At 2.5 trillion dollars, South Africa is endowed with the world’s most valuable mineral treasure. Simple logic suggests that the country’s comparative geological endowment confers an advantage as a preferred mineral investment jurisdiction. On the contrary, South Africa was the only country out of 71 mineral-rich jurisdictions, not to benefit from the 2001 and 2008 resource booms. Furthermore, while its competitors grew on average by 5 percent, the South African extractive industry contracted by approximately 1 percent per annum. One of the proximate causes of the decline can be attributed to the increased production cost to extract minerals from mines operating at depths of approximately 4km underground. Globally, demand for resources is affected by the unpredictable nature of commodity prices and depressed levels of economic growth in key markets. Locally, labour strikes and power outages have hampered the supply of resources. Uncertainty around the issue of nationalisation of the mining sector, policy amendments to the mining industry and the taxation thereof have also affected the stability of the extractive industries.
Empirical evidence suggests that resource-rich countries are prone to poor economic performance. This phenomenon is termed the resource curse. Yet some resource-rich countries have averted the resource curse and benefited economically from their resource endowment. South Africa does indeed suffer from a resource curse. This is demonstrated by the country’s inability to utilise resource revenue to improve human development, evidenced by worsening inequality, poverty and slow GDP growth. These negative outcomes are amplified by the prevalence of corrupt practices, abuse of state power, rent seeking behaviour and the resultant loss of international confidence in the country.
Case studies from Botswana, Norway and Alberta, Canada reflect the transformative outcomes that resource development can achieve. This study draws on these countries’ strategic policy formulation experience governing their decision on awarding extractive rights, generating fiscal returns and revenue management.
The findings of this study reveal that a tax regime that is internationally competitive, stable, transparent and administered effectively can produce a fair return. The “shareholder value principle” provides an all-inclusive value-based approach to extractive sector policy formulation. The competitiveness of the extractive sector can be enhanced by offering an exploration incentive. Furthermore, the mining charter requirements impose associated costs that impact the indirect sharing of resource rent. It is for this reason that these provisions can be regard as fiscally equivalent to taxation and should therefore be included when evaluating the investor-state fiscal take.
There is merit in reviewing the extractive industry fiscal regime in a resource-intensive economy every ten years, due to factors such as resource depletion and new technologies that can affect resource demand. A dual licencing system is proposed that allocates licences in the least explored areas by discretion and by tender when there is confirmation of a known reserve. This together with an escalating area fee to promote the release of holding unproductive licences, all contribute to efficient exploration activities. Proactive investment in geomaps is essential to support the auctioning of extractive rights and support the competitiveness of the country’s natural resources.
It is recommended that all non-renewable resource rent from oil and gas should be invested in a Natural Resource Fund (NRF). The NRF should have the objectives of stabilization and to save for future resource depletion. The stabilization objective of the fund acts as an income smoothing policy tool that aids in reducing the impact of commodity price volatility and currency appreciation. The savings objective is a mechanism to promote intergenerational equity and avoid excessive and non-sustainable government spending of natural resource tax revenue.