100 Encourages investment Not a deterrent to investment Mild deterrent to investment Strong deterrent to investment Would not pursue investment due to this factor Source: Fraser Institute (2011, 2015). Figure 3.9: The labor strikes have proved very costly for platinum firms in South Africa (Impact of strikes on platinum mine revenues, US$ millions) Marikana Rustenburg Impala Amandelbult Rasmone 0 200 400 600 800 1,000 1,200 1,400 1,600 Imputed revenue without strikes Actual gross revenue (based on 152 strike days) Source: S&P Global Market Intelligence and World Bank staff Calculations. 84 3. Net Benefits, Sustainability and Impact on Social Dynamics Hostile labor relations are not unique to the four foreign-run copper mining companies South Africa. In 2012, Zambian miners in 2011, a company fired at least 1,000 killed a manager by pushing a mine trolley striking workers. However, the government at him during a riot as tensions at foreign- negotiated a reinstatement, though some owned mines escalated. A year before, 13 were disciplined. A 122-page report by Human mineworkers were injured after being shot Rights Watch detailed the pervasive nature during a pay protest by two foreign mine of abuse in foreign-run mines, including managers. The Zambian government later poor health and safety conditions, having to dropped charges against the two managers regularly work 12 and 18-hour shifts and anti- who had been accused of attempted murder. union activities, all of which violate Zambia’s When miners stopped production at three of national laws and international standards. Figure 3.10: Tight regulation and labor militancy are a strong deterrent to investment in the region. (Perceptions of labor regulations/employment agreements and labor militancy/ work disruptions, % of respondents) Would not pursue investment due to this factor Strong deterrent to investment Mild deterrent to investment Not a deterrent to investment Encourages investment 0 10 20 30 40 50 60 70 80 Zimbabwe Zambia South Africa Namibia Botswana Source: Fraser Institute (2018). Communities near mines often expect to the bare minimum needed to prevent specific benefits from mining companies the mine’s closure. Anglo made nearly all and conflicts arise when these expectations 2,000 workers redundant, retaining only a are not met. The benefits can be schools, minimum operations team of 121 full-time hospitals, and infrastructure – but also staff and turned the shaft into a research employment. There has been a sharp decline and development (R&D) laboratory for new in the use of migrant labor as communities mechanization technology. The surrounding and unions pressure firms to hire workers community protested violently against the from areas neighboring the mine itself. In decision. Burning tires were used to block 2016, after sustained losses due to low prices off the single road that provides access to at Twickenham, its conventional platinum the mine and protesters tampered with the mine in Limpopo, Anglo Platinum put it on electricity supply without regard for anyone care and maintenance, reducing production who may have been underground at the time. 85 3. Net Benefits, Sustainability and Impact on Social Dynamics An armed takeover was threatened unless first developed in 2002, amended in 2010, the mine employed 5,000 locals. The demand and revised again in 2017 and 2018. Under for 5,000 local workers was a far cry from the rubric of transformation, the charter the 121 staff and 500 R&D contractors from aims to undo the legacy of apartheid, making around the world who are on site. the ownership, labor force (and other aspects of mining) more representative of South Disagreements over South Africa’s African demographics. However, changes Mining Charter are a stark illustration of to the ownership targets were challenged in contestation in mining. The Broad-Based court by the industry and added to policy Black Socio-Economic Empowerment uncertainty amid concerns about higher Charter for the South African Mining and costs for mining companies. Exploration Minerals Industry, (the Mining Charter), was investment fell (Figure 3.11). Figure 3.11: There has been a decline in mining investments in South Africa over the past decade, partially due to lower investor confidence (Exploration budget trends in South Africa, 2009-2018) 2009-2018 400.0 Exploration Budget ($M) 300.0 200.0 100.0 0.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Exploration Budget Source: S&P Global Market Intelligence. 86 3. Net Benefits, Sustainability and Impact on Social Dynamics The 2017 charter raised ownership capped by the B-BBEE dividends available requirements, creating tensions with and shortfalls are carried forward during mining companies.39 Black ownership was the 6-year term. raised from 26% to 30%, while tightening up compliance requirements. 