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Local content could trigger and bolster local enterprise and supplier development

Have we reached a stage in South Africa where we are comfortable with our local suppliers that we can replace or reduce foreign suppliers to create local jobs and business opportunities?

In the past two months President Ramaphosa has been working tirelessly at stimulating South Africa’s economy having announced a stimulus package.
Later he chaired a Presidential Jobs summit where there was a pledge to create an additional 275,000 jobs a year. He recently hosted an Investment Conference which yielded R290 billion in investment commitments, bringing South Africa one step closer to achieving its target of securing $100 billion in the next five years.

Investment announcements were made from companies in sectors such as; forestry, manufacturing, telecommunications, transport, energy, agro-processing, consumer goods, pharmaceuticals, infrastructure, financial services, energy, ICT and water. Mining companies – Anglo American, Bushveld Minerals, Vedanta Resources and IvanPlats, also committed billions of Rands in investing in the local mining industry.

This means the gazetting of the Mining Charter couldn’t have come at an appropriate time by starting to create certainly in the industry. The Mineral and Petroleum Resources Development Amendment (MPRDA) Bill which has been subject to the legislative process since 2013 has now been withdrawn to the delight of the mining industry.

The government through the Mining Charter explains the reason for the Procurement of South African manufactured goods and services stating that it provides opportunities for expanding economic growth, creating decent jobs and widening market access to the country’s goods and services.
According to the new Mining Charter, a minimum of 70% of total mining goods procurement spend (excluding non – discretionary expenditure) must be on South African manufactured goods.

* 21% to be spent on South African manufactured goods produced by a Historically Disadvantaged Persons owned and controlled company;
* 5% to be spent on South African `manufactured goods produced by a women or youth owned and controlled company; and
* 44% to be spent on South African manufactured goods produced by a BEE compliant company.

1. The above-mentioned procurement targets must be complied with progressively within a period of five years, as outlined in the transitional arrangements. The mining companies have six months from the date of publication of the Mining Charter, 2018 to submit a five – year plan indicating progressive implementation of inclusive procurement targets.

This is what the country needs. But whether companies will manage to implement these targets within a five-year period is doubtful, taking into consideration the challenges these companies have had in the past trying to meet targets related to ownership, employment equity, procurement and enterprise Supplier development in the previous Mining Charters.

Does the department have enough resources to monitor the implementation of these targets by mining companies?

The challenge regarding procurement, is that with an industry such as mining, it comes with enormous capital costs that include environmental assessments, exploration, heavy mining equipment and mining infrastructure development, it will be interesting to know how mining companies will be able to procure goods from local manufacturers and at what price.

An example is that mining companies use 300-tonne dump trucks which South Africa does not manufacture but imports such as Kamatsu, Caterpillar and Liebherr. One can argue that Caterpillar does have a 20% local content level already in South Africa, where they are bringing in and assembling.

There will be a need for government to sit down with the mining companies and see how their plan can be implemented practically and iron out the challenges.
One solution the department of Minerals Resources has come up with, is for mining companies to promote economic growth through the development or nurturing of small, medium and micro enterprises and suppliers of mining goods and services.

In instances where a mining right holder procures goods and services of a contractor to undertake extraction or processing (crushing and concentration) of minerals on their behalf, such goods and services will be deemed to have been procured by the mining right holder.

This is one other solution by which mining companies will be able to meet the procurement targets. But it means reviewing existing contractors that supply goods and services, which will take time and resources.

Although the charter might not be applicable to non-mining companies, however it will affect the purchasing decisions of the mining companies with their suppliers.
If you are a supplier to the mining industry, you will need to adhere to the procurement targets stated in the new mining charter.

2. It means looking at existing supplier contracts. Some are long term and do not meet the Mining Charter requirements. This could lead to disputes with some and the company could lose money through early cancellation of these contracts and possible litigations. Not only that, but also probable disruption in certain operations of the mines.

Another solution suggested in the Mining Charter is that the mining company develops suppliers through Original Equipment Manufacturers (OEMs) as prescribed in the Implementation Guidelines.

Currently the government through the department of Trade and Industry introduced a black industrialist incentive programme with an aim to unlock the potential of Black Industrialist companies operating in strategic and productive sectors of the South African economy through deliberate, targeted and well-defined financial and non-financial interventions.

The programme has so far resulted in investment of R11.1bn from 128 projects. Hopefully with Mining charter procurement requirement, this will help create a demand to develop more suppliers to meet the mining industry needs.

The South Africa Capital Export Council (SACEC) and South African Minerals Processing Equipment Cluster (SAMPEC) are other platforms that could assist in promoting and boosting local manufacturing interests in the mining industry too.

While the companies will be grappling with how they meet the procurement and enterprise supplier development targets of the new Mining Charter due to the local content requirements, one cannot overlook the possibility that South Africa could be contravening the World Trade Organisation (WTO) rules.
In the multilateral trading system under the WTO, the most relevant agreements on compliance of Local Content Requirements (LCR) are the General Agreement on Tariffs and Trade (GATT) and the Agreement on Trade-Related Investment Measures (TRIMs).

The TRIMs agreement prohibits the use of LCRs that requires a specific percentage or quantitative target of local goods purchases by companies, and has trade-balancing requirements that restrict the volume or value that a company can import to an amount related to the level of products it exports.
According to the WTO, by their nature, local content requirements emphasise preferential treatments for local suppliers vis-à-vis foreign goods and services providers and are therefore viewed by many countries as protectionist measures.

Members of the WTO including South Africa are therefore required to adhere to the rules under GATT and TRIMs, otherwise this part of the mining charter on local content may well be subject to challenge (through domestic court processes or international dispute resolution systems) for failing to comply with international investment and trade law obligations.

3. If this is going to be contested under the international dispute resolution systems, South Africa will not be the first to be brought under such scrutiny.
Many developing countries which include Tanzania India, Nigeria, Indonesia and Brazil have put in place guidelines and acts that provide preference to local suppliers.

The Tanzanian government recently enacted the Local Content Regulations GN 3 of 2018 to address its challenges in the mining industry. Not only does it force licensees and contractors to use indigenous Tanzanian companies for the procurement of goods and services, but also requires a physical presence in Tanzania.
This is also being monitored in terms of how it is being implemented.

In 2016, a WTO panel ruled on the US dispute against India concerning the use of local content requirements in the context of the Jawaharlal Nehru National Solar Mission (JNNSM) energy scheme.

In the initial phases of the JNNSM, solar power developers were required to use certain types of solar cells and modules manufactured in India for power generation projects to ultimately sell that electricity to government agencies under a long-term agreement at a guaranteed rate.
The US complained that these domestic (local) content requirements violated India’s national treatment obligations under GATT and the TRIMs Agreement.
The WTO panel found that the domestic (local) content requirements are trade-related investment measures violating the national treatment obligations under the TRIMs Agreement and the GATT.

Promoting the use of more efficient, best price available intermediate goods in global markets for a country’s manufacturing needs, is the economic assumption underlying this WTO obligation. Lastly, while we welcome South African president Cyril Ramaphosa’s investment drive to attract investments into the country’s economy, we need to be circumspect as to how these investments will flow into the country enabling it to come out of recession while ensuring that all these companies comply with South Africa’s regulations that govern how they operate in this country.

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