i naugural p resentation to p ortfolio c ommittee on m ineral r esources o n d epartment o f m...

INAUGURAL INAUGURAL PRESENTATION TO PRESENTATION TO PORTFOLIO COMMITTEE ON PORTFOLIO COMMITTEE ON

MINERAL RESOURCES ON MINERAL RESOURCES ON DEPARTMENT OF MINERAL DEPARTMENT OF MINERAL

RESOURCESRESOURCES10 OCTOBER 2012

For an Equitable Sharing of National RevenueFor an Equitable Sharing of National Revenue

PRESENTATION OUTLINEPRESENTATION OUTLINE1. The Role and Function of the Financial and Fiscal Commission

(FFC)2. Contribution of Mineral Resources to Economy3. Budget Analysis of Department of Mineral Resources

1. Budget Composition2. Expenditure Composition3. Budget Growth and Shares4. Trends in Departmental Expenditures5. Financial Management Performance

4. Entities and Agencies Reporting to Department5. Previous FFC Analysis and Recommendations: Growth and Job

Creation (relevant for Mining)6. Concluding Remarks

2Presentation to Portfolio Committee on Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012Mineral Resources: 10 Oct 2012

1. THE ROLE AND FUNCTION OF THE 1. THE ROLE AND FUNCTION OF THE FFCFFC

Presentation to Portfolio Committee on Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012Mineral Resources: 10 Oct 2012 3

BACKGROUNDBACKGROUND• 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


BACKGROUND (CONT.)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


ENFORCEMENT OF ENFORCEMENT OF RECOMMENDATIONSRECOMMENDATIONS

• 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


2. THE ECONOMY AND ROLE OF 2. THE ECONOMY AND ROLE OF MINERAL RESOURCESMINERAL RESOURCES


-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

GD

P (Q

uart

erly

% C

hang

e)SOUTH AFRICAN ECONOMY HAS FACED FIRST

RECESSION IN 20 YEARS…

RecessionLast recession almost 20

years ago

GrowthUnbroken economic growth

RecessionEconomy contracted due to

global crisis

Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

0%

5%

10%

15%

20%

25%

-45% -40% -35% -30% -25% -20% -15% -10% -5% 0%

Change in Output (from sector peak)

Size

of S

ecto

r (as

% o

f GVA

)

Mining

Hotels & Restaurants

Construction

Mining

Manufacturing

Other ServicesTransport

Energy

LAR

GER

SECT

OR

LARGER CONTRACTION

ContractionBusiness & Finance, Manufacturing and Construction severely impacted

during downturn

…AND THE ECONOMIC SECTORS HAVE ALSO BEEN BADLY IMPACTED…

Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

MINING CONTRIBUTIONMINING 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.

10Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012

KEY SECTOR CHALLENGESKEY 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


3. BUDGET ANALYSIS: DEPARTMENT 3. BUDGET ANALYSIS: DEPARTMENT OF MINERAL RESOURCESOF MINERAL RESOURCES


BUDGET AND PROGRAMMES OF BUDGET AND PROGRAMMES OF MINERAL RESOURCESMINERAL 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


BUDGET COMPOSITION ACROSS BUDGET COMPOSITION ACROSS PROGRAMMES – 2012/13PROGRAMMES – 2012/13


21%

13%

15%

51%

Administration

Promotion of Mining Safety and Health

Mineral Regulation

Mineral Policy and Promotion

Presentation to Portfolio Committee on Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012Mineral Resources: 10 Oct 2012

EXPENDITURE COMPOSITION EXPENDITURE COMPOSITION ACROSS ECONOMIC ACROSS ECONOMIC

CLASSIFICATIONS – 2012/13CLASSIFICATIONS – 2012/13


48%

1%

34%

17%Transfers and Subsidies

Payments for Capital Assets

Compensation of Employees

Goods and Services

Presentation to Portfolio Committee on Presentation to Portfolio Committee on Mineral Resources: 10 Oct 2012Mineral Resources: 10 Oct 2012