40 A right • Consideration of free carry. Free holder failing to achieve 100% compliance is carry is defined as the non-B-BBEE automatically identified as non-compliant, shareholder providing vendor financing regardless of how they score in other areas, to the B-BBEE shareholder. However, no affecting mining licenses. Deliberations repayments of the funding are made to centered on how to operationalize ownership the non-B-BBEE shareholder. requirements, testing various models to bring in broad-based black economic empowerment The 2017 Mining Charter would have (B-BBEE) shareholders. Figure 3.12 provides imposed additional costs on mining an overview of the impact of various companies. Not modelled in Figure 3.12 is the possible ownership and funding structures, impact of increased B-BBEE ownership which some of which were considered during the creates costs to existing mining operations by negotiations, modelled for a hypothetical new diluting existing shares. The model focuses mining operation: on a new mine and shows that increasing the required share of B-BBEE shareholding has no • Capital structure. Percentage of non- impact on the internal rate of return. Vendor B-BBEE ownership and percentage of financing with free carry for B-BBEE shares, B-BBEE ownership. on the other hand, have significant impacts on internal rates of return and thus hurdle rates. • Vendor financing. Ranging from 0 to The June 2018 version of the Mining Charter 100%, vendor financing is defined as the requires a 10% free-carry. portion of B-BBEE equity that will be funded by the non-B-BBEE shareholder Contestation over the Mining Charter over an agreed term and at a certain continues. In 2019, the Minerals Council filed interest rate. This rate is usually below the an application to take the third Mining Charter prime rate. Repayments of the funding are on judicial review. The council will challenge 39 After the previous version of the Mining Charter, the Department of Mineral Resources published an outcome of the review of the charter’s effectiveness at driving the intended transformation. These were the key outcomes of the review: (i) the industry was not fully transformed – although there have been improvements in compliance, there is still a long way to go; (ii) limited social impact – many people adopted a compliance-driven mode of implementation, designed to protect their social license, rather than create substantial social impact; (iii) insufficient progress in broad-based empowerment ownership – the interest of mine workers and communities are typically held in trusts and there was not always a clear benefit stream from the trusts to the intended beneficiaries; and the flow of benefits which was designed to do more than just service debt, but also provide cash flow to BEE equity owners, was insufficient; and (iv) surrounding communities still live in extreme poverty, which is reflective of the culture surrounding mining operations; despite the MPRDA’s transfer of South Africa’s mineral wealth ownership to people, it is still under government oversight. 40 The other 3 components of the “scorecard” are employment equity (20%); human resource development (20%); inclusive procurement, supplier and enterprise development (60%). The Charter removed mine community development and housing and living conditions as scoring elements, but rights holders will still be required to submit relevant documents for the housing and living conditions plan and social and labor plan, which will require multi-stakeholder approval. 87 3. Net Benefits, Sustainability and Impact on Social Dynamics a number of provisions in the charter, but High Court ruling in April 2018 which stated will focus on the “once empowered, always that companies that met, but then fell below empowered” principle. Under the revised version the 26% target, would not have to top up their of the charter, companies that met the previous B-BBEE shareholding. A second provision that is 26% ownership target will remain compliant set to be challenged is that firms must procure even if their empowerment partners choose to a minimum of 70% of goods and 80% of services exit the transaction. However, these companies from South African companies within the next will lose their compliant status when they five years. The Minerals Council has said that renew or transfer their mining rights, and would meeting some of the targets in the specified have to top up their B-BBEE shareholding to time frame would be a challenge, given the the new 30% minimum. This went against a limited availability of inputs. Figure 3.12: Combinations of B-BBEE equity, vendor financing, and free carry affect hurdle rates for investment to varying degrees (Percentage point change in internal rate of return of hypothetical new mine,41 relative to a case without B-BBEE requirements) Difference to Base 50% Non B-BBEE Equity, 50% B-BBEE Equity, 100% Vendor Financing, Free Carry -18% 70% Non B-BBEE Equity, 30% B-BBEE Equity, 100% Vendor Financing, Free Carry -10% 74% Non B-BBEE Equity, 26% B-BBEE Equity, 100% Vendor Financing, Free Carry -8% -6% 70% Non B-BBEE Equity, 30% B-BBEE Equity, 50% Vendor Financing, Free Carry -5% 74% Non B-BBEE Equity, 26% B-BBEE Equity, 50% Vendor Financing, Free Carry -3% 50% Non B-BBEE Equity, 50% B-BBEE Equity, 100% Vendor Financing -3% 70% Non B-BBEE Equity, 30% B-BBEE Equity, 25% Vendor Financing, Free Carry -2% 74% Non B-BBEE Equity, 26% B-BBEE Equity, 25% Vendor Financing, Free Carry -2% 70% Non B-BBEE Equity, 30% B-BBEE Equity, 100% Vendor Financing -2% 74% Non B-BBEE Equity, 26% B-BBEE Equity, 100% Vendor Financing -1% 70% Non B-BBEE Equity, 30% B-BBEE Equity, 50% Vendor Financing -1% 100% Non B-BBEE Equity, 0% B-BBEE Equity 0% 74% Non B-BBEE Equity, 26% B-BBEE Equity 0% 70% Non B-BBEE Equity, 30% B-BBEE Equity 0% Source: World Bank staff. Mandatory development of a mining Act (MPRDA) is another area of contestation. community, stipulated in South Africa’s The MPRDA states that if there is a mine Mineral and Petroleum Resources Development near a community, it must contribute to the 41 The model is based on the development of a hypothetical mine comprising a 1-year construction phase and 6-year operational phase, where: (i) revenue is derived from price and volumes of coal, gold, platinum, iron ore and manganese commodities; (ii) costs are derived from the respective direct and indirect high level costs for each commodity type; (iii) on taxes, both royalties and the corporate income tax are factored in, and include the allowance for spend on capex; (iv) major capital expenditure occurs during the construction phase, and “stay in business” capital is considered during operations; and (vi) The construction cost of the mine is funded via a mix of debt (70%, at a cost of 10%, or 1% below prime) and equity (30%). 