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10 October 2012

Inaugural Presentation to Portfolio Committee on Mineral Resources On Department Of Mineral Resources. 10 October 2012. Presentation Outline. The Role and Function of the Financial and Fiscal Commission (FFC) Contribution of Mineral Resources to Economy

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10 October 2012

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  1. Inaugural Presentation to Portfolio Committee on Mineral Resources On Department Of Mineral Resources 10 October 2012 For an Equitable Sharing of National Revenue

  2. Presentation Outline • The Role and Function of the Financial and Fiscal Commission (FFC) • Contribution of Mineral Resources to Economy • Budget Analysis of Department of Mineral Resources • Budget Composition • Expenditure Composition • Budget Growth and Shares • Trends in Departmental Expenditures • Financial Management Performance • Entities and Agencies Reporting to Department • Previous FFC Analysis and Recommendations: Growth and Job Creation (relevant for Mining) • Concluding Remarks Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  3. 1. The Role and Function of the FFC Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  4. Background • Financial and Fiscal Commission • Permanent statutory body established in terms of S 220 of Constitution • FFC operational since 1994 • Independent and subject only to Constitution and the law • Must function in terms of an act of Parliament • Mandate of Commission • Makes recommendations, envisaged in Chapter 13 of the Constitution or in national legislation to Parliament, Provincial Legislatures, and any other organs of state determined by national legislation • Enabling legislation: S 214 (2), 218(2), 228 (2), 229(5), 230(2) and 230A(2) of the Constitution • FFC Act (No 99. of 1997), IGFR Act (No. 97 of 1997), Money Bills Amendment Procedure and Related Matters Act (2009) • Provincial Tax Regulation Process Act, Municipal Fiscal Powers and Functions Act, Borrowing Powers of Provincial Government Act, Municipal Finance Management Act, Municipal Systems Act Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  5. Background (cont.) • FFC’s primary outputs/reports in terms of Section 221 of the Constitution • Annual Submission on the DoR • Submitted 10 months prior to tabling of the DoR Bill by Minister • Contains recommendations/proposals for the following fiscal year and MTEF • Submission on the MTBPS • Contains the FFC’s response to the MTBPS and adjustments to the division of revenue • Submission on the DoR Bill • Submitted to Parliament in February and outlines the FFC’s response to the DoR Bill and relevant annexure • Annual Report • Special reports made at own initiative or request by state organs Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  6. Enforcement of Recommendations • Recommendations are not binding • Recommendations are made to Parliament so that the legislature can examine the financial and fiscal decisions of government against them and understand why they have been accepted or rejected • Recent legislation (MBAPRMA) requires Parliament to consider the recommendations of the Commission when deliberating on Money Bills • Government is obligated through an Act of Parliament to explain how it has taken the FFC recommendations in arriving at the division of revenue for any particular year • The response is tabled in Annexure E of the DoR Bill Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  7. 2. The Economy And Role Of Mineral Resources Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  8. South African Economy has faced first recession in 20 years… Recession Last recession almost 20 years ago Growth Unbroken economic growth Recession Economy contracted due to global crisis Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  9. …And The Economic Sectors Have Also Been Badly Impacted… LARGER SECTOR Contraction Business & Finance, Manufacturing and Construction severely impacted during downturn Manufacturing Construction Mining Transport Other Services LARGER CONTRACTION Hotels & Restaurants Energy Mining Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  10. Mining Contribution • Country abundantly endowed with mineral resources and a key global player: • 90% of platinum metals • 80% of manganese • 73% of chrome • 45% of vanadium and 41% of gold on earth • Mining sector accounts for 8.6% of GDP directly on a nominal basis • Investment • A third of the market value of the JSE • Energy • Mining is responsible for 93% of electricity generation via coal power plants • A third of liquid fuels supply via Sasol’s use of coal • Complementary role in deep rural areas: • Remittances • Clinics, schools, community centres • Jobs etc. Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  11. Key Sector Challenges • Global economic outlook • Public expenditure cutbacks • Implementing change/transformation and gaining consensus on right economic and ownership strategy for mining • Ownership • Beneficiation • State Mining Company • Other pressing issues • Impact of the mining strikes on growth, inflation and investment • Lingering uncertainty around nationalization and • Issues about confusion between municipalities and traditional leaders  and impact on mining investment Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  12. 3. Budget Analysis: Department Of Mineral Resources Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  13. Budget and Programmes of Mineral Resources • Total Budget – R 1, 169 Billion – 2012/13 • Programme 1 – Administration – R238 million • Strategic support and management services • Programme 2 – Promotion of Mine Safety and Health – R154 million • Safe mining of minerals under health working conditions • Programme 3 – Mineral Regulation – R180 million • Regulation of minerals and mining sectors to promote economic development, employment and compliance • Programme 4 – Mineral Policy and Promotion – R595 million • Develop relevant minerals policies to promote mining industries and attract investment Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  14. Budget Composition across Programmes – 2012/13 Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012 Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  15. Expenditure Composition across Economic Classifications – 2012/13 Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012 Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  16. Budget Particulars • 48% of budget is transfers and subsidies • Departmental agencies • Public Corporations and private enterprise • Households • Compensation of employees at 34% - above total government average of 31% • Budget driven by Programme 4 – minerals policy and promotion – 51% • Small investment in capital assets • Economic services and infrastructure • Indirect regulatory role in economic development via mining and efficient and effective use of mineral resources Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  17. Nominal and Real Budget – 2006/07 – 2014/15 Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  18. Nominal and