Chance for SA in new Australian mining tax
18 April 2012
Posted by: SAIT Technical
By Tim Harris* (Published in the Business Day)
AUSTRALIA’s decision last week to introduce a new 30% tax on iron ore and coal profits presents a rare opportunity for SA to attract mining investment. If Finance Minister Pravin Gordhan makes the right policy interventions, SA can use this relative cost advantage to help take back the market share it has lost to Australian mining over the past decade and mitigate new threats to mining in SA.
Regulatory uncertainty, insufficient infrastructure investment in rail, ports and energy and speculation about nationalisation have contributed to the mining sector missing the benefits of the global commodities boom of the past decade. During a boom in which most mineral-wealthy countries have seen mining output increase by 5% a year, SA’s mining output has been contracting by 1% a year. Accordingly, SA has lost ground to international competitors.
The National Treasury pointed out last year that domestic investment growth in mining averaged 7% a year in the 2000s compared with 24% in Australia. Further, between 2000 and 2010, SA’s global market share in iron ore and coal production decreased by 30%. In iron ore, SA’s loss is almost exactly mirrored by Australia’s gain in market share.
A small window of opportunity opened for us to start taking back this market share when the Australian parliament passed laws for the new tax. This levy is to be implemented from July, leading the head of the Western Australian Chamber of Minerals and Energy to complain that the tax threatens Australia’s prosperity and competitiveness by making it a less desirable place to invest.
Australia’s loss of competitiveness can be SA’s gain if we capitalise on this new relative cost advantage. SA has proven mineral reserves worth $2,5-trillion — more than any other country. The mining industry already generates 9% of our gross domestic product (GDP) and employs 500000 people directly. Coal and iron ore are important contributors here, but SA’s production and exports are dwarfed by Australia’s. Production, value-add and employment could all increase significantly if we remove the constraints to growth in the mining sector.
If we achieve this, the Mining Industry Growth, Development and Employment Task Team has predicted that the mining sector could grow by between 3% and 4% a year for the next decade and create an additional 140000 jobs. Iron-ore production, in particular, has the potential to grow by 6% a year.
To make the most of this window of opportunity, Gordhan must urgently implement a three-step plan to rebuild mining in SA:
• The first step is to impose a moratorium on any new taxes in the mining sector until we make back the ground South African mining has lost in the past decade. The governing party’s talk of increased taxation on mining puts the cart before the horse — mining needs resuscitating before we can consider recouping more taxes from the industry.
• The second step is for Gordhan to urgently meet Public Enterprises Minister Malusi Gigaba to dramatically increase the share of Transnet’s R300bn infrastructure-build plan earmarked for private participation. In his budget speech, Gordhan committed to mobilising private-sector capacity "through construction and operating concessions, for example in the management of industrial development zones, freight logistics and ports operations”. But Gigaba recently said that private participation in Transnet’s programme would be only R5bn-R8bn — a mere 2,6% of the total programme. Mobilising private capital is the best way to quickly and affordably scale up the infrastructure required by SA’s iron ore and coal miners.
• The third step is to dramatically increase state funding for mining research and development. Countries that successfully used their mineral wealth as a base from which to diversify their economies spend about 4% of their GDP on research and development. Our spending, by contrast, is 1% of GDP. Although Gordhan has recently allocated additional funds to the Council for Geoscience and to Mintek, SA’s national mineral research organisation, these amounts should be doubled in future budgets.
The Australians’ decision to introduce a new mining tax presents a rare opportunity for SA to claw back market share in iron ore and coal, but Gordhan needs to strike while the iron is hot to make our country an appealing destination for mining investment.
* Harris is an MP and the Democratic Alliance’s finance spokesman.