88 3. Net Benefits, Sustainability and Impact on Social Dynamics development of the community. An application and makes negotiations more adversarial. For for a mining license must include a social and mining companies, in the short-term, SLPs labor plan (SLP), which was designed to promote can be a significant expense that contributes employment, social and economic welfare, and to reduced returns.42 However, in the medium to ensure that mining firms are contributing to and long term, SLP negotiations and execution the betterment of the communities in which they also provide an avenue for reducing commercial operate. SLPs should be done in a consultative risk, thus decreasing the likelihood of disruption, process and include the Department of Mineral and hence, increasing commercial returns. Resources (DMR), local government, mining Although earmarking resources for community companies, communities, traditional leaders, development is viewed in an increasingly positive trade unions, and mining contractors (Figure 3.13). manner, efficiency and implementation are areas A SLP is submitted as part of the application for that could benefit from improvement. Applying a mining license and once approved, becomes a a likely range of SLP spend to the hypothetical legally-binding document. A SLP must contain mining company studied in Figure 3.12, 1% of specific sections, including: (i) a local economic revenue expenditure on a SLP would reduce the development program; (ii) human resource internal rate of return by 2.7 percentage points; development program managing downscaling 5% expenditure would reduce it by 4.1 percentage and retrenchments; and (iii) financial provisions. points. This can significantly affect hurdle rates, Information on the details in SLPs is scarce, the commercial viability of a mine, and the reducing transparency, which undermines trust incentives for mining companies to invest. Figure 3.13: A SLP is required from mine construction to well beyond the time a mine closes (Lifecycle of SLP collaboration between firms, communities and the government) PRIOR TO MINING PRODUCTION PHASE MINE CLOSURE Apply to DMR for a mining Once the DMR issues a mine A mining company’s license with details of license, the company can begin responsibilities to its workers environmental impact. operations. The documents and surrounding communities submitted as part of the mine does not end when the mine Design and include the SLP license application become closes. which details how the mine legally binding. The company will benefit the communities must show: It must fulfill all SLP being affected by the mining commitments. operations. Fulfillment of all the commitments it made in the Begin to rehabilitate the land Consult with communities SLP and submit annual reports where mining has occured about the implementation of detailing their progress. so that it can be utilized for the SLP. agriculture. Submit a new SLP every 5 years. Source: World Bank staff. 42 Where infrastructure is built for the benefit of employees as part of SLPs, it is allowed as a deduction over 10 years. However, when expended for the benefit of non-employees of the mine, such expenditure is treated as non-deductible capital expenditure unless the expenditure was included as part of the SLP and does not constitute infrastructure (or environmental rehabilitation). 89 3. Net Benefits, Sustainability and Impact on Social Dynamics The local economic development and human of the three aforementioned sections. Even resource development components of the with this provision, mines can struggle when SLP are designed to improve economic they lose fiscal capacity due to a downturn opportunities for workers and mining in commodity pricing. Although SLPs have communities. They are intended to ensure been in place since 2002 and were designed that mining firms contribute to the surrounding with a transformative agenda in mind, most communities and to the areas from where communities are still without meaningful their workers are recruited. The section on benefits and continue to live in extreme economic development contains the largest poverty. There are several reasons for this: number of programs aimed at broad-based communities are not always consulted during economic development, including poverty the development of the SLP, which can make eradication and infrastructure development. the SLPs irrelevant to local challenges. Both programs must align with the local Although SLP guidelines say that mining municipality’s Integrated Development Plan companies must consult with the public targets. The human resource development before completing their SLPs, guidelines do program must create a plan for developing not carry the same legal weight as the MPRDA the skills of both their workers and the larger and regulations, which do offer input on the community. Firms are mandated to provide issue. Furthermore, firms do not always skills that are relevant for mining and non- meet their SLP commitments and the DMR mining sectors and programs can include does not always hold firms accountable. adult basic education, artisan training, Ultimately, despite low commodity prices, apprenticeships and scholarships. having provisions to address training, local