Real Budget Growth Rates – 2006/07 – 2014/15 Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  19. Budget Growth • Department of Minerals Resources formed part of Department of Minerals and Energy prior to 2009 • Trends should be viewed in that light • Alterations to ENE to adjust for split in department • Steady nominal and real growth till 2010/11 • 15% nominal growth in budget in 2010/11 • Budget increased prior to and at recession • Budget protected in initial stages of recession • Minimal growth in 2011/12 budget • Negative real growth in budget in 2011/12 • Tight fiscal framework • Decline in national revenues • No real growth in minerals budget in outer year of 2012 MTEF Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  20. Nominal Shares and Growth per Programme– 2006/07 – 2014/15 Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  21. Real Shares and Growth per Programme– 2006/07 – 2014/15 Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  22. Trends in Department Programmes – 2006/07 – 2014/15 • Mineral policy and promotion largest potion of budget over period under review • Gradually increased over the period to above 50% of total department budget • Average growth of 11% over the period in nominal terms and 5% in real terms • Fastest growing programme over the 2012 MTEF • Administration programme fastest growing over period (12% in nominal terms) • Other programmes do not grow considerably over the 2012 MTEF Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  23. Nominal Shares and Growth per Classification – 2006/07 – 2014/15 Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  24. Real Shares and Growth per Classification – 2006/07 – 2014/15 Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  25. Trends in Department Expenditure items – 2006/07 – 2014/15 • Grants and subsidies largest share of department budget at just under 50% • Compensation of employees highest growing item – 11% in nominal terms over period reviewed • Large increases in employee costs prior to 2012/13 • Department had to adjust transfers and subsidies downwards to accommodate large increase in staff costs • Constitutes around 34% of total budget • Erratic growth rates in goods and services • Very low real growth in goods and services and personnel costs in outer year of 2012 MTEF • Negative real growth in grants and subsidies Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  26. Financial management performance • Department established in 2009 • First audit done for 2010/11 financial year • Department received a qualified audit • Qualified on compliance with laws and regulations • Qualifications on financial statements • Current assets • Liabilities • Revenue • Unauthorised, irregular, fruitless and wasteful expenditure Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  27. 4. Entities and Agencies Reporting to Department Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  28. Financial Performance of Entities and Agencies • Mine Health and Safety Council • Financially unqualified with findings • Compliance with laws and regulations • South African Diamond and Precious Metals Regulator • Financially unqualified with findings • Compliance with laws and regulations • Council for Minerals Technology • Financially unqualified with no findings • Council for Geoscience • Financially unqualified with no findings • State Diamond Trader • Financially unqualified with no findings Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  29. Financial Performance of Entities and Agencies • Department’s entities and agencies performing well financially • Most obtained unqualified audits in 2010/11 • Finances are sound • Efficient and effective expenditures • Meeting goals and objectives • Department playing and effective monitoring role in entities and agencies • A major concern is the good financial performance of entities and agencies outshines department itself • What are the reasons behind this? • Department relatively newer administration? Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  30. 5. Previous FFC Analysis Recommendations: Growth And Job Creation (Of Relevance To Mineral Resources) Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  31. Overarching Problem Statement High unemployment biggest social hazard Poverty reduction still challenges development Growth of inequality is not slowing down Country vulnerable to climate change, water scarcity and environmental degradation Impact of capacity challenges NGP sets a target of 5 million by 2020. Mining sector projects 140 000 jobs by 2020 and 200 000 by 2030 (averaging 15 556 per annum till 2020) 40 000 jobs were lost during the crisis, and disturbances on mines have started strangling job creation… Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  32. Identification Of Sectors With Good Growth Potential • Market is usually the best mechanism for achieving sector diversification • However, market failures and non convexities justify using several successful models in government intervention that could play a mentoring and facilitating role in industrial development • Basis of sector identification in FFC Analysis (2009-2012) • Factor endowment: labour, land, minerals • Stage of development of industry • Investment and trade data • Trade opportunities • Revealed Comparative advantage (Multiplier Analysis and Qualitative) • Export of raw forms of mining and labour-intensive products dominant; import of processed goods, machinery and many other manufactured products • Investment is focused in agriculture, construction, labour-intensive manufacturing and mineral resources • Comparative advantage of South Africa seems to lie in resource based and labour-intensive activities in the short to medium term Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  33. Where Are The Opportunities? • South Africa's key challenges in industrial development • Continue "Take off" stage, avoiding the risk of reversal of structural change (decline in share of mining industry over past century) • High investment to drive growth • Strengthen existing industrial growth pillars and search for new sources of growth • Three-main approaches emerge • Capture more value-added in the existing industries • Upgrade potential/emerging industries both for import substitution and export (beneficiation and all that) • Discover latent comparative advantage… Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  34. Seizing Opportunities: Is It Feasible? • Capturing more value-added • Mining: develop forward linkages? • Mining: develop backward linkages/clusters? • Mining: diversify into activities with high revenue earning potential? • Upgrade potential/emerging industries • Regional and global production chains • Oil, gas and mining • Discover latent comparative advantage • Higher Education, ITC (Software), renewable energy • Supply line of regional and global heavy industry Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  35. Implied Government Role in Mineral Industrial Development A supporting institution (a public good) is needed to facilitate (coordinate) the interaction of capital and knowledge.

