Picture: THINKSTOCK
Picture: THINKSTOCK

THE government has vowed to transform the mining industry into the core of national industrialisation and economic growth via the "mineral-energy complex", which is the broad set of industries that transform domestic mineral resources into energy, metals and final products.

At the core of policy is the notion that unbeneficiated natural resources provide only a "comparative advantage", which, left alone, keeps the country "digging dirt"; the private sector-dominated mining industry being incentivised only to extract, refine and export, rather than to support domestic industrialisation. For the government, digging dirt has a huge opportunity cost: every ton of coal exported unprocessed, every ounce of precious metal sold to foreign buyers unbeneficiated, represent countless manufacturing jobs lost, dollars of exports forgone and tax rands sacrificed.

Government policy is intended to turn that costly comparative advantage into a "competitive advantage" in the production of globally competitive manufactured products derived from these resources.

The shift from comparative to competitive advantage, the notion goes, cannot occur without huge government intervention. A key obstacle would be that South Africa is afflicted by the wrong prices and economic incentives — a systemic market failure. By trading at world prices, producer-sellers put domestic consumer-purchasers at a disadvantage. World prices are "antidevelopmental" — they do not allow the country to capture the huge value-adding opportunities that exist. The policy is thus to restructure the economy toward achieving "developmental prices" in pursuit of competitive advantage — a new dispensation, in which producers are "incentivised" to sell to the domestic market at developmental prices.

• The "cost plus" approach is meant to achieve prices lower than world’s. At least, the argument goes, domestic buyers should be able to secure prices that reflect the national cost advantage.

• The de facto import quota and "developmental pricing" measures contained in the Mineral and Petroleum Resources Development Act’s amendment before Parliament are to make strategic minerals cheaper to domestic buyers through regulatory fiat — de facto administered prices.

These measures are supported by vast government-directed investment along the mineral-energy complex value chain:

• Infrastructure investment in energy, water, telecommunications and transports through the parastatals.

• Equity investment by state-controlled financial institutions in sectors and companies deemed strategic to the mineral-energy complex.

They are also supported by other policies designed to increase government interventive capacity. One is the cancellation of bilateral investment treaties, viewed as shackles that prevent intervention where foreign equity interests are strong.

From this policy toolkit, the government expects the domestic private sector will provide a supply response in an "augmented and developmental market". "Made" competitive by cheaper finance, "indigenised" ownership, cheaper entrants, and available infrastructure, this "developmental" private sector will reindustrialise the country, at once keeping South Africa capital-intensive and creating jobs through the rise in demand thus engineered. The private sector will still be privately financed and (mostly) owned — thus escaping direct nationalisation — but will be deputised in serving the national interest.

Besides the fact that this vision looks eerily similar to that of the previously disreputable and fiscally bankrupt regime, the policy is beset by many debilitating contradictions:

• Limited by its low fiscal capacity, the government is requiring that parastatals fund infrastructure by raising large debt off their balance sheets. This leads to drastic increases in the fees charged for their services and goods. The result is that developmental infrastructure is being provided at antidevelopmental monopoly prices. As increasing portions of consumer costs go to meet these fees, overall prices are increasing.

• Allied with labour unions, the government has also chosen a development route intended to create a consuming middle class centred on the public service, mining and manufacturing workforce, and service sector employees. This Keynesian bias has led to high wage inflation and decreased productivity — pushing the private sector away from an otherwise much-needed labour-intensive growth model, and offshoring production.

• Many government interventions are politico-bureaucratic: in making directed investment decisions, parastatals and public investment entities are likely to degrade their long-term financial standing and expose their shareholder and beneficiaries; and ministers’ decisions ignore market conditions and are forcing the private sector to subsidise policy without compensation. This is driving disinvestment.

• Largely dependent on foreign markets for its production, South Africa cannot veer very far from rules and agreements that put reciprocity and equal treatment at the core of trade and investment relations. Discriminatory pricing, unequal treatment of investors, and export quotas have a political and economic cost.

The policy and its contradictions ultimately point to a fundamental flaw in the notion of comparative versus competitive advantage: that which holds that the mere possession of the resource forms comparative advantage. It does not. Comparative advantage arises only when a country can explore, develop, extract and ship its natural resources at prices buyers are willing to pay, and where no subsidies durably apply.

Failing that, the resource remains in the soil, where its value is zero. Worse: it is extracted and sold at negative value, subsidised by the government for no good economic reason besides keeping vested and factional interests happy.

This is a flaw that has been reproduced in resource-rich countries for decades.

If the decline in production and exports of South Africa’s minerals — beneficiated and not — is any indication, it is a cost South Africa is already paying. The decline in the mining industry started well before the 2008 economic crisis, and has occurred despite historically high demand and prices.

The government has chosen to listen to a few lone voices against the overwhelming evidence of facts, ignoring the lessons of history. Having failed to understand that Asia’s economic miracle was founded on creating competitiveness, not damaging it, government policy is undermining comparative advantage without creating any of the conditions required for competitive advantage. By increasing infrastructure and labour costs at unsustainable rates, interfering with capital allocation against price signals, forcing prices and restricting the functioning of supply and demand, and picking champions, the government is driving investment down and reducing the size of the mining sector.

Government policy is rapidly undermining its own otherwise good goal of national industrialisation and economic growth via the mineral-energy complex. Worse still, it is ensuring that the "dirt diggers" are shrinking in size and contribution to the economy. Without them, there can be no mineral-energy complex. And it is doing so at its own risk by unsustainably increasing its fiscal load. A rethink is a matter of national urgency.

Baissac is MD of Eunomix, a consultancy specialised in derisking resources and infrastructure projects.