development and retrenchments improves The section on managing downscaling and social cohesion in mining communities and retrenchment must create a blueprint for how promotes sustainable development. the mine will handle downsizing operations, should that become necessary. This must include: The Centre for Applied Legal Studies at the (i) a plan to save jobs and avoid job losses; (ii) plans University of Witwatersrand carried out to provide alternative procedures for creating research to understand why the SLP system job security when job losses are unavoidable; has been ineffective. Key findings included: (i) and (iii) plans to minimize social and economic the SLPs did not address gender inequality. The consequences on individuals, communities and mining sector can entrench gender inequality regions when retrenchments and/or closure of because the loss of communal land most the mine become inevitable. The World Bank, commonly affects women, who are usually International Council on Mining and Metals responsible for providing food; and because (ICMM) and Intergovernmental Forum on Mining, women face many obstacles to entering the Minerals, Metals and Sustainable Development mining workforce, including high rates of have all recently produced publications gender-based violence, insensitivity to gender in highlighting the need for a just transition by work allocations and inappropriately designed taking care of social issues after mine closures. safety gear; (ii) SLPs were not translated into the languages commonly spoken in mining The financial provision section states that a communities and less than 2% of SLPs were specified budget must be allocated for each available online; (iii) little due diligence was 90 3. Net Benefits, Sustainability and Impact on Social Dynamics done to plan local economic development clearly demarcated; and (iv) housing is a critical projects – 56% of SLPs did not mention any part of SLPs, but there was a lack of clarity sort of feasibility analysis prior to undertaking as to how firms would facilitate housing for a project; (iii) roles and responsibilities were not workers and communities. Figure 3.14: Higher net benefits are associated with more attractive mining regimes (Fraser attractiveness score (higher is better) and net benefit of mining, 2016) 90 80 Botswana Investment attractiveness 70 Namibia Zambia 60 50 South Africa 40 Zimbabwe 30 20 10 0 - 2.00 4.00 6.00 8.00 10.00 12.00 14.00 Net benefit (low) Source: Figure 3.2, Fraser Institute (2016) and World Bank staff. The more equitable the distribution of net the other stakeholders to varying degrees, benefits, the greater the attraction for mining respond by raising taxes or royalties and investors. This chapter has illustrated some of through regulations. Figure 3.14, although only the estimated distribution of net benefits to a correlation, does suggest that countries that various stakeholders at a macro-level, while retain higher net benefits domestically¸ tend to providing some nuance to the complexities of have more attractive investment climates. establishing a fair and equitable distribution of More research is needed to establish causation, these benefits. Perceptions about imbalances but an intuitive understanding suggests that in the way the resources are shared can result a more equitable distribution of net benefits in conflict. Labor tends to respond through reduces contestation, and thus, commercial strikes, communities through protests and risk, thereby creating environments that are other disruptions, and companies by reducing more attractive to investors who would extract their investments. Governments, representing the resources for the benefit of all stakeholders. 91 4. Policy Implications 4. POLICY IMPLICATIONS The policy recommendation in this section linkages; and (iv) change should be managed focuses on how governments can create a efficiently, to minimize negative consequences. more equitable distribution of benefits from Underpinning all of these recommendations is the mining sector, without reducing incentives a need to improve the availability of data in to future investments or stopping ongoing the sector, thereby increasing transparency, in exploration or extraction. This section provides order to make good governance easier, develop four overarching recommendations: (i) develop tax policies with accurate data, understand good governance and create a stable regulatory the commercial feasibility of creating local environment; (ii) capture rent effectively; (iii) production linkages and developing policies to strategically develop backward and forward benefit all stakeholders. 92 4. Policy Implications Recommendation 1 Develop good governance and create a stable regulatory environment The extent to which a country’s natural Stable policy is important to reducing risk resource endowments can be used to reduce in mining investments. There are a number poverty and inequality, is dependent on of risks that investors face in the region, the quality of governance. Governance including contract frustration, rapidly determines the requirements that firms must changing taxation policies, expropriation, meet prior to commencing exploration and/ industrial action, bribery and corruption, or mining (e.g. social licenses), the regulatory security and regulatory burdens. Providing costs that firms must cover, the benefits transparency and policy certainty helps firms are required to provide to workers, firms offset the social, political, and communities and the domestic economy, and economic risks that have to be endured the amount of revenue that firms must pay in addition