  36. Issues In Capital Accumulation • NGP: savings and investment in SA below levels needed for sustained growth • Policies in place to address these • Savings • To achieve growth of more than 4%, domestic savings rate has to be some 24% of GDP • Currently at some 16% (compare to 40% in China) • Even worse: current ratio of savings to disposable income of households is -0.3 • Investment • Modest pick-up in investment rate expected in 2011 (low capacity utilisation) Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  37. Issues In Capital Accumulation: Some Challenges • Government balancing act: inclusive growth and job creation together with fiscal sustainability and low inflation • Structural challenges • Infrastructure: transport and energy (absence of sufficient electricity generating capacity and implications for NGP) • Public service delivery • Even though the 2010 GHS indicates a slight improvement in service delivery, management and maintenance of service delivery are also key • Private sector development, competition Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  38. Issues In Capital Accumulation: Major Findings • With respect to prospects for achieving accelerated economic growth • Focused infrastructure spending (TFP and employment) results in improved GDP growth • Reduces the debt-to-GDP ratio especially in medium term • With respect to current IGFTs • Reduce disparities in terms of well-being amongst provinces • Have small overall GDP effect but high provincial disparities • With respect to fiscal policy and jobs, there are no easy answers • Higher government spending alone is not sufficient • Higher spending on infrastructure alone is not sufficient • Higher productivity growth alone is not sufficient Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012 38