BUDGET PARTICULARSBUDGET 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


NOMINAL AND REAL BUDGET – NOMINAL AND REAL BUDGET – 2006/07 – 2014/152006/07 – 2014/15


-

200 000

400 000

600 000

800 000

1 000 000

1 200 000

1 400 000

1 600 000

Nominal

Real

NOMINAL AND REAL BUDGET NOMINAL AND REAL BUDGET GROWTH RATES – 2006/07 – GROWTH RATES – 2006/07 –

2014/152014/15


-5%

0%

5%

10%

15%

20%

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15

Nominal Growth

Real Growth

BUDGET GROWTHBUDGET 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


NOMINAL SHARES AND GROWTH NOMINAL SHARES AND GROWTH PER PROGRAMME– 2006/07 – PER PROGRAMME– 2006/07 –

2014/152014/15


-

100 000

200 000

300 000

400 000

500 000

600 000

700 000

800 000

Administration


Mineral Regulation


REAL SHARES AND GROWTH PER REAL SHARES AND GROWTH PER PROGRAMME– 2006/07 – 2014/15PROGRAMME– 2006/07 – 2014/15


-

50 000

100 000

150 000

200 000

250 000

300 000

350 000

400 000

450 000

Administration


Mineral Regulation


TRENDS IN DEPARTMENT TRENDS IN DEPARTMENT PROGRAMMES – 2006/07 – 2014/15PROGRAMMES – 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


NOMINAL SHARES AND GROWTH NOMINAL SHARES AND GROWTH PER CLASSIFICATION – 2006/07 – PER CLASSIFICATION – 2006/07 –

2014/152014/15


-

100 000

200 000

300 000

400 000

500 000

600 000

700 000


Goods and Services

Transfers and Subidies


REAL SHARES AND GROWTH PER REAL SHARES AND GROWTH PER CLASSIFICATION – 2006/07 – CLASSIFICATION – 2006/07 –

2014/152014/15


-

50 000

100 000

150 000

200 000

250 000

300 000

350 000

400 000


Goods and Services

Transfers and Subidies


TRENDS IN DEPARTMENT TRENDS IN DEPARTMENT EXPENDITURE ITEMS – 2006/07 – EXPENDITURE ITEMS – 2006/07 –

2014/152014/15• 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


FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT PERFORMANCEPERFORMANCE

• 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


4. ENTITIES AND AGENCIES 4. ENTITIES AND AGENCIES REPORTING TO DEPARTMENTREPORTING TO DEPARTMENT


FINANCIAL PERFORMANCE FINANCIAL PERFORMANCE OF ENTITIES AND AGENCIESOF 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


FINANCIAL PERFORMANCE FINANCIAL PERFORMANCE OF ENTITIES AND AGENCIES 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?


5. PREVIOUS FFC ANALYSIS RECOMMENDATIONS: 5. PREVIOUS FFC ANALYSIS RECOMMENDATIONS: GROWTH AND JOB CREATION (OF RELEVANCE TO GROWTH AND JOB CREATION (OF RELEVANCE TO

MINERAL RESOURCES)MINERAL RESOURCES)


OVERARCHING PROBLEM OVERARCHING PROBLEM STATEMENTSTATEMENT

• 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…


IDENTIFICATION OF SECTORS IDENTIFICATION OF SECTORS WITH GOOD GROWTH WITH GOOD GROWTH

POTENTIALPOTENTIAL• 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


WHERE ARE THE WHERE ARE THE OPPORTUNITIES?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…


SEIZING OPPORTUNITIES: IS IT SEIZING OPPORTUNITIES: IS IT FEASIBLE?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


IMPLIED GOVERNMENT ROLE IN MINERAL IMPLIED GOVERNMENT ROLE IN MINERAL INDUSTRIAL DEVELOPMENTINDUSTRIAL DEVELOPMENT

A supporting institution (a public good) is needed to facilitate (coordinate) the interaction of capital and knowledge.

35

ISSUES IN CAPITAL ISSUES IN CAPITAL ACCUMULATIONACCUMULATION

• 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)


ISSUES IN CAPITAL ISSUES IN CAPITAL ACCUMULATION: SOME ACCUMULATION: SOME

CHALLENGESCHALLENGES• 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


ISSUES IN CAPITAL ISSUES IN CAPITAL ACCUMULATION: MAJOR ACCUMULATION: MAJOR

FINDINGSFINDINGS• 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


ISSUES IN KNOWLEDGE ISSUES IN KNOWLEDGE ACCUMULATIONACCUMULATION

• 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


POLICY RECOMMENDATIONS: POLICY RECOMMENDATIONS: MACRO AND GOODS AND MACRO AND GOODS AND

SERVICESSERVICES• 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


POLICY RECOMMENDATIONS: POLICY RECOMMENDATIONS: KNOWLEDGEKNOWLEDGE

• 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)


6. CONCLUDING REMARKS6. CONCLUDING REMARKS


SUMMARY AND PRIORITIESSUMMARY 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)


SUMMARY AND PRIORITIESSUMMARY 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


CONCLUSIONCONCLUSION• 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


THANK YOU.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.zaTel: +27 11 207 2300Fax: +27 86 589 1038

i naugural p resentation to p ortfolio c ommittee on m ineral r esources o n d epartment o f m...

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