to the inherent geological risks to the government. It is also dependent on associated with mining. Additionally, an the institutional capacities to administer and environment with an equitable distribution enforce mineral laws, regulations, guides and of benefits is favored by investors, as it standards. Without sufficient governance, contributes to a stabilized region. mining can disproportionately benefit only a few (generally the government or capital Addressing the distrust between mining holders), and increase inequality. companies and governments is important to creating a stable regulatory climate. Creating an environment of stakeholder Historically, distrust has led to abrupt policy collaboration is important to facilitating the changes and operational stoppages in a equitable distribution of benefits from the context where limited mineral sector data extractive sector. This report has highlighted prevent objective assessments of the effects the importance of balancing the interests of of existing policies. The Extractive Industries various stakeholders, including the government, Transparency Initiative (EITI) was created to investors, communities and workers, to create an reduce information asymmetry and develop investment-friendly climate, prevent conflicts, a foundation of trust and collaboration and distribute benefits equitably. Although between governments and companies. The there are certain measures in place, such as EITI Standard requires information to be the requirement for community consultations, provided for all points of the extractive value workers’ forums and requests for investor chain, including extraction, rent transfer, inputs into government policies, these are and how it benefits the public. The EITI aims still often done merely for compliance, rather to reduce rent capture by looking at how than in the spirit of meaningful collaboration. licenses and contracts are allocated, who Creating a forum that brings together all benefits from those operations, the legal and stakeholders for genuine multi-stakeholder fiscal arrangements in place, how much is discussions, rather than bilateral discussions, paid, how those revenues were allocated, and could provide a platform that could lead to what extraction contributes to the economy, more meaningful collaboration. particularly for employment. 93 4. Policy Implications The EITI can also be implemented at the there has been a rise in resource nationalism subnational level, which could bring clarity across the region – including higher taxes and on royalties to local communities. Section increases in state equity and local beneficiation 2.4 examined reasons why communities requirements. When governments unilaterally may not receive royalties allocated to them: amend or break existing fiscal agreements misappropriation and maladministration, they have with mining companies, they signal lack of transparency around negotiation and that future investments or projects are at risk conclusion of mining royalty agreements and vulnerable to abrupt changes. Given that with communities, and withholding of royalty mining investments are long-term in nature, payments by companies. The EITI would allow generally ranging from 25-80 years, certainty local stakeholders access to information on and stability are important. mining operations, how mining revenues are used, how mines operate and what their local Creating and consistently enforcing policies impacts are. At the time of publication, Zambia that require firms to cover their social and remains the only country in this analysis that sustainability costs from exploration through to has joined the EITI. Reducing the information mine closure is central to creating a sustainable asymmetry and increasing transparency are policy climate. A reason governments revise key steps to reducing conflict, increasing trust, existing agreements or create policies that can and bringing stability to the mining sector in be perceived as punishing mining companies, is the Southern African region. Such steps are because mining companies generate significant also critical to attracting investment and negative externalities, including pollution, health ensuring the future sustainability of the sector. consequences for workers and communities, infrastructure damage and irreversible land Honoring the existing fiscal agreements is damage (section 2.4). The costs of these key to creating a sustainable regulatory consequences should fall squarely on the climate and giving companies the long- shoulders of those who profit from it – mining term confidence needed to make mining companies. However, these costs should be built investments. In response to perceived into the agreements entered into by the firms imbalances in the distribution of benefits, and governments, so that there are no surprises. Recommendation 2 Governments should capture rent effectively Governments should maximize their revenue governments to fix their existing tax collection collection, while being mindful of the hurdle systems, with built-in space for shortfalls and rate, to ensure firms are being compensated windfalls, rather than continually changing for the risks associated with mining. policies based on commodity prices, new Developing effective revenue collection mineral deposit discoveries, or other factors. policies is a challenge across the region. This The previous recommendation of joining the is evidenced by the rapid turnover of various EITI to increase transparency and reduce resource tax policies. To create a stable regime information asymmetry will allow governments and attract investors, it is