  39. Issues In Knowledge Accumulation • Current status • SA must transition from a low added-value economy to a more knowledge-intensive economy that combines low, medium and high-knowledge intensive productive activity in order to increase the proportion of medium to high income jobs • Such a transition requires • a strong, adequately funded, post-school education system • comprising colleges, vocational institutions and universities • Issues/diagnosis • Missing-middle in the education system (Basic) • Supply-demand mismatch in higher education • Lack of investment in quality education • Lack of investment in research and development Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  40. Policy Recommendations: Macro And Goods And Services • Government should actively and specifically continue pursuing implementation of significant capital investment in public infrastructure that has a positive impact on total factor productivity infrastructure (incl. facilities, information collection, logistics, ports and railways) in the context of the NGP • Reward successful businesses (large, medium and small) for good practices in job performance • Procurement policy can be used to create demand and favorable conditions for industrial development while ensuring domestic competition • Develop and implement credible job plans for each sphere in collaboration with a broad set of actors • Not only employers, but also unions, economic development agencies, SETAs, secondary schools, colleges, universities, vocational training centres and business support providers Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  41. Policy Recommendations: Knowledge • Review of the funding framework needs to be supported by research on formulating a future funding model that divides revenue into funding higher education, further education and research, in the most optimal way • A new framework will have to be introduced in SA • Based on different funding principles and on a policy of institutional differentiation • FFC's concern: size, direction and impact of funding higher education and the post-school system as a whole • 3 major areas that require funding: higher education qualifications, further education qualifications, and research • Consideration should be given to introducing a differentiated funding framework for a differentiated public university system by shifting from a unitary system to 3 funding frameworks (one for each cluster) Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  42. 6. Concluding Remarks Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  43. Summary And Priorities Past achievements were significant and have laid a strong foundation for further and sustained industrial development The current policy of Government is well aligned with the principles of market oriented industrial development However, the government could engage in a more nuanced mineral industrial development strategy to address the challenges faced by South Africa today In the medium term, Mining is key sector to focus on since it could generate considerable externalities (involving many stakeholders, more efficient financial intermediation, infrastructure and entrepreneurship development) and impacts (income distribution and poverty reduction) Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  44. Summary And Priorities • In the medium to longer term, the mining sector could evolve further as South Africa has already established a firm foothold in the global market and network • In any sector, capital, knowledge and supporting institutions are needed to propel the development of the sector. However, the needed interactions between the three elements can differ from industry to industry • Government role in mineral industrial development is more direct in creating favorable supporting institutions and infrastructure development • However it should also play a key role in addressing issues in capital accumulation and knowledge generation • Government should intervene to correct market failures resulting from high transaction costs, inefficient resource allocation and distribution, asymmetric information, lack of investment and rule of law Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  45. Conclusion • The impact of the intergovernmental fiscal system cuts across many different sectors and spheres. • Budget Review and Recommendations Reports could be important in creating a cross department focus on minerals and inclusive growth etc • Required actions for the sector on many fronts, including: • Clear policy direction and adjustment • A proactive mineral/industrial development policy? • Strong policy implementation? • Development of relevant minerals policies to promote mining industries and economy • Remove uncertainty.... • The FFC looks forward to engaging further with the Portfolio Committee on Mineral Resources on these critical issue • Wishes to build even stronger ties with the Committee Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

  46. Thank you. Financial and Fiscal Commission (FFC) Montrose Place (2nd Floor), Bekker Street, Waterfall Park, Vorna Valley, Midrand, Private Bag X69, Halfway House 1685 www.ffc.co.za Tel: +27 11 207 2300 Fax: +27 86 589 1038 Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

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