in the best interest of to use the most accurate information when 94 4. Policy Implications creating tax policies. In exchange, governments manuals, strengthened capacity of revenue need to use a fair combination of production authorities, improved administrative taxes, royalties, and regulatory taxes to procedures and IT systems, enhanced efficiently capture rents while ensuring firms collaboration and coordination between are profitable. a g e n c i e s re s p o n s i b l e fo r m i n e ra l s policies and revenue collection, through Ad d i t i o n a l l y , g ove r n m e n t s wo u l d comprehensive country-level minerals benefit from adequate institutional databases, could reduce misalignments and arrangements for effective and efficient improve compliance, provided a competitive mining revenue collection. Tailored audit fiscal regime is in place. Recommendation 3 Strategically develop backward and forward linkages Although the majority of countries in the 2.3 analyzed five value chains – platinum, region are implementing policies to increase mining machinery, diamonds, coal, oil and the development of local production gas, and coal and uranium – to understand linkages, more attention should be given which SADC countries are likely to develop to prerequisites such as infrastructure, a comparative advantage in the short to intermediate inputs such as electricity, and medium-term. Developing policies without to developing skills. In particular, improving looking at the larger picture or sustainability access to, and the cost of, electricity and can compromise commercial viability. For transportation infrastructure can help make instance, in an effort to meet local processing countries in Southern Africa more cost- requirements, Zambia’s Konkola Copper Mines, competitive. For backward linkages, electricity a subsidiary of Vedanta resources, imports is a necessity for equipment manufacturers small amounts of copper from India and South and weak infrastructure in this area can Africa to meet the minimum requirements cause damage to equipment, slow down the needed to be commercially viable. Zambia manufacturing and repair processes, and recently implemented a 5% copper import duty, make it difficult to meet deadlines for export making the smelting process commercially customers. For forward linkages, smelting and unviable; Konkola suspended its Nchanga Mine refining – the first stages in beneficiation – operations as a result of the import duty. require a substantial amount of electricity, and it is near-impossible to process raw minerals Collaborating between Southern African without it. countries and using a regional approach would help reduce the burden of ongoing There are dangers to implementing local constraints, including those relating to beneficiation requirements without infrastructure, skills, technology, and access developing a strategy for achieving to markets. This can be difficult given that a comparative advantage. Countries the current policy climate favors nationalism should focus on developing a regional or rather than regional collaboration. However, global comparative advantage. Section allowing countries to specialize in various 95 4. Policy Implications parts of the supply chain increases the use Zambia’s Copperbelt to access the DRC likelihood of a sustainable value chain being mining value chain, since the DRC itself is developed. For example, Fessehaie (2015) too volatile to establish operations in. Thus, notes although there are significant barriers the Copperbelt offers Zambian suppliers the to developing cross-border linkages between opportunity to increase operations and achieve South Africa and Zambia, and Zambia and the economies of scale, while also offering South DRC, there is also potential for improvement. African manufacturers the incentive to increase There is scope for linkages between South the value-added content of their business in African-based machinery manufacturers and Zambia. By joining forces, constraints such as Zambian suppliers, which could help upgrade human and technological capabilities, can be the technology in Zambia’s Copperbelt. Both overcome, and regional partnerships can yield South African and Zambian suppliers already economic gains. Recommendation 4 Manage change effectively It is important to develop and implement counterparts. Given the skills constraints skills development programs aligned with facing many mining communities, capacity diversified economic activities to absorb building in the areas of technical and business the labor displaced by mechanization. development as well as assistance with access Although mechanization leads to significantly to finance can be catalysts to developing higher productivity and revenue, it is having linkages and widening the beneficiaries of the a strong impact on local labor dynamics. mining sector. Additionally, it is important The transition to mechanization is creating that there be substantial investment in next- two changing labor dynamics: in the type of generation mining equipment, which would labor demanded, from low-skilled to high- mostly target the domestic market but could skilled (engineers instead of rock blasters, for have significant technological spillover that example); and a decline in the total amount would boost exports. Existing local content of labor required. The shift to mechanization policies tend to focus on direct employment has made it necessary to develop a workforce targets and less on skills development for that is suitably qualified for other industries the creation of indirect employment around that have the jobs that are able to absorb high the mining sector. Shifting the focus of local amounts of low-skilled labor. The increased content policies to the latter would help expand tax revenue obtained from higher mining mining’s multiplier effects and productive productivity, can be used to finance skills linkages. Focus should be put on transferable development programs. skills to have versatile workers with flexible skills, who are able to adapt to change or make Mechanization requires training local an industry shift. To leverage mining operations suppliers in new skills. Providing them with for people beyond their current jobs, incentives the necessary training is key to making and partnerships would probably be more domestic mining technology and service effective instruments, instead of the imposition firms competitive against international of stringent requirements. 96 Bibliography BIBLIOGRAPHY ActionAid and The Juatice Network Africa. (2016). Still Racing Toward the Bottom? Corporate Tax Incentives in East Africa. African Development Bank Group. (2018). African Statistical Yearbook 2018. 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Limited availability of data has meant it was decided to estimate resource depletion has been problematic to estimate net benefits data via this method, because of gaps in data and ANS for the mining sector. To bridge underlying the World Development Indicators this information gap, this report has made - for example, the WDI estimates do not assumptions and used alternative indicators include data on some commodities important as proxy variables where data is unreliable or for Southern Africa, such as diamonds. Finally, does not exist. As a result, results should be estimates of CO2 and pollution damage were interpreted with caution. It is the intention of based on the WDI and equated to the share this report to build the foundation for further of mining inputs in total demand taken from work on net benefits and ANS in the mining SAM data. This is a simplistic assumption, sector, rather than being a definitive work. especially since CO2 costs are a rough approximation. Also, pollution damage only The following assumptions were made to estimates the rough cost of particulate estimate net benefits. First, while GDP of emissions on health. It also does not take the mining sector was based on existing into account wider environmental costs, such macroeconomic data from national accounts, as damage to natural resources, which the the breakdown of factor income was taken report qualitatively outlines. In short, these from SAM data derived from GTAP. However, costs can only be viewed as a rough proxy, the latest data available was only for 2014, which significantly underestimates actual and data was inconsistent for some countries. environmental costs. To mitigate these issues, data was reweighted and outliers replaced with available data In short, these costs can only be viewed where possible. Similarly, data on taxes from as a rough proxy, which significantly SAM data appeared to be inconsistent and in underestimates actual environmental costs. a number of cases appeared to underestimate actual tax revenues. Moreover, resource A number of assumptions were also used to depletion figures were based on projecting estimate ANS. First, to estimate GNI the report SAM data for economic rent, discounting by made assumptions on foreign inflows (see 4 % and dividing by the life of the mine, which annex 2). Given limited data, foreign outflow was an assessment based on a large sample estimates from a large multinational mining of mines for each country and weighted firm were used to estimate likely outflows for by the level of reserves. The analysis was each country. This approach has the following rudimentary, since it assumes no change in issues: it does not account for cross-country 102 Annex 1 variation; an individual firm (which focuses from the issues as noted earlier. Meanwhile, on key commodities) is unlikely to reflect depreciation data was not available at the the composition of mining activity at the mining sector level. As a proxy, depreciation sector level and therefore foreign flows at a for the overall economy was taken from the firm level are unlikely to completely reflect WDI and based on mining sector shares. flows at a sector level; estimates were likely Given the level of the capital stock in the to be distorted by transfer pricing. Moreover, mining sector, this is a blunt proxy for actual it would not include public sector activity depreciation. In addition, the national savings in the mining sector, which are significant rate was applied as a proxy for savings of in some countries. And it would not include income from mining. Education and health domestic mining firms, which are likely to have spending for the mining sector level was based significantly lower foreign outflows. on mining sector shares of national spending. Finally, as noted earlier, environmental costs Consumption of capital (depreciation) was are only approximated by CO2 and particulate based on SAM data and therefore suffered emissions damages. 103 Annex 2 ANNEX 2 Obtaining balance of primary incomes from annual reports The World Bank is currently developing an Brief methodological notes important study in estimating the net impact of mining on the economy of Southern African Using the company’s annual reports for the countries, as this is of utmost importance period 2014-2018, the production account, the for the Bank to support the creation of generation of income account and the allocation sustainable economic growth in the region and of primary income account for such period were for the countries’ authorities to make timely elaborated. BPI is the balancing item of the and informed economic policy decisions. allocation of income account and can be derived as gross operating surplus plus all A possible approach to this issue would be property incomes receivable from owning studying the level and the annual change financial assets or natural resources minus all of the balance of primary incomes (BPI) for the property income payable48 to both resident mining sector. BPI is defined as the total and non-resident institutional units. value of the primary incomes receivable by an institutional unit or sector, less the total of Along with business surveys and administrative the primary incomes payable. The aggregate data, business accounts (income statement, value of the gross balances of primary incomes cash-flow statement and balance sheet) are a for all sectors in the economy is called Gross major data source for compiling the sequence National Income. of accounts of non-financial corporations in a national accounts framework. The Development Economics and Data Group’s (DECDG) national accounts team’s A high level of standardization and detail contribution to this study includes the are often needed for business accounts to elaboration of the sequence of (publicly be useful for national accounts compilation available) accounts until the allocation of purposes, and in most cases business surveys primary income account to derive BPI for are still needed to complete the national the one major mining company operating in accounts. In this regard, the company’s annual Southern Africa. This work could be replicated reports for 2014-2016 do not show the same to obtain BPI of the most important mining level of detail as those for 2017 and 2018. companies in the region. Each report includes data for the current and 48 Rent on natural resources can only be paid to resident units. 104 Annex 2 previous years, meaning that a structure had to on the reports. Whilst this will not affect value be applied to 2014 and 2015 operating costs to added (measured as the difference between derive proper intermediate consumption figures output and intermediate consumption), it might for the sequence of accounts. distort technical coefficients (intermediate consumption to output ratio). Globalization is an additional piece to complicate the puzzle, as usually companies with subsidiaries Moreover, output and intermediate abroad compile their accounts on a consolidated consumption must be valued at the time the basis. In such cases, adjustments are needed production process takes place. Therefore, to derive national accounts figures that are goods withdrawn from inventories must be representative at a national level. Usually, valued at the prices they are withdrawn (not national tax agencies request enterprises to at the time of their entry). In situations in which provide data on a national basis in order to prices are rising and inventories fluctuate one calculate taxes on profits. The company’s should expect differences between business data is presented on a consolidated basis and, accounting and national accounts estimates. therefore, a more meaningful analysis could be From the reports, it is not clear whether the completed with unconsolidated data. Indeed, the value of inventories of both row materials and value of output of goods and services produced finished products has been recorded following and consumed by different establishments this principle. within the company might have been netted out The most common conceptual adjustments to business accounts include the following: Value added should be measured at basic prices (i.e. ensuring that revenue does not i include VAT and other taxes or products, but includes subsidies on products). This does not seem to be an issue with the company’s data; ii Research and development expenditures should be considered capital formation instead of intermediate consumption. Intermediate consumption figures in the sequence of accounts were calculated excluding this item; iii Interests paid and received as a result of financial intermediation must be adjusted by subtracting and adding the value of an imputed financial service produced by financial intermediaries: the so-called financial intermediation services indirectly measured (FISIM). Making assumptions on the nature of interests paid and received by the company was necessary to make these adjustments; Calculating consumption of fixed capital (the equivalent of depreciation in national iv accounts), or at least adjusting depreciation in business accounts from historic to current prices (if long series of fixed assets by type of asset are not available). Not enough data were available to carry out adjustments to depreciation figures. 105 Annex 2 Main Results The following tables and graphs describe value items of production and allocation of primary added and balance of primary incomes for income accounts, respectively. the company, directly derived as balancing Levels (US$ millions) Year Balance of Value added BPI / GVA primary incomes 2014 8,250 14,431 57.2% 2015 4,954 10,519 47.1% 2016 5,695 9,684 58.8% 2017 8,471 13,193 64.2% 2018 8,136 12,894 63.1% Annual growth (%) Year Balance of primary incomes Value added 2014 2015 -39.9 -27.1 2016 14.9 -7.9 2017 48.8 36.2 2018 -4.0 -2.3 A. Levels (US$ millions) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2014 2015 2016 2017 2018 Balance of primary incomes Value added 106 Annex 2 B. Annual growth (%) 60.0 50.0 40.0 30.0 20.0 10.0 0.0 -10.0 -20.0 -30.0 -40.0 -50.0 2014 2015 2016 2017 2018 Balance of primary incomes Value added 107